The Canada Pension Plan (CPP) is a monthly tax benefit designed to provide partial income replacement for retirees. The purpose of the CPP is to help Canadians maintain a certain standard of living after retirement. The income for the CPP comes from contributions made by employers and employees, as well as investment earnings. Both the contribution amounts and benefits of the CPP are adjusted according to the average wage and price levels in Canada.
Starting in 2019, the federal government initiated the CPP Enhancement Plan, meaning that today’s workers, the future elderly, will receive higher benefits and greater financial stability by slightly increasing their contributions to the CPP. The CPP enhancement only affects those who work and contribute to the CPP from 2019 onwards.
The year 2024 is an important one for the CPP Enhancement Plan as it will introduce some new changes that will affect CPP contributors and beneficiaries. Here are some of the main changes:
- The maximum contributory income for the CPP will increase from $66,600 in 2023 to $68,500 in 2024. The basic exemption remains at $3,500. This means that in 2024, only income exceeding $3,500 and not more than $68,500 will require basic CPP contributions.
- Starting in 2024, a higher second contributory income ceiling of $73,200 will be implemented to determine the additional CPP contributions (CPP2). Therefore, contributory income between $68,500 and $73,200 will require CPP2 contributions. These new limits are calculated according to the legal provisions of the CPP, taking into account the growth in average weekly wages and salaries in Canada.
- The basic contribution rate for employees and employers to the CPP will remain at 5.95% in 2024, with a maximum contribution of $3,867.50 per person, an increase from $3,754.45 in 2023. The basic contribution rate for self-employed individuals remains at 11.9%, with a maximum contribution of $7,735.00, up from $7,508.90 in 2023.
- The CPP2 contribution rate for employees and employers in 2024 is 4.00%, with a maximum contribution of $188.00 per person. The CPP2 contribution rate for self-employed individuals is 8.00%, with a maximum contribution of $376.00.
- CPP contributors are neither required nor allowed to make contributions on income exceeding $73,200.
These changes will have a range of impacts on CPP contributors and beneficiaries:
- For contributors, they will need to pay more for the CPP, especially those with incomes above $68,500 who will need to pay additional CPP2 fees. This may have an impact on their disposable income, but will also provide more security for their retirement savings.
- For beneficiaries, they will receive higher CPP pensions, especially those who continue to work and pay CPP2 after 2024, whose maximum CPP retirement benefits will be about 1.3% higher than under the current rules. In addition, the CPP Enhancement Plan introduces two “supplementary” provisions to increase the number of contributory years in the CPP benefit calculation, thereby improving the retirement benefit level for beneficiaries.
In summary, the enhancement of the CPP is designed to provide Canadians with a better quality of life after retirement, but also requires them to take on more contribution responsibilities during their working years. As an accountant, I recommend that you develop a reasonable financial plan based on your income level and retirement goals to cope with the changes in the CPP and make full use of other retirement savings tools, such as the Registered Retirement Savings Plan (RRSP) and the Tax-Free Savings Account (TFSA), to achieve your ideal retirement life. Particularly for self-employed individuals and small business owners, how to effectively cope with the cost increase brought by CPP2 is also an important issue to consider. If you need more information or consultation, please visit the Government of Canada website at www.canada.ca, or contact us for details.