On June 20, 2016, the federal Minister of Finance Bill Morneau,
together with eight of the 10 provincial finance ministers, agreed
in principle to expand the Canada Pension Plan (CPP). All provinces
except Quebec and Manitoba have agreed to the new CPP deal. A
change to CPP requires the agreement of a minimum of seven
provinces representing two-thirds of the Canadian population
– a threshold which has tentatively been met (subject to
ratification by the provinces). These enhancements to the CPP
represent the most significant increase to CPP benefits since the
CPP was first established in 1965.
Under the enhanced CPP, the income replacement ratio will be
increased to one third (from one quarter) of pensionable earnings.
The proposed changes to the CPP include an increase in the
Year's Maximum Pensionable Earnings (YMPE), which is the
maximum annual income subject to CPP contributions and accruals.
The 2016 YMPE is $54,900, and the CPP enhancements will increase
that earnings limit by approximately 14 percent beginning in 2024,
with the YMPE for 2025 expected to be $82,700 upon full
implementation in 2025. The changes also include a one percent
increase in employer and employee contributions to the CPP,
resulting in an increase to 5.95 percent from the current 4.95
percent contribution rate for both employers and employees, to be
phased in over a 5-year period beginning on January 1, 2019.
As a result of the CPP deal, the Ontario government has
announced that the Ontario Retirement Pension Plan (ORPP), which
was scheduled to come into effect in that province beginning on
January 1, 2018, will be abandoned – assuming that the new
CPP deal is ratified by the provinces by July 15, 2016.
What This Means For Employers
What started as the Ontario government's ambitious plan to
increase retirement savings for working Ontarians through its
introduction of the ORPP will likely end with an enhanced CPP
instead. While the ORPP was a plan for Ontario employees only, the
enhanced CPP, although providing a more modest benefit, will
benefit all employees (and the self-employed) in Canada outside of
Quebec. While it is estimated that the changes to the CPP will
provide only about one-half of the benefit that would have been
provided by the ORPP (for employees earning at or less than the
enhanced CPP earnings limit), they come at about one-half of the
cost of the ORPP.
Due to the lengthy phase-in period for the enhancements,
employers will have time to adjust to the impact of the proposed
CPP changes on their cost of doing business and to consider the
impact on the design of their employer-sponsored plans.
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guide to the subject matter. Specialist advice should be sought
about your specific circumstances.
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