In June 2016, the federal government and the provinces agreed to enhance the Canada Pension Plan, with CPP retirement pensions eventually covering one-third of average earnings, up from one-quarter.
To get there, CPP premiums have to increase. That’s slated to begin Jan. 1 and will continue in small, steady increments over the next few years.
The cumulative effect is substantial. Before digging into the figures, let’s recap the two stages of planned changes.
Stage 1: Premium increases (2019-2023)
Employees and employers each pay premiums at the rate of 4.95% of contributory earnings. That applies on income over the $3,500 exemption and up to the yearly maximum pensionable earnings, which is $55,900 in 2018. The YMPE will continue to be indexed annually.
Next year those premiums will rise 0.15 percentage points to 5.10% for employer and employee. That works out to about $80 more in premiums for each party if income is right at the YMPE.
After that, another 15 basis points will be added in 2020, 20 bps in 2021 and 25 bps in each of 2022 and 2023. Cumulatively, that’s a one percentage point increase to 5.95% on each side. Combined, it goes from 9.9% to 11.9%.
Stage 2: New premiums on higher income (2024-2025)
In 2024, a new concept and calculation comes into effect: the year’s additional maximum pensionable earnings (YAMPE). It will be 7% over the YMPE in effect in 2024, and then be set to 14% over the YMPE in 2025 and beyond.
For earnings between the YMPE and YAMPE, the employee and employer will each pay premiums of 4%.
Estimating the dollar effect
We could try to estimate the figures by making assumptions that take us out to 2025. Instead, let’s look at the effect if the rules were already in place here in 2018, since we know what those dollars mean to us.
- An employee would pay an extra 1% on contributory earnings of $52,400 (YMPE minus exemption), or $524.
- At 14% over the YMPE, the YAMPE would be $63,726, yielding a difference of $11,326. At a 4% premium cost, that comes out to $453.
It’s tempting to just sum up those two figures, but incorporating taxes makes it more complicated—in a good way.
For an Ontario resident, we can assume the tax credit on the base contributions (up to the YMPE) will be a combined 20% (rounded), bringing the $524 down to $419.
On the additional premium (YMPE up to YAMPE), the employee receives a tax deduction. The marginal tax rate at $63,726 is about 30%, bringing the $453 down to $317. (Someone at a higher income would obtain a larger deduction.)
Summing up for our sample employee: $419 + $317 = $736. This total cost is $241 (or 25%) less than if you didn’t account for the tax credits. Nonetheless, if clients are disappointed about the additional money leaving their pockets, you can remind them that they’re contributing in order to receive a larger pension in the future.
It should be noted that self-employed people bear both sides of this cost as employer and employee. As such, some small business groups have begun lobbying the new Ontario government to withdraw its support of the CPP changes.
Absent that development, the foregoing gives a rough idea of what’s in store for 2019 and beyond.
Doug Carroll is practice lead for tax, estate and financial planning, Meridian Credit Union.