January 1, 2019 marks the beginning of increased contributions to the CPP by employees and employers alike. This increase has been implemented with the goal of ensuring that Canadians are better prepared for retirement by ultimately receiving higher CPP payments. Currently, working Canadians and employers make CPP contributions of 4.95% on earned income between $3500 and $55,900.
The maximum income of $55,900 is referred to as YMPE (yearly maximum pensionable earnings) and is indexed annually by inflation. Self-employed individuals contribute both employer and employee portions for a total contribution rate of 9.9%.
The enhanced contribution rate begins January 1, 2019 and increases annually until 2023, when it reaches 5.95% for both employees and employers, or 11.9% for self-employed individuals.
In 2024, an additional layer of contributions will be added to the CPP. These contributions will apply to income earned above the YMPE up the new YAMPE (year’s additional maximum pensionable earnings). The YAMPE will equal 7% of the 2024 YMPE, increasing to 14% in 2025 and will require additional contributions of 4% for employees and employers, or 8% for self-employed individuals.
By 2025 it is estimated that the YMPE will be $72,500 with a 5.95% contribution level and YAMPE will be an additional $10,000 of income which will require a 4% contribution. What does this ultimately mean for you? What is now a maximum payment of $2,767.05/yr for both employees and employers, or $5,534.10 for the self-employed, is estimated to be $4,714/yr or $9,427.50 for the self-employed by 2024.
Young Canadians just entering the workforce will benefit from a much higher CPP payout at retirement. Those Canadians whom are currently working will see partial benefits based on the number of years of contributions to the enhanced plan. Canadians who are retired or close to retirement, will see little to no impact in benefits received.
As for the effect of increased CPP contributions to the bottom line, self-employed individuals will see the biggest impact and if incorporated, may choose dividends instead of salary to avoid CPP contributions. Employers will experience higher labour costs and may be inclined to reduce, or limit increases to pension or group RRSP plans. Employees may reduce their personal retirement savings due to the increase in contributions required to the enhanced CPP.