The enhanced Canada Pension Plan (CPP) is getting close to the finish line. Almost six months ago, employers began payroll deductions for the new “second additional component” that applies to higher-income earners. And just over six months from now, as of January 2025, the final piece of the program will fall into place: the full multiplier used to calculate the new second earnings ceiling, again applicable for higher-income earners.
The enhanced CPP is multi-faceted, to say the least. Phased in over seven years, starting in 2019, it comes with many new terms and acronyms, some of which may sound contradictory or redundant.
For example, the new “first” contribution actually comes second after the “base” contribution. While in practice the two are combined to calculate contributions up to the “first earning ceiling,” taxation status requires they remain separate because one (the base contribution) generates a non-refundable tax credit and the other, a tax deduction.
The potential for plan members and plan sponsors to get lost in all the details is understandably high—which is where your benefits advisor comes in, says Ryan McMurray, Pension and Group Retirement Specialist, Selectpath Benefits & Financial, a member firm of Benefits Alliance (BA). “Education is where we bring a lot of value to our clients. We are able to step in and boil it down and say, ‘Here’s what you need to know. Here’s how it affects you as an employer and as employees.’ ”
He adds that the new capital accumulation plan (CAP) guidelines place more emphasis on plan sponsors’ responsibility to educate employees. “The enhancements to CPP certainly qualify as something we want to make sure people understand.” McMurray summarizes some of the top takeaways here.
Takeaways for plan members
“A big part of what we talk about is what employees will actually get from CPP and OAS [Old Age Security]. I think most people know they can’t depend on CPP for their retirement income, and with the new enhancement we want to ensure that people continue to understand this will not constitute your entire retirement income,” says McMurray.
Once the enhanced CPP is fully mature, beneficiaries will see payments increased by up to a 50 per cent increase compared to the previous CPP. That sounds good on the surface. However, the period of maturity is 40 years, starting this year, which means that only “those entering the workforce now are going to see the greatest benefit [of 50 per cent,]” says McMurray.
It’s also important to put that 50 per cent increase into perspective. Before the enhanced CPP, the program replaced 25 per cent of average work earnings. Once fully in place, in 2064, the enhanced CPP will replace 33 per cent of average work earnings. While that’s still good news for recipients, the federal government’s motivation has as much to do with expediency as it does a boost in retirement income.
“For CPP to be sustainable, we do require the enhancements. Fewer people are contributing to it, more people are in retirement and we’re not getting the same demographic growth in the younger age groups that we used to,” explains McMurray. “So for the general population of Canada it’s a positive move, and the increased contributions are manageable for the individual.”
However, personal retirement savings will always provide better value and a workplace retirement plan provides the best value of all, thanks to matching contributions from employers.
“While it’s fantastic that we have a guaranteed income through the CPP, anytime we’re using the federal government to institute programs, there are going to be inefficiencies or trade-offs,” says McMurray. For example, “consider what happens when you pass away—you don’t have control of your CPP funds. Whereas if it’s an employer-sponsored program, your beneficiary gets the whole thing. You have full control.”
Takeaways for plan sponsors
While plan members’ payroll deductions for CPP increased at relatively modest annual rates, starting in 2019, plan sponsors likely felt more of a budget impact.
“For business owners, it’s already a tight labor market, wages have gone up, inflation has gone up, margins are reducing, and now they have to pay more into CPP. And on a personal level they’re getting hit on both sides because they have to pay both the employee portion and the employer portion,” says McMurray.
Before the enhanced CPP, the contribution rate was 4.95 per cent of eligible earnings for both the employee and employer. For self-employed individuals it was 9.9 per cent. By the end of 2023, under enhanced CPP, the rates were 5.95 per cent and 11.9 per cent, respectively. In dollar terms, that translates into a maximum yearly contribution that increased by 45 per cent from 2018 to 2023, from $2,594 to $3,754 in 2023 for employees and employers, and from $5,188 to $7,509 for self-employed individuals.
On top of that, the new “second additional” CPP (CPP2) contributions for employees earning more than the first income ceiling, which kicked in this year, will result in estimated maximum annual contributions of $388 ($776 for the self-employed individual) once fully in place in 2025.
McMurray’s two main messages to plan sponsors are, first, to stay the course with their group retirement plans, even though “it may feel like they’re scraping the barrel now to come up with their one or two per cent matching program,” he says.
Fortunately, plan sponsors recognize the value of group retirement plans not only for attraction and retention, but also for employees’ mental well-being. “We are seeing more employers offer retirement plans, even in the small space,” says McMurray.
Second, he tells his clients to lean into their benefits advisor to create efficiencies and drive employee awareness and engagement.
“Employee surveys are telling us that the primary cause of stress is financial. And that employees would use an advisor if their employer provided access,” says McMurray. “As the industry shifts and grows, one of our key roles as advisors is bringing education to our clients’ employees, to help them navigate the new realities of financial planning.”