Fact Sheet: What the Agreement in Principle Means for Canadians
- Strengthening the Canada Pension Plan (CPP) will not only provide retirement security for more Canadians, it will create jobs and have a positive, long-term impact on the Canadian economy.
- Middle class Canadians are working harder than ever, but many are worried that they won’t have enough put away for their retirement. One in four families nearing retirement—1.1 million families—risk not saving enough for retirement.
- On June 20, Canada’s Finance Ministers reached an historic agreement to make meaningful changes to the CPP that will allow Canadians to retire with more money in their pockets from the CPP.
- 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 $20,000.1
- Enhanced benefits will accumulate gradually as individuals pay into the enhanced CPP. Young Canadians just entering the workforce will see the largest increase in benefits.
- Right now the CPP replaces only a quarter of Canadians’ average annual earnings upon retirement.
- That means, if you make $50,000 per year 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 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 about 14 per cent, which is projected to be equal to $82,700 in 2025. So if you make $80,000 a year over your working life, you will get a third of that per year in retirement from the CPP.
- To fund these enhanced benefits, annual CPP contributions will increase modestly over 7 years, starting in 2019. For example, an individual with constant earnings of $54,900 will contribute about an additional $75 per year, or $6 a month in 2019. By the end of the 7-year phase-in period, contributions for that individual would be about an additional $515 per year, or $43 per month.2
- 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). Providing a tax deduction for new employee CPP contributions will avoid increasing the after-tax cost of saving for Canadians.
- To ensure that eligible low-income workers are not financially burdened as a result of the extra contributions, the Government of Canada will enhance the Working Income Tax Benefit, an existing benefit that is designed to help keep people in the workforce and encourage others to join it.
- The CPP will always be there for Canadians: It helps to fill the gap for those who do not have a workplace pension plan, and it is portable across jobs and provinces.
1 Benefits are presented in wage-adjusted 2016 dollars in order to provide a comparison to 2016 CPP levels. Maximum benefits require roughly 40 years of maximum contributions and benefit take-up at age 65. Under the CPP enhancement, the upper earnings limit will be increased by 14 per cent, which contributes to the higher maximum benefit.
2 The contribution rate for the CPP enhancement will be confirmed through an independent actuarial assessment, which will be performed by the Office of the Chief Actuary. Contributions have been estimated by the Department of Finance Canada.