New CPP Rules

Executive Summary

The new rules regarding the Canada Pension Plan (CPP) have confused many future retirees.  The most common approach by many future retirees is to wait until it really matters.

For all Canadians over 50 years old, who are approaching retirement, and beginning long-range planning it really matters now.

Coordinating public pensions like the CPP with other public pensions like the Ontario Retirement Pension Plan, private pensions, savings and anticipated lifestyle and longevity is the key element of retirement planning.

What you need to know

The CPP, like all prudent retirement schemes aims to set aside a portion of current earnings, invested wisely and withdrawn and used to fund periods of non-employment.  The changes to CPP aim to increase the amount of income that will be under the program by raising the amount subject to premiums and “repayment”.

The premiums will be raised, and phased-in gradually to facilitate higher payouts, too.

The major changes are as follows:

  • The incentive to delay receiving payments has increased
    • Receiving benefits earlier than age 65 will cause a reduction of 0.6% for each month, taking your CPP at age 60, 5 years early will reduce your amount by 36% (5 years = 60 months x 0.6% = 36% reduction)
    • Taking benefits later than age 65 will add 0.7% for each month you wait, taking CPP at age 70 will add 42% to your payments (5 years = 60 months x 0.7% = 42%)
  • The maximum payout will rise from 25% to 33%
    • The current maximum of $13,110 will rise to approximately $17,500 per year
  • The maximum earnings from which CPP benefits are calculated will rise from $54,900 to $82,700 in 2025
    • The increased earnings eligible for pension calculations will raise the maximum further to approximately $19,900
  • Additional payments will be funded by higher CPP premiums, the first increase since 1997
    • The premium will slowly be raised by 1% to 5.95% of wages from 2019 to 2025. The phase-in will initially cost $9/month in 2019 and $43/month in 2025 when fully implemented
    • An offsetting tax credit will assist lower income workers afford this increase
    • The additional premiums will also be matched by employers, adding significantly to employee costs

Older workers should focus on the anticipated payments, when to take them and the amount.

Younger workers, those who will fall completely under that new rules, premiums and payments will receive the maximum benefit of the changes.

 

Age in 2019 Standard Yearly Maximum Pensionable Earnings (YMPE) Standard Annual Pension under old CPP Projected YMPE Increase in
Annual Pension Under New CPP
65 $60,200 $14,185 $60,200 $0 (0.0%)
55 $81,700 $19,225 $93,400 $2,452 (12.8%)
45 $110,800 $26,100 $126,900 $6,668 (25.5%)
35 $150,300 $35,380 $172,200 $13,595 (38.4%)
25 $204,100 $48,045 $233,500 $24,522 (51.0%)

Source: moneysense.ca

Bottom Line

The CPP changes introduced will begin to affect workers in a few years.  If you plan to retire in the 20-teens, the timing of your payments is really the only change to be concerned with but if you’re still feeling concerned or confused, get in touch so we can discuss your specific situation further.

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