Updated in 2019
New and interesting changes to the CPP were unveiled this week at the meeting of finance ministers, and will go into effect in 2019. These changes are in addition to the ones previously announced that affect contribution rates and increase CPP payouts going forward.
Unlike the future CPP expansion or enhancements announced in 2016, the most recent updates are focused on Canadians who take time out of the workforce due to disability or to raise children, survivor benefit beneficiaries, and death benefits. The new changes are not expected to result in increases in CPP contribution rates.
New CPP Updates
Starting in January 2019, there will be an increase in your CPP contribution rate from 4.95% to 5.10%. What this means is that your total annual CPP contribution will rise to 10.20% (your contribution + your employer’s contribution) of your pensionable earnings. Self-employed individuals pay the full amount.
CPP contribution rates will continue to climb annually until 2023 when they level off at 5.95% (or 11.90% combined). See table below for rates.
Previous CPP Updates
Drop-in and Child Rearing Provisions
Previously, the “drop-out” provision allowed individuals to drop-out up to 8 years of their lowest or zero income years when calculating the maximum CPP pension they qualified for. With the new “drop-in” provision, a higher income is assumed for these years and used to calculate retirement benefits. This is expected to increase CPP retirement benefits for those affected.
Child Rearing: If you left the workforce to raise and care for children under the age of 7, the new formula will use your average income over the last 5 preceding years.
Disability: If you were unable to work due to a disability, the new formula will use 70% of your average earnings in the preceding 6 years before your disability.
Under current rules, you can only get the most out of CPP survivor benefits if you are 65 years of age or older. Between ages 45 – 64, survivor benefits are much lower and keep on reducing till zero$ at age 35.
The new updates mean that survivors get the benefit regardless of their age, disability, or children. Those whose applications have been rejected under the old rules can re-apply in 2019 when the new rules go into effect. About 40,000 individuals are expected to benefit from the new updates.
Related: Old Age Security Explained
The CPP Death Benefit is a one-time payment to the estate of a deceased CPP contributor. Under current rules, the maximum amount payable as death benefit is $2,500 – this amount is prorated based on how long the deceased contributed to the CPP.
With the new update, the death benefit will be set at a flat-rate of $2,500 and no longer prorated on the deceased’s earnings or CPP contributions. Several groups have tried lobbying the government to increase the death benefit to at least $3,580 to accommodate increased funeral costs. It appears that this will not be happening with this round of updates.
Personal Finance Readings Around the Web
Early Retirement Now continues his series on The Ultimate Guide to Safe Withdrawal Rates and is now on part 22. Backed up by charts and some pretty convincing math, he continues to debate how best to calculate your safe withdrawal rate in retirement. To get the best out of the series, start from Part 1.
Canadian Couch Potato shared their latest podcast: Here Come the Robots. What’s your take? Do you think Robo Advisors are the best option for average investors and the most cost effective way to investing?
Budgets are Sexy shared: When Your Wife says “Don’t Buy Me Anything.” How do you and your spouse handle gift-giving at Christmas?
Tawcan shared: Building My Dividend City. A very interesting and practical way to choosing stocks for your dividend portfolio.
Mustard Seed Money shared: Countries with the Most Debt Per Person. Canada takes the 6th spot in the list of the top 10 countries where people owe the most money. Yikes!
Pursuing Retirement wrote about Management Expense Ratios. It is interesting how much we fork out in investment fees in Canada – ridiculous to say the least.
Enjoy your weekend, folks!