Canada Enacts Pension Reform Changes

Canada will increase the maximum retirement benefit by more than 50%.

Canada has enacted changes to the Canadian Pension Plan (CPP) that will increase the maximum retirement benefit by more than 50%, and raise the share of yearly earnings received in retirement.

“This CPP enhancement will not only mean more money for Canadians when they retire, it will also mean a stronger economy and more middle class jobs over the long term,” said Bill Morneau, Canada’s Minister of Finance.

The current maximum benefit is C$13,370 ($9,926). In today’s Canadian dollar terms, the enhanced CPP represents an increase of nearly C$7,000, to a maximum benefit of about C$20,000. Increased CPP contributions will be slowly phased in over a seven-year period beginning in 2019, and it will take approximately 40 years of contributions for a worker to fully accumulate the enhanced benefit.

The enhancements will increase the share of annual earnings received during retirement from one-quarter to one-third. This means that a Canadian currently making C$50,000 a year will receive about C$16,000 per year in retirement instead of roughly C$12,000 over their working life. It will also increase the maximum income range covered by the CPP by 14%.

Young Canadians entering the workforce will see the biggest rise in benefits, as enhanced benefits will accumulate gradually as individuals pay into the enhanced CPP. To fund the changes, annual CPP contributions will increase over seven years, starting in 2019. For example, someone who earns C$54,900 will contribute about an additional C$6 a month in 2019. By the end of the seven-year phase-in period, contributions for that individual would be about an additional C$43 per month.

The CPP currently provides 5.2 million Canadians with C$37.3 billion in benefits. The signing of the bill meant that all necessary legislative requirements have been met by Canada’s governments to implement the agreed-upon enhancements.

The Department of Finance Canada estimates that 24% of families nearing retirement age are at risk of not having adequate income in retirement to maintain their standard of living. This means approximately 1.1 million families approaching retirement age won’t have enough money to maintain their standard of living when they retire.

It also estimated that 33% of families nearing retirement age who have no workplace pension plan are at risk of under-saving for retirement, compared to 17% of families who have workplace pension plan assets.

The CPP is financed by contributions from workers, employers and self-employed individuals, as well as income earned on CPP investments. The contribution rate is 9.9% of earnings between a basic exemption of C$3,500 and the “year’s maximum pensionable earnings” (C$54,900 in 2016), which approximates the average Canadian wage and is indexed to average wage growth annually. The maximum CPP contribution in 2016 is C$2,544.30 for the employee and the employer, respectively. The self-employed pay both shares.

The CPP retirement benefit currently replaces a maximum of 25% of earnings up to the year’s maximum pensionable earnings. The CPP is a “career average plan,” which means that earnings over a worker’s entire career are taken into account when calculating benefits, with certain exceptions. A full CPP retirement benefit is available at age 65; however, it can be taken up as early as age 60 with a permanent reduction or as late as age 70 with a permanent increase.

Although the maximum new retirement benefit payable at age 65 is C$13,110 per year in 2016,  due to variability in earnings levels among Canadians, the average CPP retirement benefit that was paid in December 2015 to new CPP beneficiaries aged 65 was C$7,552, or about 60% of the maximum benefit.

By Michael Katz