In case you haven’t heard, Canada Pension Plan (CPP) contributions increased again in 2024. While these increases are nothing new, what worries some Canadians is the introduction of the second earnings ceiling as part of the CPP enhancement.
To be clear, the CPP enhancement has been around since 2019, but this year marks the start of the second earnings ceiling. Simply put, middle-income earners in Canada will pay more towards the CPP. However, the payments are likely lower than you think, and the overall contributions will help provide a stable retirement income for Canadians.
What Is The CPP Enhancement?
Every year, Canadian employees and employers make contributions to the CPP. This amount increases every year by a small amount to keep in line with current wages. In 2019, the CPP enhancement was introduced to help boost the eventual payouts. Since employees and employers split the cost of the CPP contributions, the increase has been pretty minimal. However, this year, the second earnings ceiling kicks in.
With the CPP, there’s a year’s maximum pensionable earnings (YMPE). In 2024, that ceiling is $68,500, so if you make that amount or less, you don’t need to worry about paying the second earnings ceiling.
If you do make more than the first earnings ceiling YMPE, you will pay an additional 4% more with a YMPE of 73,200 for second earnings ceiling earners. This additional increase only applies to the difference between the first earnings ceiling and the second earnings ceiling.
What this means is that employees and employers will pay about an extra $113 in CPP contributions for the year, while those in the second ceiling would pay a maximum of $188 in extra deductions. So if you’re a high income earner, your additional CPP contributions work out to be about $300 for the year.
One thing to note. If you’re self-employed, you’re responsible for both the employee and employer contributions, so your 2024 total contribution would increase to about $600.
While this increase may give some people sticker shock, it’s not far off from previous increases. It just hurts more now as many people are dealing with inflation and increased interest rates, so even the small addition is putting a squeeze on their budgets.
What Is The Canadian Pension Plan (CPP)?
The CPP is a monthly, taxable payout that is meant to replace part of your income when you retire. If you’ve worked in Canada and paid into the CPP, you’ll be entitled to some funds. Since CPP payments aren’t automatic, you can apply as early as 60 with reduced payments. Alternatively, you can delay your decision and apply as late as 70, where you’d get an increased payment.
Although CPP payments are increased yearly with inflation, it’s not meant to completely fund your retirement. It’s designed to complement any savings you have within your Registered Retirement Savings Plan, Registered Retirement Income Fund, Tax-Free Savings Account, and any other savings and investments you may have.
How Much Does The CPP Pay?
The amount you’ll get from the CPP depends on various factors, including:
- Average earnings throughout your working life
- Contributions to the CPP
- When you decide to take your CPP payouts
Most people will take CPP at 65. If you’ve worked in Canada most of your life and have maxed out your CPP contributions each year, then you’d likely qualify for the maximum amount. However, those who came to Canada later, took time off to care for children, or only had a modest income may not get the full amount.
Even though CPP payments are reduced if you take your payments as early as age 60, it can help those who are looking to retire early. On the other hand, some people will opt to take CPP later for the higher payout. Since payments don’t increase over the age of 70, there’s no reason to delay your application past this age.
How To Apply For CPP Payments?
Assuming you meet all the qualifications for CPP payments, the easiest way to apply is online via your My Service Canada Account (MSCA). Even if you don’t have an account, you can register for one online. Once logged in, you can use the tools to estimate how much your CPP payments will be. In addition, you’ll be alerted as soon as your application has been received.
Note that in some situations, you’ll need to fill out a paper application when applying for CPP payments. Some scenarios include:
- You live outside Canada
- You have an authorized third party that manages your CPP account
- You received a CPP children’s benefit that was not paid directly to you between the ages of 18 to 25
- You were denied or received a CPP disability benefit that stopped prior to your 65th birthday
The Bottom Line
The CPP enhancement second earnings ceiling may be new, but it likely won’t be that noticeable. That said, if you’re self-employed, you may feel the pinch since you need to pay the employee and employer portion. The good news is that these increased payments are meant to help keep the CPP sustainable. That means when you’re eventually ready to retire, there should be enough funds for your payments.
