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Wealth Management Advisor.

 

The Enhanced Canada Pension Plan

 

In 2019 the federal Goverment introduced the Enhanced Canada Pension Plan.

This Enhancement starts in 2019 and gradually changes every year until 2025

 

The Overall increases will not Only Increase the % of your earnings going into CPP, but it will also increase the Maximum income range or YMPE (Year's Maximum Pensionable Earnings) Limit by 14%

 

The Overall cost of the enghancement can be as high as 66.8%

Here is how it works?

OUT WITH THE OLD!  Before 2019 - How it worked?

 

Under the old system, your CPP Contributions were calculated as follows:

Your Income (up to the YMPE)

- $3,500

x 4.95%

= Your annual maximum

And your Employer is required to Match this Amount

 

Example

in 2018 Your Income is $70,000 per year

The YMPE in 2018 is $55,900

Here  is the Calculation:

Income                                               $55,900

Less                                                  - $ 3,500

CPP Earnings                                = $52,400

CPP                                                X      4.95%

Your Portion                                 = $ 2,593.80

Employers Portion                      + $ 2,593.80 * If you are self employed, you pay this as well

Total                                           = $5,187.60

IN WITH THE NEW!  2019 - 2023 - What to expect

Under the new system here is what you will be Paying Annually

2018 - 4.95%

2019 - 5.1%

2020 - 5.25%

2021 - 5.45%

2022 - 5.70%

2023 - 5.95%

BUT WAIT..... THERE'S MORE

As they say in TV there is always more.

Starting in 2024 there will be a New High Income CPP Enhancement.

According to the proposed CPP Rules, starting in 2024, the Fed Governemnt will be adding a second tier which will be 14% above the YMPE . At This level, they will take an additional 4% off your paychecks that did not exist before

(in 2025 this is estimated to be on earnings between $69,700 and $79,400)

 

 

So, Can you explain that in English - Why of Course

as per the above example, here is what yopu would expect in 2025

Example

in 2025 Your Income is $80,000 per year

The YMPE in 2025 is $69,700 ( 7 Year increase of 21.4% or apx 3.25% compounded per year)

Here  is the Calculation:

Tier 1 Calculation

 

Income                                               $69,700

Less                                                  - $   3,500

CPP Earnings                                = $66,200

CPP                                                X      5.95%

Your Portion                                 = $ 3,938.90 (Increase of $1,345.10) or 1.68%

Employers Portion                      + $ 3,938.90 * If you are self employed, you pay this as well

Total                                           = $7,877.80 ( Increase of $2,690.20) or 3.36% of Salary

 

Tier 2 Calculation

Income                                               $80,000

Less Tier 2 Threashold                -  $79,400

Less  YMPE                                    - $ 69,700

Tier 2 Earnings                            = $   9,700

CPP                                                X      4.00%

Your Portion                                 = $      388

Employers Portion                      + $      388 * If you are self employed, you pay this as well

Total                                           = $     976

 

Total CPP Paid

You                                                $4,326.90

Your Employer                        + $4,326.90

Total                                          = $8,653.80

2018 Amount                            - $5,187.60

 

Cost of Enchancement

You                                                $1,733.10

Your Employer                        + $1,733.10

Total                                          = $3,466.20

 

That is a CPP Increase of 66.8%

 

THE GOAL

If you read the Govenment of Canada's explanation of the enhancement  they advertise that the reason for the enhancement is to increase your CPP income by 8.33% (from 1 quarter to 1/3 of your average work earnings)

The cost of this is an increase of CPP Payments of 66.8% so that every canadian is forced to invest 11% of thier lifetime earnings into thier plan defined pension Plan which does not provide you any guarantee of payment should you die before you get your money back

 

I would have to say Mission Accomplished!!!

 

*Please note that the above comments are opinions of Stacey Bartel and may or may not reflect the opinions of any other OBS Financial Employee's affiliates or partners

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