Understanding and calculating the “Enhanced CPP” changes

Updated with 2019 rates

2019 is the first year where the changes announced in June 2016 will be put in place. The Minister of Finance announced an agreement in principle with the provinces that would “strengthen the Canada Pension Plan (CPP) for future generations.” These proposed changes became known as the enhanced CPP, and the legislation to enact these changes (Bill C-26) has now received royal assent.

What are the changes to the CPP?

The first change that you’ll notice is an increase in the cost of CPP contributions from a total of 9.9% to a total of 11.9%. This change will occur gradually over five years, according to the following schedule:

The above contribution rates apply to all pensionable earnings that are above the Year’s Basic Exemption (YBE) of $3,500, and below the Year’s Maximum Pensionable Earnings (YMPE), which is $57,400 for 2019. These earnings from 2019 forward will be known as “first additional pensionable earnings.”

Yearly Additional Maximum Pensionable Earnings (YAMPE)

Another change to the CPP under Bill C-26 is a higher ceiling for earnings on which contributions will be required, which is called the Yearly Additional Maximum Pensionable Earnings (YAMPE.) This change will be phased-in over two years, with a 7% increase in 2024 (to $61,400 in 2019 dollars) and a 14% increase in 2025 (to $65,400 in 2019 dollars).

The total contribution rate for earnings between the YMPE and the YAMPE will be 8.0% (4.0% each for both the employee and the employer) and these earnings will be known as “second additional pensionable earnings.”

Related Article: How much will you get from Canada Pension Plan in Retirement?

CPP benefits are increasing as well

The good news is that these increased contributions will allow the enhanced CPP to replace 33.33% of your “average lifetime earnings” rather than the current 25%. Along with the higher YAMPE, this will result in a maximum retirement pension being approximately 50% more than it is currently.

The not-quite-so-good news is that this increase is being phased-in over a 45-year period. That means that no one will receive this 50% higher maximum retirement pension until 2065.

That doesn’t mean that pensions won’t be increasing before then. Pensions will start to increase slowly, beginning in 2019. The following table shows approximately how much of an increase someone will see in their monthly age-65 retirement pension (2019 maximum is $1,154.58), if they’re earning at or above the YAMPE level each year.

These increases are cumulative though, so that if you earned at the YAMPE level for the seven years of 2019 through 2025, your maximum retirement pension in 2026 would be $1,207.83 ($1,154.58 + $53.25), and the maximum will continue to increase by $14.98 for each year of additional earnings at the YAMPE level for 2026 and beyond (up to a maximum of 40 years of earnings in total).

Using this formula, the maximum CPP retirement pension in 2065 (in 2019 dollars) will be approximately $1,753.78 monthly ($1,154.58 + (40 x $14.98)), or approximately $21,045 yearly.

How to calculate a CPP retirement pension after the “Enhanced CPP” changes?

I generally don’t like the way that the government abbreviates everything, but sometimes there’s a purpose to it. For purpose of this article, I’m going to use the abbreviation RTR-FBC to stand for “retirement pension – for benefit calculation,” which is the value of a CPP retirement pension before applying any age-adjustment factor if the pension starts before or after age 65.

Starting in 2019, the RTR-FBC will consist of three parts, as follows:

Part 1 (the basic component, or basic RTR-FBC)

This part is the “old calculation” and it replaces 25% of a contributor’s average monthly pensionable earnings (AMPE), as described in this earlier article.

The basic component or basic RTR-FBC is currently the answer to Step 5 in that article, and it will soon become Step 5a when that article is updated to reflect the enhanced CPP changes.

Part 2 (the first additional component, or first additional RTR-FBC)

Starting in 2019, pensionable earnings up to the YMPE will be subject to an additional contribution rate of 1.0%. (This rate increase will actually be phased in over five years, from 2019 through 2023.) Under the enhanced CPP legislation, these earnings from 2019 onwards will be known as “first additional pensionable earnings.”

The first additional RTR-FBC will replace 8.33% of these first additional monthly pensionable earnings (FAMPE), phased in over 44 years and calculated as follows:

Step 1 – The first additional pensionable earnings must first be adjusted to a current-year value. To do this, each year of first additional pensionable earnings must be divided by the YMPE for the year of the earnings and multiplied by the average YMPE for the five years ending with the year that the pension starts.

For purposes of this calculation, these adjusted earnings will now be called the first additional adjusted pensionable earnings (FAAPE), and they are very similar to the APE which is calculated by Step 2 in the above link under the basic RTR-FBC calculation. The only difference between FAAPE and APE is that the FAAPE values are pro-rated for the years 2019 through 2022, because the contribution rate increase (1.0% for employees and employers or 2.0% for self-employed people) is also pro-rated for those same four years.

The pro-rated values for the FAAPE for 2019 through 2022 are as follows:

• 2019 – FAAPE = 15% of APE
• 2020 – FAAPE = 30% of APE
• 2021 – FAAPE = 50% of APE
• 2022 – FAAPE = 75% of APE

Step 2 – FAAPE will be totaled for all years and averaged over 480 months. Once we are past 2058, only the best 40 years of FAAPE will be totaled. The result of this calculation is the first additional monthly pensionable earnings (FAMPE).

Step 3 – The first additional component or first additional RTR-FBC is then simply 8.33% of FAMPE.

Part 3 (the second additional component, or second additional RTR-FBC)

Starting in 2024, the ceiling up to which CPP contributions must be made will be increased. The YMPE will still exist and this new ceiling will be called the “Yearly Additional Maximum Pensionable Earnings” (YAMPE). The YAMPE will be increased in two steps, to 7% above the YMPE in 2024 and 14% above the YMPE in 2025 and later years.

For example, using the 2019 YMPE of $57,400 as the starting point, this would make the YAMPE $61,400 in 2024 and $65,400 in 2025. The actual numbers will depend on the YMPEs for 2024 and 2025 once they are announced.

Starting in 2024, pensionable earnings above the YMPE and below the YAMPE will be subject to a CPP contribution rate of 4.0% for employees and employers, or 8.0% for self-employed people. These earnings will be known as “second additional pensionable earnings.”

The second additional RTR-FBC will replace 33.33% of these second additional monthly pensionable earnings, phased in over 40 years and calculated as follows:

Step 1 – The second additional pensionable earnings must first be adjusted to a current-year value. This process is the same as Step 1 above, where you divide the earnings by the YMPE for the year of the earnings and multiply it by the average YMPE for the five years ending with the year that the pension starts.

For purposes of this calculation, these adjusted earnings will now be called the second additional adjusted pensionable earnings (SAAPE).

Step 2 – SAAPE will be totaled for all years and averaged over 480 months. Once we are past 2063, only the best 40 years of SAAPE will be totaled. The result of this calculation is the second additional monthly pensionable earnings (SAMPE).

Step 3 – The second additional component or second additional RTR-FBC is then simply 33.33% of SAMPE.

Final Steps

Once you have calculated all three parts above (if applicable), you add them together to get the total RTR-FBC.

The last step is then to apply any age-adjustment factor if the pension is payable before or after age 65. This factor is fully explained in Step 6 of the “old calculation” at the above link, but it is basically:

• Reduce the pension by 0.6% for every month if starting before age 65; or
• Increase the pension by 0.7% for every month if starting after age 65.

Wrapping up on Enhanced CPP

As you can see, if you’re thinking of applying for your CPP earlier than 2025, the enhanced CPP will be of little value to you. However, for each year of pensionable earnings beyond 2024, the changes mean that your maximum CPP retirement pension will be approximately 1.3% more than under the current rules.

Additional Changes

On June 21, 2018, Royal Assent was given to the legislation to introduce two “drop-in” provisions to the enhanced CPP calculations. These changes apply only to the enhanced calculation and do not in any way alter the existing child-rearing and disability dropout provisions that still exist for the basic portion of the CPP calculation. These two changes are as follows:

• if you have low or no pensionable earnings due to child-rearing (up to age 7), you will be able to drop-in earnings based on your average earnings for the five-year period immediately prior to the birth of the child. This provision applies to first additional pensionable earnings for 2019 and subsequent years and to second additional pensionable earnings for 2024 and subsequent years.
• if you have no pensionable earnings due to being eligible for a CPP disability pension, you will be able to drop-in earnings based on 70% of your average earnings for the six-year period immediately prior to the onset of your disability. This provision applies to first additional pensionable earnings for 2019 and subsequent years and to second additional pensionable earnings for 2024 and subsequent years.

Related article:  Making sense of Child Rearing Drop Out for CPP

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