PM Justin Trudeau's Canada

[W. K. Lis]

How changes to Canada Pension Plan benefits affect your wallet today and retirement tomorrow​

From link.

Whether you’re an employee or self-employed, you are required to contribute to the Canada Pension Plan (CPP), but you may have noticed that the amount you’re required to contribute has been slowly climbing.

The reason for this is to support enhancements to the CPP program, which, once fully implemented, will increase the maximum CPP retirement pension by about 50 per cent. The first phase of enhancements started in 2019, and phase two begins in 2024, meaning CPP contributions will continue to escalate over the next couple of years.

The Canada Revenue Agency this week released a helpful backgrounder that details the changes to the CPP system so far, as well as the major enhancements coming in 2024 and 2025. To help prepare you for what’s in store, let’s look at the changes already made and the ones to come.

Let’s start with the basics. The CPP is a mandatory contributory pension plan, which covers nearly all Canadian workers, other than those in Quebec, who are covered by the Quebec Pension Plan (QPP). The CPP provides basic income replacement for its contributors and their families when the contributor retires, dies or becomes disabled. The CPP is financed by contributions from employees, employers and self-employed individuals, and the funds are professionally managed by the CPP Investment Board. As of Dec. 31, 2022, the CPP fund had a balance of $536 billion.

Since 2019, the CPP contribution rate has gradually increased every year, to 5.95 per cent in 2023 from 4.95 per cent in 2018 (before the enhancement), for a total increase of one per cent for both employees and employers. If you’re self-employed, you pay both the employee and employer portions, for a 2023 contribution rate of 11.9 per cent.

For 2023, Canadians over age 18 who make more than $3,500 annually contribute 5.95 per cent of their employment income (above this base amount) to the CPP, up to the year’s maximum pensionable earnings (YMPE), which is $66,600 for this year. This YMPE is referred to as the “first earnings ceiling” in light of the upcoming enhancements. Given the YMPE of $66,600 and the basic exemption of $3,500, that means the maximum employee CPP contribution this year is $3,754 (or $7,509 if you’re self-employed).

If you earn less than the first earnings ceiling, there will be no further CPP rate increases for you. For higher income earners, however, a second CPP contribution rate and earnings ceiling will begin in January 2024, and will only affect workers whose income is above this “second earnings ceiling,” to be known as the year’s additional maximum pensionable earnings (YAMPE).

As of 2024, if you have earnings above the first earnings ceiling, you’ll contribute an additional four per cent (eight per cent if you’re self-employed) of your income between the first earnings ceiling up to the second earnings ceiling. This additional CPP contribution will be known as “second CPP contributions.”

The level of the second earnings ceiling will be based on the value of the first earnings ceiling. For 2024, the second earnings ceiling will be set at an amount that is seven per cent higher than the first earnings ceiling, and for 2025, the second earnings ceiling will be set at an amount that is 14 per cent higher than the first earnings ceiling.

To illustrate, assume Stephanie has an annual income of $100,000, which is higher than the second earnings ceiling each year. She will make base and first CPP contributions at a rate of 5.95 per cent and, beginning in 2024, second CPP contributions at a rate of four per cent on the difference between the annual YAMPE and the YMPE.

In 2023, Stephanie will make $3,754 of CPP contributions, being 5.95 per cent of the 2023 YMPE of $66,600, less the $3,500 base amount. For 2024, let’s assume the YMPE goes up to $67,700, which is the first earnings ceiling. The second earnings ceiling will be set seven per cent higher than the first at approximately $72,400. As a result, Stephanie in 2024 will contribute $3,820 of base and first-level CPP, and $188 of second-level CPP, for a total of $4,008.

In 2025, if we assume the YMPE increases again to, say, $69,700, Stephanie will contribute $3,939 on her income below the first earnings ceiling. The second earnings ceiling will be set 14 per cent higher than the first earnings ceiling, resulting in a YAMPE, or second earnings ceiling, of approximately $79,400. Stephanie will contribute second CPP contributions at a rate of four per cent on her income between the YMPE and the YAMPE, or $388. Thus, her total CPP in 2025 would be $4,327.

To help offset some of the contribution costs, employees can claim a 15-per-cent federal non-refundable credit on the base CPP contributions, which are calculated at a rate of 4.95 per cent, and a tax deduction for both first CPP contributions (one per cent), and the upcoming second CPP contributions.

Self-employed Canadians who contribute 9.9 per cent to CPP can claim a 15-per-cent non-refundable federal tax credit on 4.95 per cent of the base CPP contributions, and a tax deduction on the other 4.95 per cent. They can also claim a tax deduction on the enhanced portion of their contributions (two per cent in 2023).

It’s important to remember that not everyone will benefit fully from the CPP enhancements. How much your CPP benefits increase will depend on how much and for how long you contribute to the enhancements.

For example, the CPP enhancement will benefit you only if you have worked and contributed in 2019 or later. Consequently, employees just entering the workforce will see the largest increase in CPP benefits while employees who are near the end of their working life will see a small increase. If you’re currently receiving CPP, nothing will change and your CPP benefits won’t increase (beyond the normal annual inflationary adjustments).

 

[picard102]

Retirement? Are we still pretending that's an option for most people born after 1980?

 

[Northern Light]

Retirement? Are we still pretending that's an option for most people born after 1980?

What we need on pensions, plain and simple is to shift the retirement age to 70.

What this does (and yes, I'm sure of the numbers), assuming you reinvest the savings in higher payouts is to raise to the benefit by 40%.

ie. If your CPP/OAS benefit were $1,800 per month today, by moving the retirement age to 70, your benefit increases to $2,520. Not luxurious but far more realistic.

It essentially sees the income replacement rate climb from 46% (33% CPP, 13% OAS) to just over 64%.

The next step is to prop up middle/upper-middle earners by bumping the contribution cap up, but also bumping the maximum income up. (Today your benefit would be calculated on an income in the mid 60s max.) So 46% of an income up to ....
I would strongly argue for increase the cap on contributions and the benefits to reflect an income of up to $100,000 for payout purposes. (for the CPP portion)

The last step is to shore up single, low-income retirees. I would argue for doing this by lowering the tax-back threshold for OAS benefits to $100,000 per year (where the clawback would begin).

The savings can then top low-income, single retirees under GIS. I don't have the numbers for that one, but it should be able to add a couple hundred a month for qualifying persons I would think.

I think that would mostly cover Canadians needs for retirement. Though, I would argue a significant bump in minimum wage would help low and lower-middle income earners with private savings and allow those who do have to work past retirement age to do so with fewer hours.

It would also make sense to bump the minimum age at which one could take CPP to 65 and boost the maximum to 75. The latter would ensure pretty much anyone a comfortable retirement at 75.

 

[afransen]

What we need on pensions, plain and simple is to shift the retirement age to 70.

What this does (and yes, I'm sure of the numbers), assuming you reinvest the savings in higher payouts is to raise to the benefit by 40%.

ie. If your CPP/OAS benefit were $1,800 per month today, by moving the retirement age to 70, your benefit increases to $2,520. Not luxurious but far more realistic.

It essentially sees the income replacement rate climb from 46% (33% CPP, 13% OAS) to just over 64%.

The next step is to prop up middle/upper-middle earners by bumping the contribution cap up, but also bumping the maximum income up. (Today your benefit would be calculated on an income in the mid 60s max.) So 46% of an income up to ....
I would strongly argue for increase the cap on contributions and the benefits to reflect an income of up to $100,000 for payout purposes. (for the CPP portion)

The last step is to shore up single, low-income retirees. I would argue for doing this by lowering the tax-back threshold for OAS benefits to $100,000 per year (where the clawback would begin).

The savings can then top low-income, single retirees under GIS. I don't have the numbers for that one, but it should be able to add a couple hundred a month for qualifying persons I would think.

I think that would mostly cover Canadians needs for retirement. Though, I would argue a significant bump in minimum wage would help low and lower-middle income earners with private savings and allow those who do have to work past retirement age to do so with fewer hours.

It would also make sense to bump the minimum age at which one could take CPP to 65 and boost the maximum to 75. The latter would ensure pretty much anyone a comfortable retirement at 75.

I'd argue that forcing people into a mandatory 65% income replacement pension is maybe a bit overkill. At that point, it makes it so that people should almost not have private savings beyond their pension entitlement (65% of pre-retirement income is nearly equivalent to continuing to earn employment income).

It also increases the longevity risk baked into CPP. The current actuarial assumptions don't allow for much upside risk in longevity, which has the potential to come to pass in the next few decades.

 

[Northern Light]

I'd argue that forcing people into a mandatory 65% income replacement pension is maybe a bit overkill. At that point, it makes it so that people should almost not have private savings beyond their pension entitlement (65% of pre-retirement income is nearly equivalent to continuing to earn employment income).

It also increases the longevity risk baked into CPP. The current actuarial assumptions don't allow for much upside risk in longevity, which has the potential to come to pass in the next few decades.

We'll have to disagree.

Canadians lack sufficient private savings for retirement broadly speaking from the middle income down, this was an issue prior to housing costs exploding, particularly for low and lower-middle income earners.

They simply lack sufficient funds after the bills are paid to contribute to an RRSP or the like.

Many also lack the requisite investor-knowledge base and for most that means a very low-risk mutual fund package on any savings the do accumulate and that will tend to barely keep with inflation from a returns perspective.

Canada's state pension payout is among the lowest in the developed world.

Canada is below the U.S. with 10 countries below us, and 42 countries above us.

The OECD average is 11% of income higher than us (or 21% higher relative payout)

I would suggest a target of matching the E-U average income replacement would be pretty reasonable. That's 64%

You can play w/the graph/data above, here:

Pensions - Net pension replacement rates - OECD Data

Find, compare and share OECD data by indicator.

data.oecd.org

* they show Canada at 51% btw, which I would take to include GIS, cause there's no way CPP/OAS add up to that.

 

[W. K. Lis]

The typical age to take your CPP benefits is at 65, but you can take your retirement pension as early as 60 or as late as age 70.

 

[lenaitch]

Moving the retirement age to 70 is fine, but only for office workers and professionals - I have a colleague who is well into her 80s and she still works part-time. My husband was a blue collar worker, and by age 62 he was unemployable due to physical issues. He started collecting US Social Security then. I would not agree to anything that would prevent people from retiring early if they so choose.

Don't confuse actual retirement ages with eligibility ages for CPP, OAS, etc. which is what is being discussed. Public and private pension plans each have their calculation for eligible retirement ages, and people who manage their own can retire when they please. If the suggestion is to have varying eligibility for CPP, etc. based on the type of work, in addition to probably being unworkable (what is a "professional"?), it would probably run afoul of the Charter.

Even in retirement, people can still work.

 

[afransen]

I'm not sure what the future of work and retirement looks like, but between increasing automation and increasing lifespan/healthspan, I think the distinction between work and retirement will become blurrier. Of course, most people are just doing straight extrapolations of 1970 to 2020 out over the next fifty years, which may be wildly wrong.

 

[Northern Light]

Moving the retirement age to 70 is fine, but only for office workers and professionals - I have a colleague who is well into her 80s and she still works part-time. My husband was a blue collar worker, and by age 62 he was unemployable due to physical issues. He started collecting US Social Security then. I would not agree to anything that would prevent people from retiring early if they so choose.

I think the default age of CPP for retirement is a straight math thing, average pay in, average pay out.

I completely understand that there are people unable able to work to or beyond 70; but I think the answer for that is some form of 'disability' pension, and/or an supplementary sectoral pension plan.

 

[Northern Light]

I'm not sure what the future of work and retirement looks like, but between increasing automation and increasing lifespan/healthspan, I think the distinction between work and retirement will become blurrier. Of course, most people are just doing straight extrapolations of 1970 to 2020 out over the next fifty years, which may be wildly wrong.

Most Scandinavian countries are already at/near 70 for their pension age, and its straight-forward actuarially its the ration of years paying in to years paying out on average.

Or thought of a different way, the ratio of those working, to those retired.

To compare, when CPP started, (1967) there were 7.7 people working for every retiree. That ratio today is 3.4 to 1, and declining.

That's not sustainable.

I don't know what number we need, but I suspect its at or above 4 to 1 to make things comfortable for everyone.

 

[afransen]

People will tend to get rather testy if you move the retirement goal posts on them. Many governments have discovered this, Macron is a recent example. It's not to say it shouldn't be done. And maybe Canada will escape the same kind of contention seen elsewhere--the 1990s CPP reforms were relatively readily accepted by the public, and it has served us very well.

 

[picard102]

At that point, it makes it so that people should almost not have private savings beyond their pension entitlement

They don't have private savings. We should plan accordingly.

 

[Northern Light]

People will tend to get rather testy if you move the retirement goal posts on them. Many governments have discovered this, Macron is a recent example. It's not to say it shouldn't be done. And maybe Canada will escape the same kind of contention seen elsewhere--the 1990s CPP reforms were relatively readily accepted by the public, and it has served us very well.

I think the blow-back for Macron; and the lesser blowback for Harper when tried to bump the age to 67 occurred because the savings from the age bump were not reinvested to raise the benefit level.

They were perceived to be the rich taking back a benefit to fund tax reduction schemes.

In the case of France, the pension benefit is quite generous, and the retirement age too low (62) with the further aggravating factor, that their pension scheme isn't really sustainable in its current form.

Canada's plan is solvent and sustainable as is; but the benefit too low, I think it would be more feasible to raise the benefit with the age, rather than by raising the contribution rate substantially. As long as the savings from raising the age is reinvested, I think people will buy in.

Clearly, one should not seek to move an imminent goal post (ie. if you're set to retire this year or next, bumping the age is not fair, and you can choose to defer your pension anyway).

I would tend to suggest, bumping to 67/68 with 5 years notice, and 70 with 10 years notice. That seems politically saleable to me.

***

France, as I noted, has problems in terms of how not to be seen clawing back a benefit for middle and low-income earners. I think the unreasonably low age of retirement there must rise; but I would suggest that rather than 'banking' the entire savings they need to tie that, at least in part, to enriching the benefit for the lowest income pensioners and providing some other 'gain' for the middle class, perhaps offset by a modest rise in business tax or on high-income earners.

The politics is straight-forward, a President who is very affluent, ex-Goldman Sachs, slashing a fought-for benefit to low and middle-income earners, while cutting taxes and labour-friendly regulations is going to go down fairly bitterly in most places, and moreso than most in France!

 

[W. K. Lis]

CPP Investments could include corporations you work at, or properties you work or live in.

From link.

Canada Pension Plan Investment Board (CPP Investments) ended its second quarter of fiscal 2023 on September 30, 2022, with net assets of $529 billion, compared to $523 billion at the end of the previous quarter.

The $6 billion increase in net assets for the quarter consisted of $1 billion in net income and $5 billion in net transfers from the Canada Pension Plan (CPP).

In the five-year period up to and including the second quarter of fiscal 2023, CPP Investments has contributed $169 billion in cumulative net income to the Fund, and over a 10-year period, it has contributed $303 billion to the Fund on a net basis.

The Fund, which includes the combination of the base CPP and additional CPP accounts, achieved five-year and 10-year annualized net returns of 8.5% and 10.1%, respectively. For the quarter, the Fund returned 0.2%, continuing to outperform leading global indices during this period.

For the six-month fiscal year-to-date period, the Fund decreased by $10 billion consisting of a net decline in value of $22 billion after all CPP Investments costs, plus $12 billion in net CPP contributions. For the period, the Fund’s net return was negative 4.0%.

“Our portfolio remains resilient despite inflationary pressures, increases in central bank rates and the continued impact of the war in Ukraine, which resulted in the continued decline in global financial markets during the quarter,” said John Graham, President & CEO. “While we expect these conditions to persist throughout the fiscal year, our diversified investment portfolio – across asset classes and geographies – continues to create long-term value for CPP contributors and beneficiaries. Our active management strategy, designed to deliver results over the long term, remains on track as demonstrated by our strong 10-year net return of 10.1%.”

The Fund’s quarterly results were adversely affected by broad declines in global public and private equity markets and in fixed income markets. However, the decline in value was more than offset by gains in U.S. dollar-denominated private equity, real estate and credit investments, which benefitted from foreign exchange gains, and by positive returns on investments in energy and infrastructure. Gains by external investment managers in fixed income, currencies and commodities also contributed positively to results.

Second-Quarter Performance:

• Net assets increase by $6 billion
• 10-year annualized net return of 10.1%
• Diversified portfolio resilient in the face of global headwinds

The base CPP account ended its second quarter of fiscal 2023 on September 30, 2022, with net assets of $512 billion, compared to $509 billion at the end of the previous quarter. The $4 billion increase in assets consisted of $1 billion in net income and $3 billion in net transfers from the CPP. The base CPP account achieved a 0.2% net return for the quarter, and a five-year annualized net return of 8.6%.

The additional CPP account ended its second quarter of fiscal 2023 on September 30, 2022, with net assets of $17 billion, compared to $14 billion at the end of the previous quarter. The $2 billion increase in assets consisted of $38 million in net income and $2 billion in net transfers from the CPP. The additional CPP account achieved a 0.4% net return for the quarter, and an annualized net return 5.0% since inception in 2019.

The additional CPP was designed with a different legislative funding profile and contribution rate compared to the base CPP. Given the differences in their design, the additional CPP has had a different market risk target and investment profile since its inception in 2019. As a result of these differences, we expect the performance of the additional CPP to generally differ from that of the base CPP.

Furthermore, due to the differences in their net contribution profiles, the assets in the additional CPP account are also expected to grow at a much faster rate than those in the base CPP account.

 

[Northern Light]

Yes, that was obvious, and no, I am not suggesting to vary eligibility based on occupation, I am saying the age at which you become eligible to the CPP/OAS should not be increased. The CPP is considered sustainable at this point......

The problem, from my perspective is that the CPP is only sustainable but it provide a very low pay-out which will not sustain most people in retirement.

What good is a pension that leaves you in poverty? If we don't bump the retirement age up, we would have to substantially raise contribution rates in order to bring benefits to a minimum reasonable level.

I'm not sure why you would advocate for a broad-based low retirement age which is below current global norms and which suggests ratio only 43 years work to 19 years retirement.

I think the latter is simply far too long.

I think we need more globally normative paid vacation mandates throughout people's working lives, certainly not below 4 weeks.

But the notion that people should sit on their hands for almost 2 decades is not reasonable to me.

Perhaps I'm also influenced by the fact my mother's health deteriorated rapidly in retirement.

Without the need to get up and go to work regularly, and get out at least 5 days per week, as a life-long smoker, she no longer got good cardio, and as a result COPD set in sooner and more severely than it would have otherwise.

That in turn reduced her circulatory function; and when combined with reduced intellectual stimuli left her suffering from moderate dementia, principally in the form of short-term memory impairment.

To me, one should enjoy one's entire life, and have good work life balance, and automation should be supporting us in a shift to shorter work week's as well.

But retirement should surely not last much more than 10 years on average.