Canada Pension Plan Reform
Canada Pension Plan Reform
The federal government and the provinces have reached an agreement to increase the benefits provided by the Canada Pension Plan. Under the current rules, both employees and employers pay 4.95% of the individual’s salary into the Canada Pension Plan. Self-employed individuals must pay both the employee and employer’s share or approximately 10% of their income. The maximum threshold is currently $55,300, so there is no CPP deducted on the excess amount.
This model is designed to pay retirees approximately 25% of their pre-retirement income that does not exceed the threshold of $55,300. The government’s reform has two major changes. Rather than paying 25% of the salary as a retirement pension, the per centile will be increased to 33%. This step would raise the maximum CPP from just over $13,000 to approximately $17,500. The next steps are to increase the maximum threshold from $55,300 to $82,700, while contributions will increase from 4.9% to 5.9% for both employees and employers.
As a result of these reform proposals which are being phased in over many years, the maximum payout will eventually be $19,900 per annum, but this payout will not be available until 2065. These numbers are in 2016 dollars and since CPP is indexed to inflation, the payouts will actually be significantly higher than those quoted by the government.
Although the increased pension will be beneficial to seniors, the self-employed may have some issues. When the system is totally phased in, they must contribute 11.8%% of $82,700 or $9,760 per year. The government takes your money, invests the contributions and eventually gives it back to you in the form of a pension. Thus, the government has no skin in the game. Entrepreneurs are not given the option of dropping out of the Canada Pension and self-finance their retirement.
