The Canada Pension Plan enhancement: Explained
Since 2019, the Canada Pension Plan (CPP) has been undergoing a multi-year enhancement to increase the amount of retirement income it replaces for Canadian workers. While the original CPP replaced a maximum of 25% of a person's average work earnings, the enhanced plan will eventually replace one-third of average earnings. These higher benefits are funded by increased contributions, phased in over two steps.
Phase one: 2019 to 2023
The first phase of the enhancement focused on gradually increasing the core contribution rate. This first additional contribution applies to all eligible earnings within the Year's Maximum Pensionable Earnings (YMPE) limit.
Phase two: 2024 and 2025—The CPP2
Starting in 2024, the second and final phase of the enhancement was introduced, affecting higher-income earners. This step adds a second, higher earnings ceiling known as the Year's Additional Maximum Pensionable Earnings (YAMPE). In 2025, the YAMPE is $81,200, approximately 14% higher than the 2025 YMPE of $71,300. Workers earning between the YMPE and YAMPE are required to make second additional CPP contributions (CPP2) at a rate of 4.0% for employees and employers, and 8.0% for self-employed individuals, on this portion of earnings.
Impact on future benefits
The enhancement aims to increase the maximum retirement pension by more than 50% for those who contribute for 40 years. This applies to retirement, disability, and survivor pensions, with the increase depending on the amount and duration of contributions to the enhancement. Younger workers will see the most significant long-term effects.
Comparison of CPP contributions
To better understand the new payment structure, here is a breakdown of the different contribution tiers:
| Feature | Base CPP (pre-2019) | First Additional CPP (2019-2023) | Second Additional CPP (2024-2025) |
|---|---|---|---|
| Purpose | Replaces 25% of average work earnings up to the YMPE. | Increases income replacement rate from 25% to 33.3% on earnings up to the YMPE. | Increases income replacement on earnings between the YMPE and YAMPE. |
| Contribution Range | Earnings between the basic exemption ($3,500) and the YMPE. | Same as Base CPP. | Earnings between the YMPE and the YAMPE. |
| Employee/Employer Rate | 4.95% | Phased in, adding 1% to reach 5.95%. | 4.0%. |
| Tax Treatment | Non-refundable tax credit. | Tax-deductible. | Tax-deductible. |
Example of CPP2 in action
Consider an employee in 2025 earning $85,000 annually, exceeding both the YMPE and YAMPE.
- Base and First Additional Contribution: The employee and employer contribute 5.95% on earnings between the basic exemption and the YMPE of $71,300.
- Second Additional Contribution (CPP2): The employee and employer contribute an additional 4.0% on earnings between the YMPE ($71,300) and the YAMPE ($81,200). For an $85,000 salary, the CPP2 applies to $9,900 ($81,200 - $71,300) of earnings.
For those earning below the YMPE, only the regular base and first additional contributions apply.
Implications for workers and retirement planning
The enhanced CPP means higher payroll deductions, especially for high earners, but provides significantly higher future retirement income. The increased earnings ceiling strengthens the financial safety net for Canadians. It's crucial to include these changes in retirement planning, alongside other savings like RRSPs and TFSAs. The CPP enhancements are automatically applied through payroll deductions.
Conclusion
The new CPP payment structure is the result of the multi-year enhancement project that began in 2019 and fully phased in by 2025. It introduced a second earnings ceiling (YAMPE) and required additional contributions (CPP2) from higher-income earners. While this means higher payroll deductions, it promises a substantial increase in future retirement, disability, and survivor benefits, offering enhanced financial security for Canadians. For detailed information on personal contributions and future benefits, consult {Link: Canada.ca Canada.ca}.
Reference
- Canada.ca. Canada Pension Plan enhancement. [online] Available at: https://www.canada.ca/en/services/benefits/publicpensions/cpp/cpp-enhancement.html.
