Description of the CPP Enhancement
- The changes effected under the enhancement were agreed to in principle by Canada’s Ministers of Finance on June 20, 2016.
- The enhancement can be characterized as having two pieces:
- First, it provides a broad-based increase to the benefit by increasing the current 25% benefit rate to 33%. After full transition (see more on the transition under General Assumptions), a Canadian with $50,000 in constant earnings throughout their working life would receive a yearly pension benefit of roughly $16,000 instead of the $12,000 they would currently receive, or approximately $4,000 more per year.
- Second, it further increases the benefit to middle income Canadians by raising the earnings base (i.e. the Year’s Maximum Pensionable Earnings or YMPE) upon which benefits are determined by 14% (targeting $82,700 in 2025). Those Canadians in higher income brackets are expected to be able to take care of themselves through additional private savings programs.
- The first part of the enhancement is funded by additional contributions at 1% from employees and 1% matched by their employers, to be phased-in fully by 2023. As a result, total contributions will reach 5.95% from employees and 5.95% from employers. The phase-in starts in 2019 and ends in 2023.
- The second part of the enhancement, related to the increase in the YMPE, will require additional contributions at 4% from employees and matched by their employers. The contributions will be applied to the difference between the increased YMPE and the old YMPE. These contributions phase in during 2024 and 2025 (about half each year). Of particular note is that these additional contributions related to the second part of the enhancement will be tax-deductible (current CPP contributions are tax credits).
Retirement occurs at age 65.
The age that the user enters should be their age at July 1, 2016.
The earnings that the user enters should be their 2016 annual employment income.
The user has not received nor will receive CPP disability benefits.
The user works and contributes to the CPP for their full career.
Users have sufficient earnings/employment/contribution history to generate a CPP benefit at retirement proportionate to their 2016 earnings vs. 2016 YMPE.
The user's 2016 earnings as a proportion of the 2016 YMPE is representative of the same proportion for the user's entire career.
Salary and average wage inflation increases are assumed at 3.0% per year.
Benefits under the enhancement will be “fully funded”; we have assumed a phase-in of benefits of 40 years. For the first part of the enhancement, the phase-in occurs from 2019 through 2058. For the second part, the phase-in occurs from 2025 through 2064.
There are additional adjustments to the projected benefits to reflect the 2019-2023 phase-in of the extra 1% contributions and the 2024-2025 phase-in of the 4% contributions on the increased YMPE.
The average monthly contributions shown are based on the contributions made each year starting in 2016 (or at age 18 if later), over the remaining number of years until the user reaches 65, taking into account the increases in salary and average wage inflation. Actual contributions will be lower than the average in earlier years and higher than the average as the user approaches age 65.