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Middle-income earners will start seeing a larger portion of their paycheques going toward Canada Pension Plan contributions as of Monday.
A broader pension revamp began in 2019 as both the Quebec Pension Plan and CPP began phasing in enhanced benefits intended to provide more financial support for Canadians after they retire. So far, individual contributions — and the employer's matching portion — have primarily ticked upward.
The trade-off is that Canadians will eventually receive higher payouts once they start collecting their pensions.
But as of 2024, the CPP includes a new, second earnings ceiling. For those who make more than a given amount, additional payroll deductions now apply.
"The primary objective of these changes is to strengthen benefits and enhance overall financial stability for prospective retirees," said Alim Dhanji, senior wealth adviser at Assante Financial Management Ltd. in Vancouver.
Previously, everyone earning over the base amount (currently $3,500) contributes a set portion of their income, up to a maximum amount (last year's was $66,600) that increases slightly every year. Those who are self employed pay both the employee and employer portions.
Starting this year, the enhanced pension plan now has two earnings ceilings.
The first tier works similarly to the old system: just like before, workers contribute a set portion of their earnings to CPP, up to a government-set threshold — for 2024, it's $68,500. Those earning that amount or less won't see any changes to their current contribution rates.
What's new, for anyone earning more than that amount, is a second contribution level that tops out at $73,200.
People in this group pay an additional four per cent on their second tier earnings, or the amount they make between $68,500 and $73,200.
For 2024, that means a maximum $188 in additional payroll deductions. Overall, people earning over $73,200 will be contributing an extra $300 in 2024, compared to their previous contribution last year.
The upgraded CPP policies, which continue phasing in through next year, were designed to significantly boost retirement income for Canadians — an increase from one-quarter of their eligible income to one-third.
Anyone who has paid into CPP since 2019 will receive higher benefits, but the full effects will take decades to materialize, so the youngest workers stand to gain the most. People retiring 40 years from now will see their income go up by more than 50 per cent compared to the current pension beneficiaries.
Dhanji noted the changes will not affect the eligibility criteria for retirement pension, post-retirement benefits, disability pension and survivor's pension.
The new, second threshold will affect employers as well as employees, Dhanji noted, since they are required to match their workers' higher contributions.
Employers have been affected by the phased increase since 2019, he said. Between that year and 2023, both workers and their employers saw contribution rates rise by almost a full percentage point.
Canadian employers match their workers' pension earnings as a part of the policy. While the pension amount gets split between the employer and workers, freelancers and self-employed people are responsible for paying both portions — a combined 11.9 per cent for the first tier and eight per cent 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 said.
This report by The Canadian Press was first published Jan. 1, 2023.