Less Money is Coming Home To YOU! Brace Yourself for the 2024 CPP Contribution Increase!

Are You Ready for the Impact Higher CPP Contributions Will Have on Your Take Home Pay?

In the past, one person’s income could easily support a family of four, but things have changed. Nowadays, most families need two incomes because the cost of living has gone up a lot. To adapt to this, the Canada Revenue Agency (CRA) has a program to improve the Canada Pension Plan (CPP). When you retire, this program aims to give you 33–50% more money from CPP to help you keep up with the higher living costs and lifestyle changes.

BUT !!! CPP Contributions are rising…

To achieve a higher payout, there needs to be a higher contribution. Recognizing that many people live paycheck to paycheck, the Canada Revenue Agency (CRA) can’t drastically increase the Canada Pension Plan (CPP) contribution all at once. Therefore, the increase is being done in two phases. In the first phase, the CRA raised the CPP contribution rate from 4.95% in 2019 to 5.95% in 2023. This contribution is based on the maximum pensionable earnings, which the CRA adjusts each year.

If your income is up to $3,500, no Canada Pension Plan (CPP) is deducted. However, any income above that amount is eligible for CPP deductions, up to the maximum limit. In 2023, the maximum limit is $66,600. So, a 5.95% CPP contribution applies to the portion of income between $3,500 and $66,600. Specifically, for 2023, the maximum CPP contribution for employees is $3,754.45, calculated as 5.95% of the applicable income ($66,600 — $3,500).

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How will the 2024 CPP increase impact you?

In 2024 and 2025, the second phase of the CPP enhancement will kick in. You’ll still be making a 5.95% CPP contribution based on the maximum pensionable earnings set by the CRA. However, if your yearly income surpasses this maximum, you become eligible for Phase 2 CPP, which comes with higher maximum pensionable earnings.

Your employer will deduct a 4% CPP contribution on the income you earn above the maximum amount set in phase one, up to the new limit introduced in phase two. I’ve calculated an estimated increase in your CPP contribution for 2024 and 2025.

Here’s a breakdown of the estimated CPP contributions for 2023, 2024, and 2025 based on the provided information:

Let’s go through this with an example of a fictitious person — Andrea, and let’s break down Andrea’s CPP contributions for both 2023 and 2024:

2023:

• Andrea’s annual income: $80,000
• Phase 1 Maximum Contributory Earnings: $63,100 (as per the table)
• Phase 1 CPP Contribution (5.95%): $3,754.45

So, in 2023, Andrea’s CPP contribution will be $3,754.45.

2024:

• Andrea’s annual income: $80,000
• Phase 1 Maximum Contributory Earnings: $64,200 (as per the table)
• Phase 1 CPP Contribution (5.95%): Calculated on $64,200
• Phase 2 Maximum Pensionable Earnings: $72,400
• Enhanced Earnings — Phase 2: $4,700 (surplus earnings above Phase 1 maximum)
• Phase 2 CPP Contribution (4%): Calculated on $4,700

Adding both contributions, Andrea’s total estimated CPP contribution for 2024 would be $4,007.90. This is comprised of the Phase 1 contribution and the additional Phase 2 contribution based on her surplus earnings.

In short, if your annual income is approximately $80,000, you can anticipate a CPP contribution increase of approximately $200 to $400 over the next two years (2024 and 2025) due to the phased enhancements in the Canada Pension Plan.

The increase to CPP is still — not likely to be sufficient

If you contribute the most you can to CPP for 40 years, you can get the full 50% increase in your CPP payout. But, keep in mind, the enhanced CPP might not be enough for all your needs. The CRA says it will replace 33% of what you usually earn. So, you need to find other ways to cover the remaining 66% and make sure that money grows with inflation over time.

Talking to an investment advisor portfolio manager, and looking into different investment options can help with planning for your retirement.

You can leverage the Tax-Free Savings Account (TFSA) and Registered Retirement Savings Plan (RRSP) to build multiple passive income sources for your retirement. Following the 50:30:20 rule of budgeting can be a helpful guide. Allocate 50% of your income for essential needs, 30% for things you want, and 20% for savings. By using TFSA and RRSP for savings, you create a structured approach to building a financial safety net and generating passive income for the future. This strategy aligns with responsible financial planning and helps ensure a more secure retirement.

If you earn $80,000 a year, you can save $16,000 following the 50:30:20 rule. After putting $4,000 into CPP, you have $12,000 left. You can split this between TFSA and RRSP. By investing $6,000 every year in the stock market, your savings can grow significantly over time. This is a simple way to build a strong financial foundation for your future.

In Canada, there are numerous high dividend-yielding stocks that can play a crucial role in bridging the income gap for individuals planning for retirement. These stocks offer regular payouts to shareholders, providing a highly reliable source of passive income. By strategically investing in such dividend-paying stocks, investors have the opportunity to generate fairly consistent returns that can supplement their retirement savings. This approach helps in creating a diversified portfolio, balancing the reliance on government pension programs like CPP, and offering a more secure financial future.

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Joe A. Macek, FMA, CIM, DMS, FCSI

Investment Advisor, Portfolio Manager

iA Private Wealth | iA Private Wealth USA

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