Personal Finance

New Year, New Enhancements in Canada Pension Plan (CPP)

In 2019, the Canada Pension Plan (CPP) underwent significant enhancements, positioning itself as a vital pillar of retirement income for Canadian workers. As we approach 2024, the final stage of these enhancements is set to take effect, marking a pivotal moment in the evolution of the CPP and its impact on the financial landscape for Canadian workers.

The Foundation: CPP and its Mandatory Participation

The CPP, funded collaboratively by workers, employers, and self-employed individuals, is a mandatory program for most individuals over 18 working in Canada, excluding Quebec. The program applies to those earning above $3,500 annually, with exemptions for those below this income threshold.

CPP Enhancement Unveiled: A Boost to Retirement Income

One of the key features of the enhanced CPP is the significant increase in the maximum retirement pension. For a young worker planning a full 40-year career, the retirement pension in 2064 is projected to be 50% higher compared to recent retirees. This enhancement aims to raise the income replacement level from 25% to 33% of a worker’s pensionable earnings by 2064, impacting not only retirement pensions but also survivor and disability pensions.

New Year New Enhancements in CPP

Evolving Contribution Landscape: Understanding CPP Contributions

CPP contributions are calculated based on annual earnings within defined limits, with the Year’s Maximum Pensionable Earnings (YMPE) setting the upper boundary. Since 2019, CPP contribution rates have been gradually increasing, with a 1% rise for employees and employers, and a 2% increase for self-employed individuals by January 2023.

2024: Introducing Year’s Additional Maximum Pensionable Earnings (YAMPE) and Second Additional CPP Contributions (CPP2)

In 2024, a new earnings ceiling, the Year’s Additional Maximum Pensionable Earnings (YAMPE), will be introduced. This sets the stage for additional contributions beyond the YMPE, constituting the second phase of the CPP enhancement. The YAMPE will be approximately 7% higher than the YMPE in 2024.

  • Employees and employers will contribute an additional 4% on earnings exceeding the YMPE up to the YAMPE.
  • Self-employed individuals will contribute 8% on earnings within this range.

These contribution rates are set to remain constant indefinitely after the adjustments in 2024.

Contribution Rates and Maximums in 2024

  • Maximum pensionable earnings will increase to $68,500 from $66,600 in 2023.
  • A new second earnings ceiling of $73,200 is introduced for calculating second additional CPP contributions (CPP2).
  • Contribution rates for employees and employers stay at 5.95%, with maximum contributions rising to $3,867.50 each.
  • For self-employed individuals, the rate remains at 11.90%, with a maximum contribution of $7,735.00.
  • CPP2 contributions are set at 4% for employees and employers (maximum $188.00 each) and 8.00% for self-employed individuals (maximum $376.00).

Calculating Additional CPP Contributions for 2024

If you make less than $68,500:

Your annual CPP contribution will be (annual income – $3500) * 0.0595. For self-employed individuals, this includes the employer portion.

If you make more than $68,500 but less than $73,200:

Your CPP will consist of Base CPP contribution and CPP2 contribution. The additional 4% CPP2 contribution is mandatory on earnings above $68,500, up to $73,200. For self-employed individuals, the percentage deduction is 8%.

  • Base CPP contribution: ($68,500 – $3500) * 0.0595 = $3,867.50
  • CPP2 contribution = (Your income – $68,500) * 0.04 (with a maximum contribution of $188)

If you make more than $73,200:

No additional amount will be deducted from your salary. Your annual CPP contribution will be $4,055.50 if employed and $8,111 if self-employed.

Looking Ahead: 2025 & Beyond

The Canada Revenue Agency (CRA) projects that in 2025, the second earnings ceiling will be set approximately 14% higher than the first earnings ceiling. From 2026 onwards, both ceilings will increase incrementally each year, while contribution rates will remain constant indefinitely.

In conclusion, the 2024 CPP enhancement marks a critical juncture in the evolution of the CPP, with changes in contribution structures and earnings ceilings. Understanding these intricacies is vital for individuals navigating their financial future in the Canadian workforce.