Starting in January 2019, the Canada Pension Plan (CPP) will kick off a 7-year enhancement process, bringing major changes for employers and employees alike. Today, CPP benefits replace about 25% of employees’ pre-retirement income up to an annual maximum. But under the revised plan, they’ll replace closer to 33%.
What does this mean for you as an employer? In this blog, we’ll outline the key changes that lie ahead and what you can do to prepare for them.
What Are the Major Changes to CPP?
Eligibility guidelines for CPP will stay the same under the new plan. However, the amount employees and employers contribute will increase, and these higher contributions will result in higher benefits. This expansion will be gradually implemented in two phases over the next seven years.
Phase 1 - Increasing Employee and Employer Contributions
Currently, employees and employers both pay 4.95% of their annual salary to CPP, up to a maximum of $2,593.80 per year. Starting at the beginning of 2019 and extending over the next five years, employee and employer contributions to CPP will slowly rise. By the end of Phase 1, individual contributions will have increased from 4.95% to 5.95% annually, and total contributions from 9.9% to 11.9%.
However, it’s important to know that these changes won’t apply to all income. The rates apply only to earnings between $3,500 and the maximum pensionable earnings per year. In 2018 the maximum pensionable earnings is $55,900. The maximum is increased each year to reflect inflation and other factors.
Phase 2 - Adding Extra Contributions for Those With Higher Salaries
A second tier of the expansion program will be introduced over a 2-year period starting in 2024. This next phase will introduce an additional contribution rate, which is expected to be 4% for both the employer and the employee.
This second rate will only apply to people whose salary is higher than the expected pensionable earnings. It will also be subject to an upper earnings limit, which is anticipated to be $82,700 in 2025.
This means that, under the revised CPP, the total contribution rate will be 11.9% on earnings up to the original earnings limit and 8% for earnings within the additional earnings range.
Is Your Company Ready for the Upcoming Changes to CPP?
With these major changes just around the corner, businesses are struggling with how to handle the costs of the additional contributions they’ll have to make.
As an employer, it’s important to start thinking about how to accommodate the increased financial strain the CPP expansion will bring. Will you need to adjust payroll costs in order to meet higher contribution rates? Should you make amendments to your company’s retirement and health benefits plans?
Your next steps will depend on several key factors.
Should You Integrate CPP Contributions Into Your Existing Employee Retirement Plan?
Most companies with defined contribution plans probably won’t need to integrate with the new CPP. But your company could still be affected, because individual member contributions may decrease after the 2019 expansion. This is because employees who start contributing more toward CPP will have to accept less take-home pay—an unappealing option for most people.
However, reducing contributions is not necessarily a good idea especially for older workers who may be unfairly impacted since they’ll have less time to accumulate the new rate. The upcoming CPP enhancements will be received on a pro-rata basis by those contributing today. Older workers will receive little in the way of additional retirement income. Today’s youth and future generations will benefit fully from the enhancements when the increase in CPP benefits take full effect in forty years.
On the other hand, if your company does choose to integrate CPP contributions with a pre-existing employee benefits plan, there are several ways you can balance out your costs. These include reducing salary increases, rethinking benefits coverage to be more tax efficient, and restructuring the plan to maintain the current contribution budget. If none of these strategies work for you, your best option is to plan and budget for the upcoming increases well in advance.
No matter what strategy you choose, remember that communication is key. Whether or not you choose to modify your existing benefits plan, it’s essential that you make the upcoming CPP changes clear to all of your employees. Understanding that the increase in CPP contributions will provide an increase in CPP benefits is key. By providing everyone with the information they’ll need to make smart, informed choices, you’ll ensure your team is ready to plan for the future—whatever it may bring.
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