Get set to pay more in CPP contributions

Cost of living ratchets up again

The Canada Pension Plan will launch a new level on Jan. 1 and – no surprise – it will cost Canadians more.

The CPP has been getting a lot of attention due to the Alberta government’s proposal to opt out and set up a parallel provincial plan, à la Quebec.

Based on a report commissioned by the provincial government, Alberta would take with it 53% of CPP assets on departure, a figure that has dumbfounded everyone who has read it. That won’t happen. Even if Alberta did leave, estimates I’ve seen suggest it would only be entitled to around 20% of the CPP fund.

In short, the proposal isn’t going to fly, at least not on those terms. It seems to be a case of Premier Danielle Smith trying to mess with Justin Trudeau’s brain.

What is real is the launch of CPP2 in January. Most people are unaware that’s the date when a plan to raise coverage levels kicks in. We’ll be paying the usual increased contribution, plus a surtax for higher income workers.

Evelyn Jacks, who has written several books on taxation and runs the Winnipeg-based Knowledge Bureau, drew my attention to these changes in a recent issue of her company’s newsletter.

It all dates back to June 2016. A meeting of federal and provincial finance ministers that year agreed to increase benefits to cover 33% of pensionable earnings, rather than 25% as at present. Of course, that can’t happen without raising the contribution level.

The finance ministers of the day decided to wait eight years before implementing the plan (perhaps because they figured they’d have moved on by then and someone else would be blamed). Most Canadians didn’t take notice – it was a long way off.

But now, here we are. The new regime takes effect in less than two months, just at a time when inflation has many people scrambling to make ends meet.

Here’s a quick look at what’s going to happen. You can find more details at the Canada Revenue Agency website.

First, employees and businesses will have to deal with the regular annual contribution hike. The maximum annual payment will go up by 3%, to $3,867.50, for an employee, as the pensionable income covered increases to $68,500. That amount must be matched by the employer. Self-employed people will be on the hook for the full amount of $7,735.

At this point, the new level kicks in. People earning more than $68,500 in pensionable income will be required to make additional contributions at a 4% rate on the next $4,700, to a maximum of $188. That will bring the total maximum contribution in 2024 to $4,055.50 for an eligible employee and $8,111 for someone who is self-employed.

The Knowledge Bureau estimates that CPP2 contributions in 2025 will be 4% of an additional $9,700 in pensionable earnings, or an extra $388 on top of the maximum level for CPP1.

Raising benefits down the road is a desirable objective for any pension plan. But many people may be reluctant to pay higher contributions while inflation is eating away at their buying power. For a government that’s badly trailing in the polls, the timing doesn’t look great.

Gordon Pape is one of Canada’s best-known personal finance commentators and investment experts. He is the publisher of The Internet Wealth Builder and The Income Investor newsletters, which are available through the Building Wealth website.

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