Get ready for increased contributions and increased benefits starting next year (2019). Established in 1965, the goal of CPP was to replace about 25% of average pre-retirement employment earnings with the other components being Old Age Security (OAS) which is based on residency, employer pension plans and personal savings such as RRSPs and other investments. Enrolment is mandatory, and contributions are made by employee and employers. Selfemployed individuals pay both the employee and employer portion. By 2025, the federal government goal is for CPP to replace about 33% of average earnings.
How does CPP work now?
- You can take CPP as early as age 60 without having to stop working or reducing your earnings. This makes it easier to transition into retirement as you can reduce hours while drawing on CPP. Your monthly CPP pension decreases if you take it before age 65. The early pension reduction is 0.6% per month if taken prior turning age 65 for a maximum reduction of 36% if you take CPP at age 60.
- If you are under age 65 and you work while receiving your CPP retirement pension, you and your employer will still have to make CPP contributions. This also applies to self-employed Canadians under age 65 who are receiving CPP who must pay both the employee and employer portions.
- Contributions made to CPP while collecting CPP go towards a Post-Retirement Benefit (PRB). Annually, your CPP is increased to reflect the PRB. If you are age 65 to 70 and you work while receiving CPP, you can choose to make CPP contributions; these contributions will increase your CPP retirement benefits. If you decide to make contributions, your employer will also have to make CPP contributions for you. Page 4 of 4
- Your monthly CPP pension will increase if you wait to take it after age 65 by 0.7% per month to a maximum of 42% if taken at age 70. Maximum age to contribute to CPP is 70.
- The number of years of low or zero earnings that are automatically dropped from the calculation of your CPP pension is 17%, allowing up to 8 years of your lowest earnings to be dropped from your CPP retirement benefit calculation (i.e. 39 of your best earning years are included in the calculation).
- Primary caregivers who collected the Canada Child Tax Benefit or its previous version, Family Allowance, can eliminate the child care years from the qualifying period. Known as the child rearing provision, the qualifying period is reduced for the years between your oldest and youngest child + 7 years. For a mother that had 4 children in a 10-year span, her qualifying period would be 39 years – 10 years – 7 years = 22 years which would result in a higher CPP benefit amount.
- CPP benefits can be split between spouses during the time they are together and must be done at source. This should be considered if there is a significant difference in retirement income which would lower the overall taxes paid on CPP benefits.
- The maximum CPP benefit is $1,134.17 month (2018). If a spouse dies, the maximum that the remaining spouse would receive after age 65 would be 60% up to a combined maximum of $1,134.17.
What’s changing?
- Beginning in 2019, CPP contributions will increase gradually, such that the contribution rate in 2023 will be 1% higher than it is today for both employees and employers making it 5.95% up to the year’s maximum pensionable earnings (YMPE). YMPE in 2018 is $55,900 and is indexed to inflation annually; there are no contributions required on the first $3,500 of earnings.
- In 2024, an additional 4% contribution will apply on earnings above YMPE up to a new projected limit, estimated at $79,400.
- As a result, over the next 6 years, employees will take home less each year and employers will pay more.
- Could these changes be cancelled or amended if there is a change in federal government? If recent history is any indication, yes. When the Liberals won in 2015 they reversed some of the changes enacted by the Conservatives so likely we’ll see some tinkering if the reverse happens.
Added benefits of CPP:
- Disability pension – for contributors who incur a “severe” and “prolonged” disability and are unable to work, benefits are payable prior to age 65.
- Death benefit – a maximum of $2,500 is paid to the deceased contributors’ estate on death. The intent of this provision is to help with funeral costs.
- Survivor’s benefit – available after the death of a spouse. The amount depends on age, whether the tax payer receives a disability or retirement pension, and the deceased CPP contribution history.
- Children’s benefit – dependents of disabled or deceased
- CPP contributors that are under age 18 or between 18 and 25 and attending school full time are eligible for $244.64 per month (2018).
Is CPP sustainable?
- In the 1990’s several changes were made including increasing contribution amounts and changes to investment strategy. CPP’s fund value as of March 31, 2018 is $366.6 Billion and is sustainable over a 75-year projection period.
Working through when to apply for CPP and completing the forms can be an onerous task. We’ve gained expertise in this area and can help. Please give me a call at 780-717-3582 or email jhummel@lhfinancial.ca for assistance. You can also obtain more information by checking out Service Canada’s website or calling 1-800-277-9914. Jim Hummel, CFP®, CKA®