Middle-income earners in Canada will experience a shift in their paycheques starting this week, as alterations to Canada Pension Plan (CPP) deductions take effect. The changes are part of a broader pension overhaul initiated in 2019, aiming to enhance retirement benefits for Canadians. The modifications primarily involve an increase in individual and employer contributions, with the prospect of higher payouts for retirees.
One notable adjustment, effective from 2024, introduces a second earnings ceiling within the CPP. Individuals earning above a specified amount will now face additional payroll deductions. Alim Dhanji, Senior Wealth Adviser at Assante Financial Management Ltd. in Vancouver, emphasized that the primary goal of these changes is to fortify benefits and improve overall financial stability for prospective retirees.
Previously, individuals earning over a base amount of $3,500 contributed a set portion of their income, up to a maximum of $66,600 (as of last year), with slight annual increases. Self-employed individuals were responsible for both employee and employer portions. Now, the enhanced pension plan comprises two earnings ceilings.
The first tier mirrors the old system, where workers contribute a set portion of their earnings up to a government-set threshold, which is $68,500 for 2024. Those earning up to this amount won't experience changes in their current contribution rates. The innovation lies in the second contribution level, applicable to earnings between $68,500 and $73,200.
For those in this income bracket, there is an additional four percent contribution on their second-tier earnings. In practical terms, this means a maximum of $188 in extra payroll deductions for 2024. Individuals earning over $73,200 will contribute an extra $300 compared to the previous year.
The CPP enhancements, continuing through the next year, aim to significantly increase retirement income for Canadians, moving from one-quarter to one-third of their eligible income. While the full effects will take decades to manifest, workers who contributed since 2019 will benefit the most. Those retiring 40 years from now could see their income rise by more than 50 percent compared to current pension beneficiaries.
Dhanji clarified that the changes won't impact eligibility criteria for retirement pension, post-retirement benefits, disability pension, and survivor's pension. Both employers and employees will be affected by the new second threshold, as employers are required to match their workers' higher contributions.
Since 2019, employers have witnessed phased increases, with both workers and employers experiencing almost a full percentage point rise in contribution rates between that year and 2023. Canadian employers typically match their workers' pension earnings, with freelancers and self-employed individuals responsible for both portions – a combined 11.9 percent for the first tier and eight percent for the second tier.
"From a financial planning standpoint, employers can find assurance in the fact that these changes are designed to benefit their employees during retirement, contributing to enhanced financial well-being," Dhanji concluded. As these adjustments take effect, Canadians are encouraged to stay informed and plan accordingly for their future financial security.
