CPP and you
What the expansion means for your future.
After a decade of trying, Canada’s finance ministers reached a historic consensus Monday to expand the Canada Pension Plan.
The agreement, signed by federal finance minister Bill Morneau and eight of his provincial counterparts, provides for the first substantive change to our national retirement scheme since its creation by Lester B. Pearson in 1965.
It also means that Ontario’s go-it-alone scheme, which pushed pension reform onto the national stage, is dead.
Instead, by 2019, all working Canadians will be paying into an expanded CPP in return for a bigger future benefit.
The deal recognizes that the time has finally come to do something about retirement security. Everyone will pay more. Everyone will get more. In an interview Monday night, Ontario Finance Minister Charles Sousa said he was proud to be a part of the weekend meetings in Vancouver.
It was an occasion where regional differences were set aside to create something of greater national consequence. “We came up with an affordable, universal plan,” Sousa said. “It was nation building that happened here. It was bigger than today. It was all about tomorrow.” It will be another 21⁄ years before any changes take
2 place. Many details are still to be worked out.
Here are answers to basic questions about the deal.
What did the ministers agree to do? They agreed to a gradual expansion of the pension plan. Premiums will rise in steps over seven years, starting in 2019. “Gradually” is the key word. Canadians will gradually pay more and gradually get more.
Now, employers and employees each contribute 4.95 per cent of income between salaries of $3,500 and $54,900.
The agreement increases the upper income limit by 50 per cent to $82,700 by 2025.
Another key change is that the current CPP is meant to replace 25 per cent of earnings up to the $54,900 ceiling. The new plan will replace one-third of income up to the higher ceiling.
How much are pensions going up? The maximum CPP pension in 2016 for someone retiring at age 65 is $13,110. That is based on maximum earnings for CPP purposes of $54,900.
The Department of Finance says that under the new scheme, at maturity, a Canadian earning slightly less — $50,000 in constant earnings through- out a working life — would receive a yearly pension of $16,000.
That compares with the current maximum of $12,000 at that income level.
Bear in mind that “at maturity” is a euphemism for about 40 years of work. And few people get the maximum. The average CPP pension is about 60 per cent of the maximum amount.
Will the changes affect RRSP room? No, according to Sousa.
And in order to avoid increasing the after-tax cost of the added premiums, Ottawa will provide a tax deduction for the additional contributions rather than a tax credit.
Will it be compulsory? Yes.
Who pays what? Employees and employers will continue to pay equally at the 4.95-per-cent rate. The self-employed continue to pay both portions.
When will I start paying more? On Jan. 1, 2019. An employee earning $55,000 a year in 2019 will see an increase in monthly premiums of $7 a month, The Canadian Press reports.
At that income level, the premium rises by another $7 a month in each of the next five years.
This earner will pay $420 more annually by then.
For those earning above that, there is another two years of phase-in.
How much more will I get?
Circumstances are different. It depends on how long you work and how much you make.
If I retire after 2019 will I get something?
Yes, but it isn’t clear how much. But someone retiring in 2020 having made one year of the increased contribution would get a minuscule amount. Someone retiring in 2030 would have 10 years of extra contributions.
Who benefits most?
Young people and those in mid-career. Fewer and fewer people entering the workforce are being enrolled in company pensions. So this measure adds income support for them. Time is on their side to let the money grow.
Those who are already retired will see nothing, those over 50, very little.
Sousa says that some years from now, when people look back, they may appreciate this week’s achievement better.
“In the 1960s, when they were putting CPP in place, it was tough slogging. But today it’s not a question of should we have CPP, but, ‘My God, what if we didn’t have it.’ ” It’s hard to disagree with that. This makes the enhancement all the more important. Adam Mayers writes about investing and personal finance on Tuesdays and Thursdays. Have a question? Reach him at amayers@thestar.ca