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Canada Pension Plan: Your Paycheck Could Be Smaller in 2021

Christopher Liew, CFA
·3 min read
edit Colleagues chat over ketchup chips

The Canada Pension Plan (CPP) has undergone mandatory increases between 1996 and 2004. During the period, the rate rose to 9.9% from 5.6% of eligible earnings. The consequence was that for every $1 increase in CPP contributions, the private savings of the average Canadian households reduces by $1.

Fast forward to 2021, CPP contributions increased again, effective January 1. The CPP enhancements, a multi-year plan approved by provinces and the federal government, began in 2019. The first bump in the employer and employee contribution rate was 5.1%. For this year, the rate is 5.45%.

If you’re a CPP contributor, your paycheck could be smaller again. It also means the yearly maximum pensionable earnings (YMPE), or upper limit on earnings, will go up alongside the higher premiums. Thus, the YMPE in 2021 is now $61,600. Enhancement proponents argue the program expansion is good for CPP contributors.

Pension calculation

The CPP calculates an individual’s retirement pension based on 25% of the average pensionable earnings during the contributory period. Every Canadian worker who earns more than the basic annual exemption amount must contribute to the pension system. Generally, the contributory period ends when a user starts collecting the pension.

Maximum employee contribution

The maximum contributory earnings in 2021 is $58,100 ($61,600 minus $3,500), while the contribution rate is 5.45%. Hence, the maximum employee and employer contribution is $3,166.45 ($58,100 X 5.45%). A self-employed individual will contribute $6,332.90 ($3,166.45 X 2).

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Regarding the paycheck cut, the amount is $263.87 per month instead of the $241.50 in 2020. After this year, the contribution rates will increase to 5.7% and 5.95% in 2022 and 2023. Therefore, the contribution rate for self-employed individuals is 11.4% and 11.9% in the next two years after 2021.

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Dividend payments have been regular since 2001. Management has likewise raised dividends for 21 consecutive calendar years. The energy sector is volatile, although CNR endures commodity price cycles. Its asset base has low sustaining capital, while the reservoir risk is also low.

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Increase in replacement level

Younger CPP users will benefit the most from the ongoing enhancements but not Canadians at or near retirement. With higher contributions, the CPP’s replacement level will increase to one-third of the average pre-retirement earnings from one-quarter.

Remember that the benefits depend upon how much and for how long you contribute to the enhanced CPP. If you received your pension in 2065 or later, you would realize as much as a 50% increase to what you would receive before the enhancements.

The post Canada Pension Plan: Your Paycheck Could Be Smaller in 2021 appeared first on The Motley Fool Canada.

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Fool contributor Christopher Liew has no position in any of the stocks mentioned.

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