Enhancements to the Canada Pension Plan started January 1, 2019. Contributions to the CPP will increase for the next 7 years from last year’s 4.95% so that you will receive less take-home pay. How much will this be?
The CPP retirement benefit objective prior to the enhancements was to provide up to one-quarter (25%) of the average work earnings which was $55,900 in 2018. Once the enhancements are in place and for a person that has enough years of contribution at the higher levels, the retirement benefit is to provide one-third (33.33%) of the average work earnings.
Staged Payments Increase
According to the Government of Canada at Canada Pension Plan enhancement, there are two steps for the increase in contribution rate.
Step 1: 2019 to 2023 – The contribution rate increases each year from the 2018 rate of 4.95% to 5.95% in 2023 for employees (as indicated in the table given later) on earnings between $3,500 and the Year’s Maximum Pensionable Earnings (YMPE) that we now have. The YMPE increases each year depending on how much the average wage increases, which is not the same as the consumer price index ( i.e. inflation). There is more on this subject at the end of this post.
Step 2: 2024 to 2025 – For these two years a second earnings level, called the Year’s Additional Maximum Pensionable Earnings (YAMPE) is introduced which is above the YMPE. The YAMPE is 7% more than the YMPE for 2024 but increases another 7% to its final amount of 14% more for 2025. Between these two earnings levels, the Employee Rate is 4% and the Employer Rate is 4% (or 8% if self-employed).
YMPE and YAMPE Amounts
The 2019 YMPE amount has been set at $57,400 as given in Contributions to the Canada Pension Plan. Future amounts, of course, depend on how wages change in the future. The following table shows these amounts (as given in this link) and the contribution rates. (Note that there are other published values for the YMPE and YAMPE before the Enhanced CPP took effect and should be ignored.) The calculations are as follows:
- – The Maximum YMPE Contribution is the YMPE less the $3,500 minimum amount times the YMPE rate.
- – The Maximum YAMPE Contribution is the YAMPE less the YMPE times the YAMPE rate.
- – The Maximum Contribution at YAMPE is the Maximum YMPE Contribution plus the Maximum YAMPE Contribution.
|Year||YMPE||YMPE Employee Rate||Maximum YMPE Contribution||YAMPE||YAMPE Employee Rate||Maximum YAMPE Contribution||Maximum Contribution at YAMPE|
Impact on Take-Home Pay
If you are below the Year’s Maximum Pensionable Earnings (YMPE) the increase in CPP payments will be as indicated in the above table. For example, for 2019 the increase will be .15% of your earnings, for 2020 another .15%, for 2021 it will be an additional .2% and for 2022 and 2023 it will be and additional .25% each year. As long as your income does not increase in these years you will see your take-home pay decrease by this percent.
For example, for total earnings of $40,000, the CPP contribution in 2018 would have been ((40,000-3,500) x 4.95% = ) $1,806.75. In 2019 the increase in CPP contribution will be $54.75 or about $2.10 every 2 weeks, which is not a lot. However, in 2020 it will be $109.50, in 2021 – $182.50, in 2022 – $273.75 and finally in 2023 it will be $365 which will be the amount from then on.
For this example, the 1% increase of $365 is on top of the $1,806.75 for a total of $2,171.75. Put another way, this 1% increase in 2023 results in you paying just over 20% more towards the CPP for a fixed salary of $40,000. This is shown in the chart below.
For those with a salary of more than or equal to the YMPE, the contribution amount keeps increasing because the YMPE increases each year as well and the contribution rate. You can examine the table to see how much it changes. However, the chart below shows that for a person that has yearly earnings that exactly matches the YMPE each year, the change from the 2018 contribution is over 50% or a hit to the take-home pay of over $1,300.
For anyone earning the Year’s Additional Maximum Pensionable Earnings (YAMPE) or more, the extra deduction of $388 in 2025 pushes the CPP deduction to $4,426.90 or $1,733.10 more that it was in 2018. As shown in this chart, due to the enhanced CPP and the increase in the YMPE, the reduction in take-home pay is now over 66%.
Because the YMPE and hence the YAMPE (which is 14% higher) increase each year, anyone making above either of these will have more taken from their earnings each year. As shown at the end of this post, the YMPE is increasing by about 2% each year. Therefore, expect that your CPP contribution will increase by this 2% times the 5.95% of the employee rate. That is, take the previous year’s YMPE and multiply it by (.02 x .0595 = ) .12%. This may not seem like a lot and for now is less than $80 per year or $3 per bi-weekly pay. For a person earning the YAMPE, the extra 4% must be taken into account by adding (.02 x .04) = .08% to the amount between the YMPE and the YAMPE.
Spreadsheet for Calculating Contributions
To help you see how the Enhanced CPP will affect your CPP deductions, I have prepared a simple Excel spreadsheet where you can enter your Earnings. It also contains the table and charts presented in this post as well as the YMPE and Consumer Price Index from 1966.
Click on Download Spreadsheet and then enter your Earnings and the Increase per Year you expect. The results are shown in the table below them for 2018 to 2025. The spreadsheet can be used in the future by changing the Year and the YMPE as they become available. Scroll down to see other charts and tables, if you are interested.
How Does This Affect the Pension?
Keep in mind that you will only receive 100% of the maximum CPP benefit when you retire if you have 39 years of earnings that exceed the YAMPE each year. Anything less will result in a lower pension.
For the example of the $40,000 earnings, the CPP contributions go up by 20%. However, this person is only 71% of the $55,900 YMPE in 2018. Does this mean if the person continues to earn at this percent of the YMPE the pension will be about 70% of the maximum available? I highly doubt it. How the increase of the enhanced CPP to include income up to the YAMPE (14% above than the normal YMPE) will affect the pension for people earning in this lower range in not clear to me at this time.
I expect that the only people to get 100% of the maximum pension will be those that consistently earn above the YAMPE which in 2025 will be close to $80,000. It is probably an overstatement to say that getting 33% compared to the existing 25% of the pension will be available to many people.
So far I have not seen any analysis on how much people will actually get due to the enhanced CPP. However, you can find a number of comments on the internet if you search for them. There are two in particular:
- – J. Chevreau on Jan 10, 2019 discusses the enhanced CPP and “how much you’ll pay to how much you’ll get”.
- – D. Runchey describes in detail how the pension will be calculated in the future in Understanding and calculating the “Enhanced CPP” changes. I have consulted previous articles by him and found them and this one to be very informative and useful.
Based on Runchey’s article, the original pension calculations are still valid, with the Enhanced CPP being included by new and separate calculations. There is one additional calculation for the transition years from 2019 to 2022 for earnings up to the YMPE and another one for the earnings above the YMPE. As well, the new calculations make use of a “drop-in” provision instead of the existing “drop-out” for child-rearing and disability years. The best 39 years (he indicates that it is 40 years) from age 18 must still be used, but now become a combination of the old and new calculations.
According to the Runchey article, the additional benefits due to the enhanced CPP will rise from $1.44 to $14.98 per month ($17.28 to $179.76) and then stay at the higher figure from then on, but it is not clear to whom they will apply.
Change in YMPE and Inflation
It was mentioned above that the YMPE is not the same as inflation. Inflation is the common name for the change in the Consumer Price Index from year to year.
There is a set of Government of Canada tables of the YMPE, called the Maximum annual personable earnings (it would be nice if the same name was used everywhere), for all years the CPP has been in existence (1966 to 2019). The Consumer Price Index for these same years can be found at Historical Inflation Rates for Canada. They only go to 2014, so go to this Stats Canada page for the latest ones.
The following chart shows how the yearly change in YMPE and Inflation compare from 1996 onward. The YMPE is extended beyond 2018 with the amounts given in the table above. They are really not the same, even though you might expect that there would be some relationship. For example, is inflation a result of increased wages or is the opposite true that wages increased because inflation increased.
It is not clear from the above chart if the impact of the yearly changes actually are similar over the years. The following chart shows that the YMPE lags behind the CPI up to the mid 1990’s and then increases at about the same rate until the early 2010’s. After that the YMPE increases faster.
Notice that from 2019 onward, there is a steep increase to the YMPE. We will have to wait to see if the CPI also increases at the same rate. Perhaps amounts provided by the government for the table above are larger than they actually will be. Or perhaps they are expecting inflation to increase as employees look for increased wages to compensate for the larger CPP contributions required from now.
There is one other way to see how the YMPE compares to the effect of inflation. This is to start in 1966 with the $5,000 of the YMPE at that time and increase it by inflation. The chart below shows what this looks like from 1996 to 2018. It is almost impossible to see the difference as the lines overlap. To show the difference, the orange line is how much the $5,000 if increased by Inflation is larger than the YMPE amount. It is expressed as a percent. The 1.5% to 2.5% difference indicates that the YMPE is about a year behind inflation.
I will be updating my 4 part post on the When to Take the CPP in the future to take into account the Enhanced CPP, but it is of low priority. It is useful for the next few years until the full effect of the increased contributions take effect. The spreadsheet was intended to be used when a person is within 10 years of retirement so that a choice between delaying or taking early can be evaluated. The impact of a few dollars per month will not change this decision for the next few years.
Some of the spreadsheets, in particular Estimating How Much You Need In Retirement will need to be significantly adjusted as they apply to anyone at any age. It is possible that the percent approach can still be used with the benefit being adjusted upwards as the number of years away from retirement increases.
Of more importance is the changes required to Lifetime Finances. Presently it only requires that the user enter a percentage of the maximum or an exact amount that cannot exceed the current year’s maximum payment. This is then inflated to retirement. To take into account the Enhanced CPP, the salary must be considered as well as the YMPE and YAMP plus their percentages and the increase of these limits over time. The automatic CPP deductions calculations must also do the same. This will take some time to get correct but until then there are work-arounds: increase the CPP deductions on the Expense page; add the additional CPP pension income on the Income page as Other Taxable income.
I expect to have more analysis on the impact of the enhanced CPP in the future so comments and suggestions are always welcomed. Please use the email form on the Contact page or one of the email addresses given there. I have not enabled comments on any of the posts because it generates too much spam.