TORONTO — The biggest change to the country’s pension plans in more than a decade will take place in the new year, but the effects will be felt differently depending on which generation you belong to.
Beginning in early 2019, the Canada Pension Plan and Quebec Pension Plan will phase in enhanced benefits over the next seven years to provide more financial support for Canadians after they retire.
However, while pension contributions will gradually increase for all employees and employers, the younger generations will see the lion’s share of enhanced benefits as the improvements slowly make their way through the system.
“Don’t get too excited unless you’re 30 years old or less. Then it could impact you fairly significantly,” says Doug Runchey, an independent consultant who specializes in Canada Pension Plan and Old Age Security.
Currently, employees contribute a percentage of their pensionable earnings until hitting an annual cap, while their employers pay an equal amount per employee. Self-employed people pay both amounts.
Under the enhanced plan, CPP contributions will go up in two ways.
One increase will involve a series of higher contribution rates from 2019 to 2023 and the other will involve a higher ceiling on annual income subject to contributions in 2024 and 2025.
On Jan. 1, 2019, the total rate paid by employees and employers will rise to 10.2 per cent per employee from 9.9 per cent (employee portion of contribution rises to 5.10 per cent from 4.95 per cent).
The contribution rate is scheduled to gradually increase to 11.9 per cent of an employee’s pensionable earnings in 2023 (of which employees contribute 5.95 per cent).
Until 2023, the contributions will be applied on up to a maximum annual income ceiling that rises most years under an established formula.
In each of 2024 and 2025, however, the ceilings will be determined by a new formula — meaning people earning above a certain threshold will contribute more and receive more CPP benefits than they would under the original calculations.
As a result of the contributions increase, benefits will also increase gradually — although it will take decades and a lifetime of employment for most of them to be fully available to retirees.
In general, baby boomers and generation Xers will stand to gain less than millennials or generation Z because it will take 45 years to achieve maximum benefits, although they go up slightly every year of employment starting in 2019.
Hassan Yussuff, president of the Canadian Labour Congress, says the economic benefits of CPP enhancements will more than offset the increased costs and help the overall economy by giving retirees more buying power.
“I believe the premium increase is going to have little or no impact, both on workers but equally so on employers who are going to have to contribute,” says Yussuff, who campaigned for several years to get support of the enhancements.
He says small business owners — like their employees and the self-employed — have difficulty saving for retirement.
“So the CPP is going to guarantee they get something out of the system,” Yussuff says.
“Of course it will take some time for this new enhancement to deliver the benefits, but that’s the nature of all pensions.”
One of the main voices speaking against the enhanced CPP when it was proposed in 2016 was the Canadian Federation of Independent Business.
Monique Moreau, the CFIB’s vice-president for national affairs, says the business group constantly needs to remind governments that its members must deal with a range of cost increases — not just the expense of the latest initiative.
“An enhanced CPP may seem like a relatively manageable increase, but that’s just for the CPP,” Moreau says.
She notes that a new federal carbon tax will go into effect next year in provinces that don’t have a comparable program.
However, she says, Ottawa has also reduced the small business tax rate to 10 per cent, as of Jan. 1, 2018, and it will go down to nine per cent as of the new year.
In addition, the rate for employment insurance premiums and maximum annual EI premiums have fallen since 2016 due to annual adjustments.