By Greg Pallone

An individual’s retirement income generally comes from a combination of personal savings, employer-based pension plans, and government plans, including CPP and Old Age Security (OAS).

However, that may not be enough: According to one survey, 70% of Canadians are worried they aren’t saving enough for retirement.[1] How will changes in the Canada Pension Plan (CPP) help alleviate the public’s unease?

To boost retirement savings, the federal government introduced the CPP enhancement program at the start of 2019.[2] Whereas CPP is currently intended to replace one-quarter of an individual’s work earnings during retirement, the enhanced program will aim to replace one-third of those earnings.

Changes for 2021

The major change in 2021 is an increased individual contribution, going from 5.25% of earned income to 5.45% (in 2018, the year prior to the enhancement, the contribution was 4.95%).

However, after the challenges of a global pandemic and the economic uncertainty that went with it, some individual contributors may be concerned about receiving less take-home pay.

Even having more of an impact: the change in the yearly maximum pensionable earnings (YMPE). In 2020, the YMPE was $58,700. The YMPE increases every year, typically by 1% to 3%. This year, however, the pandemic eliminated a huge number of lower- and middle-income jobs, pushing average earnings higher. This led to a YMPE of $61,600 for 2021, an increase of nearly 5%.

Although it may not seem like a large increase, applying the increased contribution of 5.45% to a 5% increase in YMPE means individuals may be contributing 9.3% more than in 2020, further stressing employees’ finances.

Tips for Employers

Canadians may worry about the contribution increases to CPP, and employers need to monitor the situation and support their employees.

These three tips can help:

  • Consider the timing for other employee benefits. Employers often change other employee benefits, such as increased cost sharing, making amendments to coverage or making additional matching contributions to pension plans, at the start of the new year. However, as a major change like the CPP enhancement hits employees, it may be best to reconsider annual changes. These kinds of benefits changes should be introduced at the same time as other, mandated major changes are rolled out.
  • Consider the impact of payroll deductions on employees. Employers need to be aware of the impact this year’s CPP change has on employees. If an employee is paid at a higher level than this year’s YMPE, there will be little impact on them, since they are already being deducted by the maximum amount each year. They will only see the increase in the contribution to 5.45%. But workers earning less than the YMPE will notice the increase more dramatically.
  • Consider employees’ overall retirement readiness. Studies have demonstrated that that many nearing retirement age — think younger Baby Boomers and older Gen Xers — are not prepared for retirement. In fact, the CPP enhancements were designed specifically to address those concerns. Employers should endeavor to understand their employees’ predicament and offer additional support and education on retirement readiness.

 

HUB International’s team of qualified retirement plan consultants has extensive experience with all aspects of retirement planning, including CPP and OAS.

 

[1]Benefits Canada, “Canadians concerned about retirement readiness: surveys,” February 12, 2020. https://www.benefitscanada.com/news/canadians-concerned-about-retirement-readiness-surveys-142586

[2]Canada Revenue Agency, “The Canada Pension Plan enhancement – Businesses, individuals and self-employed: what it means for you,” November 13, 2020.