Wealth Strategies: CPP Increases

There has been a lot of discussion about increasing CPP contributions, and the effect this will have on take-home earnings for Canadian workers. Due to increases in both the CPP rate and the Yearly Maximum Pensionable Earnings (YMPE), annual CPP contributions will increase by up to $255 in 2023 for employees and employers. Compared to increasing EI premiums this year, the increase to CPP premiums will have a real benefit for Canadians, especially younger generations that will see these higher contributions grow for longer. The changes that were initially introduced in 2019 and will continue into 2025 were designed to increase income replaced by CPP to one third of the average work earnings, up from one quarter prior to 2019.

CPP Contributions are based on two factors: the set contribution percentage and the Yearly Maximum Pensionable Earnings (YMPE). In an effort to better prepare Canadians for retirement, the contribution percentage set by the government has increased by 1% from 4.95% to 5.95% starting in 2019. This means that employees must contribute 5.95% and employers must contribute 5.95% for earnings over $3500 per year, up to the YMPE limit currently set at $66,600.00 for 2023. Recent increases to the YMPE amount have also increased to the amount required to be contributed, as this factor is indexed for wage inflation. Due to general wage increases and Covid layoffs heavily affecting the lower end of the labour market (eliminating a large percentage of lower salaries when calculating the factor), YMPE has increased drastically from $58,700 in 2020 to $66,600 in 2023, or 13.46% total.

Further to these changes, the government will also be introducing a second, higher limit over the existing YMPE factor for those earning higher income, called the “year’s additional maximum pensionable earnings” at 107% of the YMPE. Starting in 2024, Canadians earning a higher income will contribute based on 2 earnings ceilings, - both being indexed to wage growth - and with the second ceiling drawing premiums of 8%. As an example, based on estimates for 2025, the YMPE will be $69,700 with a 11.9% CPP Contribution requirement (5.95% Employee and 5.95% Employer Contributions) and the 2^nd ceiling capped at $79,400 with an 8% CPP Contribution requirement, all split between employer and employee. This means that if a Canadian were to earn $79,400 or more in 2025 (after all planned increases are complete), the employee and employer would each contribute $4147.15 (5.95% * $69,700 each) for the first ceiling and $388 each for the 2^nd ceiling (difference between the 2^nd ceiling and first ceiling $79,400-$69,700=$9700* 4%).

The additional required savings will benefit Canadians greatly, although it will affect the net take home income for many. Consideration also needs to be given to employers and self-employed Canadians, as the cost for savings is increasing, with self-employed Canadians responsible for both the employer and employee contributions.