Question Period Note: CANADA PENSION PLAN ENHANCEMENT

Canada’s federal and provincial governments have enhanced the Canada Pension Plan.

• Canada’s federal and provincial governments have enhanced the Canada Pension Plan (CPP), with an historic agreement reached by Canada’s Ministers of Finance. The enhanced CPP represents a major step in improving retirement outcomes for workers. It will help Canadians to achieve a secure and dignified retirement.

• The Canada Pension Plan enhancement will boost the Canada Pension Plan payments that working Canadians will receive when they retire from
one-quarter of their eligible earnings, to one-third. The enhancement will also increase the level of earnings covered by the Plan.

• To make sure these changes are affordable, they are being phased in slowly until 2025 so that the impact on the economy and employers is small and gradual. The contributory burden on low-income workers is being mitigated by increasing the Canada Workers Benefit.

• Survivor and disability pensions will also increase, further strengthening the financial security of workers and their families.

The CPP is a sustainable contributory social insurance program that provides partial income replacement for Canadian workers and their families in the event of retirement, disability or death. Federal and provincial governments are joint stewards of the CPP. The Plan covers almost all employed and self-employed persons in Canada outside Quebec, which administers the comparable Quebec Pension Plan. In 2022-2023, CPP contributions totalled $74.8 billion. There were 6.5 million CPP beneficiaries per month on average, representing a total annual benefit value of $56.0 billion.

Monthly CPP benefits, which are indexed annually, are intended to provide a base upon which contributors can add income from the two other pillars of Canada’s retirement income system: Old Age Security benefits and private savings and investments, including employer pension plans.

The CPP enhancement will increase income replacement rate from one-quarter to one-third of pensionable earnings. It will also increase the limit on pensionable earnings by 14 percent by 2025. Together, these two changes will increase retirement pensions by between 33 percent and 50 percent, depending on an individual’s career earnings.

In 2023, the first part of the phase-in was completed, with the CPP enhancement contribution rate reaching its permanent level of 1 percent (paid by employers and employees) on earnings up to the base CPP’s earnings limit, for a combined contribution rate (base and enhancement) of 5.95 percent (paid by employers and employees). The increase to the earnings limit will be phased-in in 2024 and 2025, and workers with earnings above the base CPP limit will contribute at a rate of 4 percent on those earnings, up to the new enhanced limit (employers will match these contributions). Self-employed individuals pay both the employee and employer shares.

The enhanced CPP will be fully funded. Each year of contributing to the enhancement will allow workers to accrue partial additional benefits, with fully enhanced benefits available 40 years after full implementation.

To offset the impact of higher contributions on low-income workers, the Government of Canada increased the Canada Workers Benefit, formerly known as the Working Income Tax Benefit. This is a refundable tax credit that supplements the earnings of low-income workers. In addition, the protection provided by the CPP’s Year’s Basic Exemption of $3,500 means low-income workers already have lower effective contribution rates, and thus smaller increases in actual contributions relative to their CPP benefits. The enhanced CPP contributions are also tax deductible to further mitigate the effect of the increased contributions on Canadians.

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