It’s Sustainable: Canada Pension Plan Outlook

Walter Harder

The Canada Pension Plan (CPP) has earned an average return of 11.1% over the past ten years, and as of March 31, 2019, its value was $392 billion dollars. But, with longer life spans and the boomer generation retiring, will that be enough? Here’s a look ahead at how Canadians will fare as changes to the CPP program occur:

According to the Chief Actuary of Canada’s most recent triennial report, CPP will be sustainable over the next 75 years. But recent changes to the plan will require it to increase pensions from the current rate of 25% of pensionable earnings to 33% of pensionable earnings in order to ensure this is the case. These changes started this year, although the increased pensions won’t kick in for some time.  To accommodate the increased payouts, premium rates began to increase this year and will continue to increase each year until 2025.

The greatest increase will be felt by those earning more than the maximum pensionable earnings ($57,400 for 2019) but rate increases will be felt by all contributors until 2023. 

Here’s how an employee earning $50,000 (in real dollars) will fare over those years:

Year

Earnings

Rate

Premiums

Increase

 

2018

$50,000

4.95%

$2,310.75

N/A

 

2019

$50,000

5.10%

$2,371.50

$69.75

 

2020

$50,000

5.25%

$2,441.25

$69.75

 

2021

$50,000

5.45%

$2,534.25

$93.00

 

2022

$50,000

5.70%

$2,650.50

$116.25

 

2023

$50,000

5.95%

$2,766.75

$116.25

 

The actual real dollar increase this year, using this example is about $70.00. With a further increase to $93 in 2021, and again in 2022 to $116.25.  Self-employed contributors will pay double. These costs are mitigated slightly because the increases will be deductible.

So how much will this affect the employee’s take home pay? The table below shows the income and payroll taxes for a single Ontario employee earning $50,000 in 2018 and 2019 (assuming no other payroll deductions and a 2.5% pay raise):

Year 2018 2019 (2.5%) Increase
Earnings $50,000 $51,250.00 $1,250,00
CPP $2,301.75 $2,435.25 $133.50
EI $830.00 $850.75 $20.75
Income Tax $7,844.98 $8,199.04 $354.06
Take Home Pay $39,023.27 $39,765.96 $741.69

More than $500 of this employee’s $1,250 cost-of-living pay raise is eaten up with payroll taxes, leaving only $742 to actually pay for the increased cost of living.

If this individual were working as a consultant with the same net self-employment income:

Year 2018 2019 (2.5% inc.) Increase
Net SE Income $50,000 $51,250.00 $1,250.00
CPP $4,603.50 $4,870.50 $267.00
Income Tax $7.358.81 $7,588.20 $229.39
Inc. After CPP/IT $38,037.69 $38,791.30 $753.61

Despite the fact that the consultant will see twice the increase in CPP contributions in 2019, the changes to their net income after CPP and income tax are only $12 more than for an employee with the same salary level.

This additional forced savings of $11 to $22 per month in increased CPP contributions may result in smaller contributions to their RRSPs or TFSAs,  but those should be offset with the lower need for such savings in retirement as a result of the increased CPP pension.

The next triennial review of the CPP will begin in the fall of 2019, but according the latest annual report, the legislated increases in the CPP contribution rate should be sufficient to fund the enhancements to the plan.

Additional educational resources: Help Canadians plan financially for the future as an MFA™-Retirement and Succession Services Specialist.

 

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