Starting in 2019, there will be changes to the Canada Pension Plan (CPP). I have to admit I was a bit surprised when I heard about it (and only learned about it while I was researching something unrelated online). Also, the explanations of the changes given on the Government of Canada website were about as clear as mud, so I thought I’d try to simplify it for you.
One important note: I am not a pension expert, so please verify what I’m telling you with someone who is.
The Effect on your Contributions
Current State
In 2018, you don’t pay CPP on your first $3,500 earned. Above that, you pay into it at a rate of 4.95% of your gross pay until you hit the annual earnings limit, currently $55,900. This means that if you make $55,900 or more in a year, you pay a maximum of ($55,900 – $3,500) X 4.95% = $2,593.80 in your pension, and your employer matches (or your amount is doubled if you’re self-employed).
Starting in 2019
Starting in 2019, the percentage of your pay that you contribute to CPP each paycheque will increase by a little bit each year until 2023. It will go up by 0.15% to 0.25% per year, until it hits 5.95% in 2023 (11.9% if you’re self-employed). This means that, once we hit 2023, if you take the 2018 dollars example above, you’d be paying a max of ($55,900 – $3,500) X 5.95% = $3,117.80. In reality it’ll be a little more than that, because the annual earnings limit is tied to inflation and goes up each year.
Starting in 2024
So it gets more interesting when we hit 2024. No more increases to the percent you contribute per paycheque. However, the annual earnings limit will be increasing by 7% over what it would have been under the old rules. This will happen again in 2025, when the annual earnings limit will be another 7% (for a total of 14%) higher than the original annual earnings amount would have been. On this extra 14%, you and your employer will both put in 4% of your earnings (not the 5.95% you were capped at up to that point).
If we take the 2018 dollars example one more time, the max you’ll pay in 2025 would look like this:
(($55,900 – $3,500) X 5.95%) = $3,117.80, plus the extra amount: ($7,826 X 4%) = $3,430.84
This amount is about 33% higher than it is today, and remember: your employer is matching your increased contributions, too.
Other Changes
There are a few other changes to the plan coming in 2019 that affect the CPP Disability Benefit and Survivor’s Pension, but those are beyond the scope of this post (in other words, I don’t feel like I understand them well enough to speak to them). Read more about them here.
Wrapping it Up
The reality is that, right now, around 1.1 million Canadian families approaching retirement aren’t saving enough, according to this post by the Government of Canada. That’s a big friggin’ number. Canadians today just aren’t saving enough, and while you might be pissed that more money is going to be coming off of each paycheque, the reality is that it’s for your own good. This is a good thing for most Canadians, and I’m happy that it’s happening.
It’s no substitute for putting more of your own money into a retirement fund, but it’s a hell of a step in the right direction.
