**The CPP Max Will Be HUGE In The Future**

Owen Winkelmolen

Fee-for-service financial planner and founder of PlanEasy.ca

Did you know that the Canada Pension Plan (CPP) is getting bigger? Every year since 2019 CPP has been expanding and it will continue to expand for the next 40+ years until 2065. By the end, CPP will be HUGE!

CPP is an important retirement benefit. The old “basic” CPP aimed to replace 25% of pre-retirement employment income. The expanded CPP will increase this amount to 33.33% and will cover a larger amount of pre-retirement of income. The result is that CPP will be over 50% larger in the future.

If we follow the rule of thumb* that suggests that we need 70% of pre-retirement income in retirement, then for the average Canadian the new expanded CPP could provide nearly *half* of retirement income in the future. When combined with OAS this means that over half of retirement income could be covered by CPP and OAS combined.

***Rules of thumb are terrible, I hate them, find out why here.**

In this post we’ll look at the current maximum CPP payment, the maximum CPP contribution, the current contribution rate, and how these will change in the future as CPP expands. We’ll also look at how the current “basic” CPP will grow by over 50% in the future…

**Current CPP Max In 2021**

The maximum CPP payment in 2021 is $1,203.75 per month or $14,445 per year. This maximum amount is payable at age 65 but most people will never reach this maximum.

To receive the maximum CPP payment requires making 39-years of maximum contributions between age 18 and 65, so this is a difficult threshold to achieve.

The current CPP contribution rate is 5.45% in 2021 but this will continue to increase over the next few years to 5.95%. In 2021, the CPP contribution is maximized when employment earnings for the year are $61,600 or above. The first $3,500 of employment earnings is called the basic exemption and does not require CPP contributions. This gives us the maximum CPP contribution in 2021 of $3,166 for an employee (($61,600 – $3,500) x 5.45% = $3,166).

These contribution rates and maximum CPP contributions are doubled for self-employed, who need to make both the employee and employer contributions.

**How CPP Max Payment Is Calculated**

The goal of CPP is to replace 25% of employment earnings up to the max. Each year a credit is earned (or a fraction of a credit). The credit is basically a percentage of the Year’s Maximum Pensionable Earnings (YMPE).

Earning more than $61,600 in 2021 would result in a contribution of $3,166 to CPP and would earn one full credit.

After earning 39 credits you are now eligible for the max CPP payment. The max CPP payment is 25% of the Average Year’s Maximum Pensionable Earnings (AYMPE). This is the average of the YMPE for the last 5-years.

In 2021 the AYMPE is $57,780 and 25% of this is $14,445. This is the maximum CPP payment in 2021.

**The Max CPP Payment Is Expanding In Two Different Ways**

The calculation above is for the “basic” CPP but CPP is expanding in two different ways. For those in the middle of their careers, or just entering the work force, the CPP enhancement will be a significant factor in future retirement plans.

The CPP enhancement started in 2019 and will slowly roll out until 2025. There are two parts to the CPP enhancement, more on that below.

Because you earn credits each, and it takes a certain number of credits to get the maximum, the CPP expansion will not be complete until 2065, 40-years after the roll out is complete. So only those who were born in 2000 and later will experience the full benefit of the CPP enhancement (One interesting thing to note, the enhanced portions of the CPP benefit require 40-years of contributions to reach the max instead of 39-years for the basic CPP).

There are two ways that CPP is being expanded…

The first way the CPP max payment is expanding is through an increase in the replacement percent. The CPP income replacement percentage is increasing from 25% to 33.33%, an addition of 8.33%. This income replacement percentage aims to replace pre-retirement income up to the YMPE (Year’s Maximum Pensionable Earnings).

This is being funded through an increase in the contribution rate. The rate is increasing from 4.95% in 2018 to 5.95% in 2023. This is happening slowly over 5-years. This increases the future maximum from $14,445 in today’s dollars to $19,258 in today’s dollars.

The second way the CPP max payment is expanding is through an increase in the income threshold that qualifies for CPP contributions (and benefits). In the past, income above the YMPE would not require CPP contributions but now there is a new second threshold. This new threshold starts rolling out in 2024 and will be complete in 2025.

The new Year’s Additional Maximum Pensionable Earnings (YAMPE) will be 14% higher than the old Year’s Maximum Pensionable Earnings (YMPE).

For example, if it was applied to 2021 this would mean CPP contributions are now also made on employment income between $61,600 and $70,200 per year. Once rolled out in 2024/2025 this expansion will help higher income earners get more out of CPP in the future.

It’s interesting to note that the contribution rate on these additional pensionable earnings is lower at only 4% (versus 5.95% on income below the YMPE)

**The CPP Max Will Be HUGE In The Future**

With the two CPP expansions fully rolled out, the max CPP payment will be huge in the future. In 2021 the maximum basic CPP payment is $14,445 per year. After 2025, and after 40-years of contributions, the maximum will increase to $21,954 in today’s dollars (for those born after 2000 and experienced the full effect of the CPP expansion).

For couples, this could be double. For two high income earners, both contributing the maximum to CPP each year, their total CPP could be as high as $43,908 at age 65 in today’s dollars (if they were both born after 2000 and experienced the full effect of the CPP expansion).

This gets even larger if they both choose to delay CPP to age 70. The actuarial adjustment of +42% when delaying CPP to age 70 would increase max CPP payments from $43,908 for a couple at age 65 to $62,350 for a couple at age 70. That’s huge!

With CPP expansion slowly rolling out, the amount of retirement income coming from CPP in the future will be much larger in the future. This creates a much higher level of stable retirement income for future retirees. This is retirement income that does not fluctuate with investment returns and is indexed to inflation each year.

**Estimates For Future CPP Max**

Remember, it takes 40-years of maximum contributions to reach the new maximum CPP payment, so only those entering the workforce now will experience the full benefit. We can extend the calculations above into the future and get a sense of how the CPP enhancement will roll out.

Also remember that the income threshold is expanding too, so even if you were maximizing CPP in the past you may not be able to maximize CPP in the future when the income threshold increases by 14%. In today’s dollars, a couple would need to earn a combined income $140,400 per year or more to maximize both of their CPP benefits. This higher income threshold will be harder to achieve going forward and will make it more difficult to reach the maximum in the future.

Disclaimer: These are estimates only and only for educational purposes. The actual CPP calculation is very nuanced and can be greatly affected by actual contributions, wage growth, inflation rates etc. Most people will not receive maximum CPP. Please speak with an advice-only financial planner about your situation and how that may impact your future CPP benefit.

Owen Winkelmolen

Financial planner, personal finance geek and founder of PlanEasy.

How does this impact those of us in our late 40’s who are experienced a hybrid of the two systems? If we have 10-12 left before retirement, will there be any benefit from these latter years of increased co tri thinks and higher thresholds.

How are our last “credits” considered in the calculation?

Very interesting post Owen. Not enough info out there on this important retirement income topic.

Hi Bob, good question, as the CPP enhancement rolls out any future contributions will earn credits towards the new expanded benefit. It takes 40 “credits” to experience the full expansion but after 2025 every year that a max CPP contribution is made will earn 1 full credit. As a rough approximation, with 10-years of contributions after 2025 that will provide 10/40 or 25% of the full CPP enhancement (it will actually be a bit higher because there are partial credits being earned between 2019 and 2025).