Industry panel spotlights evolving priorities in employee benefits
Starting January 1, middle-income earners in Canada will notice an increase in Canada Pension Plan (CPP) contributions deducted from their paychecks.
This change is part of an ongoing overhaul of the pension system that commenced in 2019, encompassing both the Quebec Pension Plan and CPP. The overhaul's intent is to augment benefits for Canadians in their retirement years.
Since its inception, there has been a gradual increase in the contributions from individuals and a corresponding match by employers.
Alim Dhanji, a senior wealth adviser at Assante Financial Management Ltd. in Vancouver, explains that the fundamental aim of these revisions is to strengthen retirement benefits and enhance financial stability for future retirees. The CPP's modifications for 2024 introduce a new structure with two earnings ceilings. This structure alters how contributions are calculated for higher-income earners.
Under the previous system, individuals contributed a set percentage of their income above a base amount (currently $3,500) up to a maximum threshold, which in the past year was $66,600. This maximum amount has been subject to slight annual increments. For the self-employed, the obligation extends to covering both the employee and employer portions of the contributions.
The revised plan for 2024 maintains the first tier similar to the previous system. Contributions are made to earnings up to a government-set limit, which is now $68,500. Individuals earning up to this amount will see no change in their contribution rates. However, a notable change is introduced for those earning above $68,500.
A second contribution level is implemented, extending it up to $73,200. Within this bracket, an additional four percent is levied on the earnings between $68,500 and $73,200. Consequently, for 2024, this equates to a maximum of $188 in extra payroll deductions, and individuals earning over $73,200 will contribute an additional $300 compared to the previous year.
The rationale behind these upgraded CPP policies, which will continue to phase in through the next year, is to considerably boost the retirement income of Canadians. The plan is to increase the income replacement ratio from one-quarter of an individual's eligible earnings to one-third.
Although all contributors from 2019 will benefit from higher payouts, the full impact of these changes will unfold over several decades, with the most substantial gains accruing to the youngest contributors. Individuals retiring 40 years from now can anticipate an income increase of more than 50 percent relative to current pension beneficiaries.
Dhanji emphasizes that these modifications do not affect eligibility for retirement pension, post-retirement benefits, disability pension, and survivor’s pension.
The new contribution structure also impacts employers, as they are obligated to match the heightened contributions of their employees. Employers have been adjusting to these gradual increases since 2019, which have culminated in nearly a full percentage point rise in contribution rates by 2023.
In Canada, employers are required to match their employees' pension contributions. For freelancers and self-employed individuals, the responsibility is to pay both the employee and employer portions, amounting to a combined 11.9 percent for the first tier and eight percent for the second tier.
Dhanji concludes by noting that, from a financial planning perspective, these changes should be viewed positively by employers, as they are intended to contribute to the enhanced financial well-being of employees during their retirement years.