This post first appeared at MoneySense.
After the federal and provincial finance ministers announced the expansion of the Canada Pension Plan earlier this week, many were left wondering how much more they’d have to pay and how it would measure up to the boosted retirement income they’d receive.
To give us an idea of how much more Canadians will see siphoned off their paycheques and to determine the winners and losers of the plan, we worked with pension and retirement experts at Morneau Shepell to crunch the numbers and answer some of your burning questions regarding the new CPP.
How much smaller are my paycheques going to get?
Wait a minute! Before we dive deep, let’s clarify something: The following analysis is based on the projected “Year’s Maximum Pensionable Earnings” (YMPE), a figure defined by the Canada Pension Plan as the maximum cap for what is fair game to be “payroll taxed” by the government. That cap usually grows each year. The federal government also announced it would raise the salary cap so that higher-income earners would also contribute and receive more CPP. Between 2024 and 2025, the salary cap is expected to be boosted by 14% to $82,700.
Currently, the YMPE is $54,900, but in 2019 when the new pension plan comes into play, Morneau Shepell estimates that it will be around $60,200 and will grow by around 3.1% yearly. Right now, the maximum CPP benefit is calculated as 25% of the average of the maximum earnings cap for the last five years. In 2016, the maximum CPP benefit you can get is $13,110. Once the new plan is fully implemented, that maximum benefit will be boosted to be around 30% of the average of the past five years, which would be $17,478 today.
OK, but really, how much more will I be contributing?
The federal government announced that contributions from employees and employers is to increase by 1%, a boost that will be phased in starting 2019 and be in full effect by 2023. During this time, if you’re earning at least the maximum salary cap (that’s $60,200 in 2019, remember, and slightly higher in each subsequent year) you can expect to see between $90 and $680 less on your annual paycheque. That works out to around $7.50 to $56 less a month.
As well, Benefits Canada reports that starting 2024, you’ll have to pay an extra premium of around 4% just on the part of your salary between the old earnings cap and the upper limit. So, for instance, in 2024, the standard salary cap would be $70,100, while the raised salary cap would be around $74,900. You’d be contributing 4% (so around $192) on that approximate $4,800 difference.
And how much more will I be getting when I retire?
That’s the golden question. Morneau Shepell’s analysis suggests that for a 25-year-old, who is 40 years away from retirement in 2019, and eligible for the maximum benefit amount would reap the most rewards of the fully expanded regime. They would receive around 51% more in yearly payouts by the time they turn 65 compared to the current plan.
Lets look at the numbers:
If a 25-year-old earned at least the salary cap throughout their career (in 2019, that’s $60,200), come 2059 when they retire, they’d receive around $72,600 per year under the new plan, compared to the roughly $48,000 a year they would receive under the current CPP rules. Bear in mind, they would contribute about $69,800 more to the CPP over their career lifetime, according to Morneau Shepell.
Meanwhile, a 45-year-old would have another 20 years to contribute under the expanded plan, so they would receive around 25% more CPP. The maximum salary cap by the year 2039, when our hypothetical 45-year-old will retire is estimated to be $126,900, meaning the maximum pension they could receive is around $32,700 a year, compared with $26,100 under the current plan. That’s a $6,668 difference. Just remember that someone with 20 years to go until retirement would have to contribute about $22,300 more in total to get that additional income in their golden years.
By the time someone who’s 35 years old in 2019 retires, the maximum benefit will be around $49,000, or about 38% more than under the old plan.
Someone who is 55 in year 2019 and hopes to retire in 10 years will contribute approximately $7,400 more over that decade to get around $2,450 more a year in retirement.
Of course, for those entering retirement in 2019, they won’t see any of the benefits that the landmark revamp of the national pension plan offers.
RELATED: Go DIY on your own CPP
So who are the winners and losers?
If you haven’t already surmised, younger Canadians just entering the workforce (who’d have plenty of years to contribute) stand to reap the most benefits under the new plan by, well, a lot when they turn 65.
Who gets the short end of the stick? Canadians with around 10 years to go until retirement by 2019 will have to contribute significantly more while receiving just 12% in additional CPP per year. That may not seem so bad—until you consider that a younger cohort will receive about 40% more in extra pension when they retire.
Millennials: Remember that these calculations are based on projections of what the yearly maximum cap will be—that max cap could be lower in reality or you could be earning less than that cap and therefore receive smaller CPP benefits. What you may be able to count on are those percentage amounts. Getting 50% more than you normally would in retirement is a huge boon. You can see it all for yourself in the chart Morneau Shepell provided below:
|Age in 2019||Standard Yearly Maximum Pensionable Earnings (YMPE)||Standard Annual Pension under old CPP||Projected YMPE||Increase in Annual Pension Under New CPP|
- These dollar values are based upon the assumption that the CPP’s maximum earnings cap will go up by 3.1% a year, with the boosted maximum CPP benefit adjusted to that amount.
- Increase is difference between original CPP and expanded CPP benefits, payable at age 65 and assuming the indvidiual has had a full working career (approximately 40 years) with earnings of at least the YMPE