Canada Pension Plan (CPP) income limits are rising at the highest rate in 30 years, a change that will boost benefits for new retirees and provide a hit for workers and businesses that contribute to the plan.
The income cap, called annual maximum pensionable income, or YMPE, will increase from $64,900 for 2022 to $61,600 for 2021, according to the Canada Revenue Agency (CRA). announced on 1 November. That’s an increase of 5.3 percent, the biggest percentage change since 1992.
The change will boost benefits for retirees who begin claiming CPP benefits in 2022 or later, but result in significantly larger contributions for workers and employers who pay into the pension plan.
According to the Office of the Chief Actuaries, the unexpected surge reflects, in part, the impact of the COVID-19 pandemic, which has led to disproportionate job losses for low-income workers.
The YMPE is calculated annually and is based on the average of weekly earnings recorded for the 12 months ending June 30. The number of low-wage workers employed between the second half of 2020 and the first half of 2021 is lower than normal. The weekly income average for 2022 is high, says Alexandra McQueen, a certified financial planner and author of several books on retirement planning.
“If the YMPE goes up, you’ll have to pay more in (CPP), although you’ll get more at the other end,” she says.
The increase scheduled for 2022 was due to a similar spike in the CPP income threshold for 2021 following pandemic job losses among low-income workers, reflecting the impact of the COVID-19 emergency on the labor market in the first half of 2020.
It also comes as the federal government is gradually increasing CPP contribution rates as part of a multi-year plan to increase benefits from government pension funds.
The CPP was initially designed to cover up to a quarter of the average annual income of employees, up to the income limit. In his first term, the Liberals introduced a plan to increase the CPP so that it would replace one-third of the median income in retirement by 2065, up to a maximum limit.
As part of the shift to higher benefit levels, the contribution rate has been increasing every year since 2019. For 2022, the contribution rate for employees and employers will increase to 5.7 percent from 5.45 percent in 2021. The contribution for self-employed workers is planned to be increased from 10.9 percent to 11.4 percent.
But a gradual increase in contribution levels meant two consecutive years of rising CPP premiums due to the pandemic’s impact on the CPP income cap.
“When we – we collectively as Canadians – said we were going to increase the CPP, no one thought it would lead to that kind of increase,” McKean says.
An increase in the contribution rate and a boom in the YMPE would be “a double whammy” affecting small businesses “at the worst possible time,” says Dan Kelly, president of the Canadian Federation of Independent Business (CFIB).
Small businesses are already submerged in below-average revenue. Only 36 percent of CFIB members have returned to normal business activity, the organization says — and with rising input costs, Canada’s inflation rate is rising with the fastest clip in 18 years, notes Kelly. He added that many business owners are also grappling with supply chain issues and labor shortages.
The CFIB unsuccessfully lobbied the federal government to delay the CPP premium hike, scheduled for 2021, but is reiterating those calls for 2022.
“We had assumed that the job market would be much more normal next year in 2021, and so we would not see this (large CPP premium increase) again,” Kelly said of CFIB’s vision of the first major growth. Beginning of this year.
But as the pandemic lockdown continued in the second half of 2020 and the first half of 2021, there has been another jump in CPP contributions as a result of persistently high job losses among low-income earners, he added.
“I don’t know how my members are going to meet their payroll budget next year,” Kelly says.
The hike in CPP premium will have an impact on workers even at a time when they are feeling the pressure of hike in consumer prices. The increase is especially large for the self-employed, who pay both the employee and employer portions of CPP contributions.
“I’m not trying to be an alarmist, but if you’re self-employed and you’re paying both sides of that, that’s a huge increase,” McKean says.
The maximum employer and employee annual contribution would be only $3,500, which would be approximately $334 more than the maximum $3,166 in 2021. For self-employed Canadians, the maximum annual contribution is set to increase to approximately $7,000 per year. $6,333 to $667 in 2021.
On the other side of the unusually large increase in the CPP income limit are retirees who will start claiming their pension in 2022 or later.
To them, the YMPE jump means a “little boost,” financial planner David Field and CPP expert Doug Runche wrote in a recent note about the upcoming change. This is because the government uses the YMPE of the year in which a claimant starts receiving his pension to calculate his benefit. Every year thereafter, that amount is adjusted for inflation.
“If you plan to start your CPP in December 2021, you may want to reconsider that decision and start receiving it in January 2022 to get a higher payout for the rest of your life,” Fields And ranche wrote.
For example, someone who turns 65 in November 2021 and is eligible for the maximum benefit will receive a first payment of $1,203.75 in December 2021, which will increase to $1,236.25 starting in January 2022, which is the CPP The payments are due thanks to annual inflation adjustments.
If the same retiree waits a month to claim their CPP, they will earn $1,252.46, or roughly…