Transcript - Episode 6: Canada Pension Plan Enhancement – Planned phases
Please note that some information contained in this recording pertains specifically to Phase One of the Canada Pension Plan Enhancement and may not be applicable under the second Phase.
Host: Hello and welcome to the Canada Revenue Agency’s payroll podcast. On today’s episode we’ll finish our conversation with Kevin, Director General of the CRA’s Business Compliance Directorate, on the Canada pension plan enhancement. In the first part of the series Kevin discussed some of the reasons why the enhancement is taking place and explained that employers will not need to change the way they calculate and remit their contributions. Today our conversation begins by discussing some of the changes for individuals. I asked Kevin how those with modest incomes will be able to make room in their budget for higher CPP contributions, and manage the increase in contributions that will give them more in retirement without having it affect their day to day lives.
Kevin: Associated with the enhancement to the Canada pension plan, there are some important changes being made to the working income tax benefit (or WITB) that are designed to roughly offset the incremental CPP contributions for those who are eligible. In short, eligible workers will be able to access the full benefits of the WITB more rapidly, and its benefits will fall off more slowly in terms of the income stream. While eligible, the benefits will also be greater across the income range. This enhancement to the WITB was introduced as part of the overall CPP enhancement to help those with more modest incomes offset the effects of higher CPP contributions on an ongoing basis.
Host: OK, and since the enhancement isn’t scheduled to begin until January 2019, is it safe to assume that the younger generations of Canadians will ultimately benefit most from these changes? How will it impact those who are in the workforce now?
Kevin: So, any contribution to the enhanced Canada pension plan will bear a benefit to the contributor. But, certainly younger workers will see the greatest benefits as they will have the opportunity to contribute to the enhanced portion of the Canada pension plan over a longer period of time, perhaps their entire working career. This is in keeping with a legislative provision for the enhanced Canada pension plan that requires each generation to pay for its own benefits. Under this approach, full benefits for the enhancement are really only available after 40 years of full contributions (in other words once the increased contribution rates are fully phased in). That being said, those contributing for part of a career or near the end of their career will see partial benefits available at the time they become eligible.
Host: More or less, what you put in is what you’ll get out?
Kevin: That’s correct, your benefits are directly related to your contributions.
Host: OK, now that we have a little bit of a better understanding of some of the changes taking place with this enhancement, can you talk about how it will be rolled out? What are the planned phases?
Kevin: So there are two phases to the implementation. The first deals with the increase to the contribution rate. We will see an increase to the contribution rate of 2% phased in over the course of five years, and that 2% is shared by the employer and the employee, 1% each. At the start, in 2019, the increase begins at just 0.15%, but it ramps up year-over-year so that, by 2023 we will have achieved the full 1% increase for each of the employee and the employer.
Host: And 2% for the self-employed.
Kevin: That’s correct 2% total for employers and employees and certainly if you are self-employed it’s 2% in its entirety.
Host: After the break, I’ll ask Kevin to discuss the 2nd phase of the Canada pension plan Enhancement. Stay with us.
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Host: Before the break, Kevin explained that phase one of the Canada pension plan enhancement - the increase to contribution rates - will occur over five years starting in January of 2019. And this will increase the total contribution rate that is shared by employer and employee by 2% on pensionable income earned up to the YMPE. So, what is the 2nd phase?
Kevin: So, the 2nd phase involves a movement upwards of the yearly maximum pensionable earnings limit. So, there will be a two-year phase-in to the upper earnings limit, which will increase by 14%. And we had mentioned this a little bit in the earlier episode. Beginning in 2024, there will be a separate contribution rate of 8%, combined share employee and employer that will be implemented for the earnings above the current YMPE up to the new upper earnings limit.
Host: Ok, so there’s definitely a few moving parts with this phase, could you just explain in greater detail to the listeners what you mean by the 14% upper earnings limit increase as well as the separate contribution rate of 8% on earnings between the YMPE and the new upper earnings limit?
Kevin: Absolutely, so, most generally, the new upper earnings limit allows us to cover more income replacement for retirement. In 2024 the new upper earnings limit will be at 107% of the current YMPE, which means that the maximum income range covered by the Canada pension plan would increase from $67,700 to $72,400, and I note that these are values in 2024 dollars.
Host: Projected numbers?
Kevin: Yes, projected numbers. This is where we think we will be in 2024. In 2025 and subsequent years the upper earnings limit will be 114% of the YMPE, projected to be $79,400. The separate contribution rate, as we already noted, will be 4% equal share between employer and employee, making up the 8% total contribution rate for those earnings between the YMPE and the new upper earnings limit, which is 114% of that number.
Host: Alright, so between 2019 and 2025 there is going to be incremental changes to the contribution rate and the upper earnings limit. Why is it going to take seven years for the enhancement to be fully implemented?
Kevin: So it’s true that the implementation is gradual and scaled and this was a strategy chosen deliberately to allow a significant amount of time for businesses and employees to adjust and make necessary changes in order to accommodate the additional contributions to the Canada pension plan.
Host: Over these last couple of episodes we’ve discussed a lot of important details about the changes that will occur to the Canada pension plan through this enhancement. Is there anything else that you’d like to add or do you have any final thoughts that you’d like to share with the audience?
Kevin: Perhaps I’ll just return to some of the opening thoughts in the earlier episode. The Canada pension plan, and the enhancements to the Canada pension plan, are really about providing income security in retirement to Canadians. The enhancement helps achieve this objective by responding to some significant changes in the job market and the pension landscape over recent years. These include declining workplace pension coverage and changes to the nature of pension plans, particularly the trend away from defined benefit and towards defined contribution plans.
I think the other part that we would want to note here is that the enhancement to the Canada pension plan leverages processes that we are familiar with. It’s familiar to employees who are already making contributions to the core plan. It takes advantage of our current payroll administration processes and we will continue to work with employers to make the contribution process as simple and straightforward as possible.
Host: Thank you for listening to the CRA’s payroll podcast. Today’s episode was part two of our two-part series on the Canada pension plan enhancement. If you’re interested in learning more you can visit Canada.ca/taxes and simply search for Canada pension plan enhancement. If you have any questions about the show, if you’d like to give feedback, or if you’d like to request a topic for a future episode, you can email us at email@example.com. We’d love to hear from you.
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