The Canada Pension Plan (CPP) earnings ceiling is increasing at the highest rate in 30 years, a change that will provide a boost to benefits for new retirees and a hit for workers and businesses contributing to the plan.
The earnings cap, called yearly maximum pensionable earnings or YMPE, is set to rise to $64,900 for 2022 from $61,600 for 2021, the Canada Revenue Agency (CRA) announced on Nov. 1. That’s a 5.3 per cent increase, the largest percentage change since 1992.
How to protect your savings from inflation
The change will boost benefits for retirees who start claiming CPP benefits in 2022 or later but also result in significantly larger contributions for workers and employers paying into the pension plan.
The unexpected jump reflects, in part, the impact of the COVID-19 pandemic, which caused disproportionate job losses for low-earning workers, according to the Office of the Chief Actuary.
Canada’s annual inflation rate soars 4.7 per cent in October
The YMPE is calculated annually and is based on an average of weekly earnings recorded over the 12 months ending June 30. A smaller-than-usual number of low-wage workers employed between the second half of 2020 and the first half of 2021 effectively skewed the weekly earnings average for 2022 higher, says Alexandra Macqueen, a certified financial planner and author of several books on retirement planning.
“If the YMPE goes up, then you need to pay more into (CPP), though you’ll get more out on the other end,” she says.
The increase scheduled for 2022 comes after pandemic job losses among lower-earning workers caused a similar spike in the CPP earnings ceiling for 2021, which reflected the impact of the COVID-19 emergency on the labour 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 enhance benefits from the government pension fund.
CPP was initially designed to cover up to a quarter of workers’ average annual earnings, up to the earnings cap. In their first term, the Liberals introduced a plan to enhance CPP so it will replace up to a third of average earnings, up to the ceiling, in retirement by 2065.
As part of the shift to higher benefit levels, contribution rates have been rising every year since 2019. For 2022, the contribution rate for employees and employers is set to increase to 5.7 per cent, up from 5.45 per cent in 2021. The contribution for self-employed workers is scheduled to increase to 11.4 per cent, up from 10.9 per cent.
But what had been meant to be gradual increases in contribution levels turned into two consecutive years of soaring CPP premiums due to the impact of the pandemic on the CPP earnings cap.
“When we — we collectively as Canadians — said we were going to increase CPP, nobody envisioned that it would lead to these kinds of increases,” Macqueen says.
Bill Morneau says CPP reform will improve retirement outcomes for future generations
Higher contributions for employers and employees
The contribution rate increase and the jump in the YMPE will be “a double whammy” that hits small businesses “at the worst possible time,” says Dan Kelly, president of the Canadian Federation of Independent Business (CFIB).
Small businesses are already squished between lower-than-average revenues. Only 36 per cent of CFIB members are back to normal business activity, the organization says — and soaring input costs, with Canada’s inflation rate growing at the fastest clip in 18 years, Kelly notes. Many business owners are also struggling with supply chain issues and labour shortages, he adds.
CFIB unsuccessfully lobbied the federal government to delay the scheduled CPP premium increases in 2021 but is reiterating those calls for 2022.
“We assumed that the job market would be a lot more normal the following year in 2021, and therefore we wouldn’t see this (large CPP premium increase) again,” Kelly says of the CFIB’s thinking as the first major increase took effect at the beginning of this year.
But as pandemic lockdowns continued into the second half of 2020 and first half 2021, persistently high job losses among low earners are set to result in yet another jump in CPP contributions, he adds.
“I don’t know how my members are going to meet their payroll budgets next year,” Kelly says.
The spike in CPP premiums will also hit workers at a time when they are feeling the squeeze of soaring consumer prices, Macqueen notes. The increase is particularly large for the self-employed, who pay both the employee and employer portions of CPP contributions.
“I’m not trying to be alarmist, but these are huge increases if you’re self-employed and you’re paying both sides of it,” Macqueen says.
The maximum employer and employee annual contribution will be just shy of $3,500, up by around $334 from a maximum of $3,166 each in 2021. For self-employed Canadians, the maximum annual contribution is set to rise to nearly $7,000 per year, up by around $667 from $6,333 in 2021.
What changes to CPP mean for you
A ‘little boost’ for new retirees
On the flip side of the abnormally large increase in the CPP earnings cap are retirees who will start claiming their pension in 2022 or later.
For them, the YMPE jump means “a little boost,” financial planner David Field and CPP expert Doug Runchey wrote in a recent note about the upcoming change. That’s because the government uses the YMPE of the year in which a claimant starts to receive their pension to calculate their benefit. That amount is then adjusted for inflation every year after that.
“If you are planning to start your CPP in December 2021, you may want to reconsider that decision and start receiving it in January 2022 to receive a higher payment for the rest of your life,” Field and Runchey wrote.
For example, someone who turned 65 in November 2021 and is eligible for the maximum benefit would receive a first payment of $1,203.75 in December 2021 that would go up to $1,236.25 starting in January 2022 thanks to the annual inflation adjustment to CPP payments.
If the same retiree waited one month to claim their CPP, they would receive $1,252.46, or roughly $16 more per month, according to Field and Runchey’s note. The higher payment reflects both the higher earnings cap for 2022 and a small increase for the one-month deferral.
Still, it might make sense for some retirees planning to start claiming CPP in December to do so anyways, Field says.
“There are reasons to be (deferring CPP) and reasons not to,” he says.
For example, it would take around six years for someone deferring CPP by just one month to January 2022 to recoup the amount of the foregone December 2021 payment, Runchey calculates.
“To make this decision worthwhile, you’re living at least roughly six years,” Field says. “Most people collect for much longer … but you have to factor your health into it.”