Backgrounder: Long-Term Benefits of Canada Pension Plan Enhancements

Related document: Backgrounder: Canada Pension Plan (CPP) Enhancement

This summary document contains hyperlinks to detailed background information and economic research conducted by the Department of Finance Canada in relation to the Agreement in Principle on Canada Pension Plan Enhancement reached on June 20, 2016.

Middle class Canadians work hard, but don’t always feel as though they are getting ahead. Canada’s retirement income system, which includes the Canada Pension Plan (CPP), provides important support, but fewer and fewer of us are able to save enough. One in four families nearing retirement—1.1 million families—risk not saving enough for retirement.

Our Government is committed to helping Canadians achieve their goal of a safe, secure and dignified retirement. That’s why, working with the provinces, we reached an historic agreement in principle on June 20, 2016 to enhance the CPP.

Substantial and rigorous economic analysis was undertaken by the Department of Finance Canada in support of the Government’s work with the provinces towards reaching this agreement.

This analysis confirms that the CPP enhancement agreed upon by Ministers will have a net positive long-term impact on Canada’s economy.

What It Means for Canadians

Simply put, there will be more money waiting for Canadians when they retire.

Right now the CPP replaces only a quarter of Canadians’ average annual earnings upon retirement.

That means, if you make $50,000 per year in today’s dollars over your working life, you will get a quarter of that per year over your retirement, or about $12,000.

There’s also currently a limit of about $55,000 at which this quarter share maxes out. So if you make more than $55,000 a year, you will still only get a quarter of $55,000.

The enhancement that Canada’s governments have agreed to does two things that will see Canadians receive more through the CPP in retirement.

First, it will increase the share of your annual earnings that you will get in retirement from one-quarter to one-third. So if you make $50,000 a year in today’s dollars over your working life, you will receive about $16,000 per year in retirement instead of today’s $12,000.

Second, it will increase the point at which this new one-third replacement rate maxes out by 14 per cent, which will equal about $82,700 in 2025. So if you make $80,000 a year in today’s dollars over your working life, you will get a third of that per year in retirement from the CPP.

Employee contributions to the enhanced portion of the CPP will be tax deductible (a tax credit will continue to apply to existing employee CPP contributions).

What’s more, those who need it most will see higher benefits in retirement without any reduction in their household budget because increases to the Working Income Tax Benefit will offset the costs of CPP contributions for eligible low-income workers.

Those that benefit the most from the improved CPP will be today’s youth, and future generations. That’s because benefits will gradually build up as you pay into the enhanced CPP. Young Canadians just entering the workforce will see the largest increase in benefits. It’s no surprise that a large majority of Canadians (75 per cent) support a CPP enhancement, which will give their children, their grandchildren and future generations better financial security when they retire.

For most Canadians, all these increased retirement savings come from only a one per cent increase in your contribution rates.

Increases to contribution rates will be gradually phased in starting in 2019. This is the responsible thing to do to make sure that businesses and workers have time to adjust to and accommodate the broader near-term influence on the economy.

For example, if you make $54,900, you will contribute about an additional $6 a month in 2019. By the end of the 7-year phase-in period, your additional contributions would be about $43 per month.

These additional contributions will support a solid return on Canadians’ investments in their CPP retirement savings: once fully in place, the CPP enhancement will increase the maximum CPP retirement benefit by about 50 per cent. The current maximum benefit is $13,110. In today’s dollar terms, the enhanced CPP represents an increase of nearly $7,000, to a maximum benefit of nearly $20,000. 

Support for Long-Term Economic Growth

As a result of these increased retirement benefits, the CPP enhancement will give retirees more money to spend on things like healthy food, transportation and housing costs, which in turn will create jobs and help strengthen the middle class.

Over the long term, greater CPP benefits will boost demand, and increase savings overall. This will boost economic output and make more money available for investment. As a result, gross domestic product is estimated to increase between 0.05 to 0.09 per cent over the long-term. Employment levels are also projected to be permanently higher by between 0.03 and 0.06 per cent (equivalent to about 6,000 to 11,000 jobs based on 2015 levels of employment).

A Better Retirement for Future Generations

For 50 years, the CPP has been there for Canadians, and future generations will now benefit even more. The CPP helps to fill the gap for those who do not have a workplace pension plan, and it is portable across jobs and provinces. All working Canadians covered by the CPP will benefit from its enhancement.

With the CPP, Canadians can worry less about outliving their savings, being affected by a sudden drop in the stock market, or the stability of their workplace pension plan:

  • CPP benefits are fully indexed to prices, which reduces the risk that inflation will gradually erode the purchasing power of benefits.
  • The CPP is also a good fit for Canada’s changing job market. It helps to fill the gap left by declining workplace pension coverage, and it is portable across jobs and provinces, which promotes labour mobility.
  • The CPP is a large program with millions of contributors, which allows the CPP Investment Board (CPPIB) that manages the CPP fund to take advantage of economies of scale in order to deliver strong net returns.
  • The CPP Fund is ranked as one of the 10 largest retirement funds in the world, allowing the CPPIB to undertake large and rare transactions and partnerships with which few other investment managers are equipped to compete.
  • At March 31, 2016, the CPP fund totalled $278.9 billion. The CPPIB has delivered a 10-year average real rate of return of 5.1 per cent net of costs (6.8 per cent nominal) on existing CPP assets. This is well above the 4 per cent real rate of return that the Office of the Chief Actuary has assessed is required to sustain the benefit and contribution rates on the existing CPP.
  • With the automatic collection of contributions for all workers, the CPP is a simple way to save.
  • An enhanced CPP is the right tool at the right time to improve the retirement income security of younger workers.