(Toronto) Middle-income earners will start seeing more of their paychecks go toward Canada Pension Plan (CPP) contributions starting Monday.
A pension overhaul began in 2019, as the Quebec Pension Plan (QPP) and CPP began phasing in enhanced benefits intended to provide more financial support to Canadians after retirement. So far, individual contributions and employer contributions have increased so that Canadians receive higher benefits when collecting their pension.
But starting in 2024, the CPP provides for a new earnings limit. For those earning more than a certain amount, additional payroll deductions now apply.
“The primary goal of these changes is to strengthen benefits and improve the overall financial stability of future retirees,” according to senior wealth advisor Alim Dhanji of Assante Wealth Management in Vancouver.
Previously, anyone who earned income above the basic amount (currently $3,500) contributed a fixed portion of their income, up to a maximum amount (last year was $66,600) which increases slightly each year. Self-employed workers pay both the employee’s and employer’s share.
Since this year, the enhanced pension plan now has two earnings ceilings. The first tier works similarly to the old system: as before, workers contribute a fixed portion of their earnings to the CPP, up to a government-set threshold of $68,500 for 2024. Those who earn this amount or fewer will see no change in their current contribution rates.
What is new, for anyone earning more than this amount, is a second contribution level which caps at $73,200. People in this group pay 4% more on their second-tier 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, compared to their contribution last year.
The enhanced CPP policies, which will continue to be phased in until next year, were designed to significantly increase the retirement income of Canadians. Anyone who has contributed to the CPP since 2019 will receive higher benefits, but it will take decades for the full effects to materialize, so younger workers will have the most to gain. People who retire in 40 years will see their income increase by more than 50% compared to current pension recipients.
Alim Dhanji noted that the changes will not affect the eligibility criteria for superannuation, post-retirement benefits, disability pension and survivor’s pension.
The new second threshold will affect both employers and employees, he noted, since they are required to match their workers’ higher contributions.
Employers have been affected by this gradual increase since 2019. Between that year and 2023, workers and their employers saw contribution rates increase by almost a percentage point.
Under this policy, Canadian employers match the retirement income of their workers. While the pension amount is shared between the employer and workers, freelancers and self-employed people 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 rest assured that these changes are designed to benefit their employees during retirement, thereby contributing to better financial well-being,” according to Alim Dhanji.