Starting Monday, middle-income earners will have a larger share of their pay allocated to contributions to the Canada Pension Plan (CPP).
In 2019, pension reform began when the Quebec Pension Plan (QPP) and CPP began phasing out expanded benefits to provide more financial support to Canadians after retirement. To date, individual and employer contributions have been increased, meaning Canadians receive higher benefits when they receive their pension.
But from 2024 the CPP provides for a new profit cap. Additional payroll deductions now apply to those who earn more than a certain amount.
“The main goal of these changes is to strengthen benefits and improve the overall financial stability of future retirees,” said senior wealth advisor Alim Dhanji of Assante Wealth Management in Vancouver.
Previously, anyone who earned income above the base amount (currently $3,500) contributed a fixed portion of their income, up to a maximum amount (last year $66,600), which increases slightly each year. Self-employed people pay both the employee and employer contributions.
As of this year, there are two upper earnings limits in the expanded pension provision. The first stage works similarly to the old system: workers still pay a fixed portion of their earnings into the CPP, up to a government-set threshold of $68,500 for 2024. Anyone earning that amount or less will not be eligible Determine changes in his salary and current contribution rates.
New is a second contribution level for everyone who earns more than this amount, which is capped at $73,200. People in this group pay 4% more on their side income, which is the amount they earn between $68,500 and $73,200.
For 2024, this means a maximum of $188 in additional payroll deductions.
Overall, people earning more than $73,200 will contribute $300 more in 2024 than they did last year.
The expanded CPP policies, which will be phased in through next year, should significantly increase Canadians' retirement income. Anyone who has contributed to the CPP since 2019 will receive increased benefits, but the full impact will take decades to take effect, so younger workers will benefit most. People retiring in 40 years will see an increase in income of more than 50% compared to current retirees.
Alim Dhanji noted that the changes will not affect the eligibility criteria for pension, post-retirement benefits, disability pension and survivor's pension.
The new second threshold will impact both employers and employees as they will be obliged to cover the higher contributions of their employees.
Employers have been affected by this gradual increase since 2019. Between this year and 2023, contribution rates for employees and their employers rose by almost one percentage point.
Under this policy, Canadian employers will double their employees' retirement income. While the amount of the pension is split between the employer and employee, freelancers and the self-employed are responsible for paying both shares – a total of 11.9% for the first tier and 8% for the second.
“From a financial planning perspective, employers can be confident that these changes will benefit their employees in retirement, contributing to better financial well-being,” said Alim Dhanji.