Let’s talk CPP, The Canada Pension Plan. For a lot of young Canadians like me, retirement isn’t really on our radar. We’re more concerned about building our careers than what’s going to happen when they’re over. But we do want to be sure that we can look forward to a good, secure retirement. So it might be shocking to learn that 24% of families’ currently approaching retirement doesn’t have enough saved. That’s 1.1 million families at risk of slipping into poverty when they retire and, as someone who eventually wants to have a family, that’s concerning, to say the least! So what do you need to know about the Canada Pension Plan? And what is the Liberal government doing to ensure we can all retire with dignity?
Maximum pensionable earnings
Well, the current CPP provides a secure, predictable benefit to you when you retire. It’s paid for by contributions from you and your employer throughout your career, at a rate of four-point-nine-five percent of your salary up to a yearly maximum, which is known as the yearly maximum pensionable earnings. This max is updated each year to keep up with inflation. In 2016, it is just under fifty-five thousand dollars. Then, when you retire at 65, you receive the annual benefit of about 25% of your average pre-retirement earnings up to this maximum. I know, it’s a bit confusing, but basically- you pay into the system while you are working and then reap the benefits when you retire. So that’s how the CPP works but it needs to be able to keep up with the reality of fewer and fewer workplace pensions. In order to strengthen the CPP for our generation, the liberal government has introduced two major changes:
- First, the benefit you receive upon retirement is being increased from 25% of your pre-retirement earnings to 33%. Or up to an extra forty-four hundred bucks a year.
- Second, a new, higher income bracket is being added, so incomes up to 114% of the YMPE will now also be eligible for CPP.
So, if you make over about 55k a year, more of your salary will be used to calculate your benefits and that’s great news! Estimates say these changes will reduce the number of families who are at risk of not saving enough for retirement by 25% and among families still at risk, the income gap is greatly reduced. Now, contributions by you and your employers will increase, but by a very small amount – only one percentage point. Plus, the change will be phased in over 7 years, so the impact will be small and gradual and these contributions are also tax-deductible. So after taxes, in today’s dollars, you and your employer would be looking at an extra $14 bi-weekly if you are making $54,900 or up to $29 bi-weekly if you are making $82,700 or more and for low-income workers, increased contributions will be offset by increases to the Working Income Tax Benefit. All in all, these changes are good news for young Canadians like you and me. They mean more guaranteed retirement earnings and a much easier path to a safe and secure retirement.