Canada Pension Plan to be Reformed; Mandatory Payments Increased

Gabrielle Klemt - 1B Geological
Posted on: July 2, 2016

The Canada Pension Plan, or CPP, is going to increase mandatory payments in eight provinces this year.  As a young person who has almost certainly not even out one jot of thought into retirement, you may be asking how this could possibly affect you. Here’s the thing: scary as it is, we should all be thinking about retirement.

Actually, starting at 18, we can all contribute to the CPP. In fact, in order to receive the maximum payment from CPP when you retire, you have to have contributed 83% of your eligible time, which is 18-65 years old. In other words, you can’t receive full benefits unless you contribute for at least 39 years from 18-65. Not only that, but you must also make a minimum payment every year in order to be considered. As of 2016, the yearly Maximum Pensionable Earnings (YMPE) level was $54,900. That means if you are not making $54,900 a year, and let’s get serious, who in university is, then you will not be able to contribute enough to have “contributed” to CPP.

Now, just because it’s almost certainly impossible for most Canadians to receive maximum CPP, doesn’t mean you can’t get a significant amount of money from them if and when you retire, but it does seem a little unfair that we can’t get it no matter how hard we try just because we want a university education. The average expected payment currently is about 25% of your yearly earnings.

What CPP wants to do is increase that to about 33% by 2025. The way they are doing it has some people upset, however. They want to set up an “Upper Earnings Limit” which will be 7% above the YMPE limit in 2024 and 14% above it in 2025. To give some perspective, it is expected that this new upper limit will be $82,700 in 2025. The people who earn in the range between the YMPE and the upper limit will have to start paying a premium of an extra 4% on top of what they currently contribute, which will rise to 5.95% of your income by 2025.

Many small business owners are currently upset about this move and you can probably find a dozen petitions circulating trying to stop it. Quebec has already refused the change to QPP due to too many complications and expenses. But, it’s not just people currently contributing who are benefiting, it is current retirees who are seeing a significant increase in payments starting even this year. Already the monthly payment has gone up $330 and is projected to keep increasing at a rate of 1.2% for the next many years.

The rise in CPP is in an effort to help “grow the middle class” as Trudeau likes to put it. I respect that he’s not just trying to help out those who are currently working but also increasing payments to those who are already retired. I think retirement scares a lot of people because it means a lot less financial security and really takes away from your freedom and independence at a time when you finally want to start doing things. I also think that this hike is so small compared to what it could be, that I think it is a major overreaction on the parts of those people who just don’t like change.