Retirement 101: the Canada Pension Plan enhancement (CPP2)
Let’s talk retirement income—specifically, the evolution of the Canada Pension Plan (CPP).
As an education member, you’re fortunate enough not to have to rely solely on the CPP as your main source of cash flow in your golden years. Yet, unlike your OTPP or OMERS pension benefit (which could replace as much as 60% of your working salary), the most Canadians could ever expect to receive from the CPP was roughly 25% of their pre-retirement income.
However, with inflation and the cost of living rising year-over-year, this has left an ever-growing retirement income gap to fill. Especially considering the average Canadian typically requires at least 50% to 60% of their pre-retirement income in order to maintain their current lifestyle (assuming their mortgage is fully paid off by the time they retire).
Enter the Canada Pension Plan enhancement (also know as CPP2).
In order to help provide greater financial stability in retirement, CPP2 will expand the amount working Canadians receive in CPP benefits, disability pension, and survivor’s pension.
This expansion is happening through two key ways:
- By increasing the pre-retirement income replacement from 25% to 33.33% (up to the Year’s Maximum Pensionable Earnings or YMPE)—which is being funded through an increase in contribution rates over a 5-year period (2019 to 2024).
- The maximum limit of earnings protected by the CPP will also increase by 14% (between 2024 and 2025).
The CPP enhancement will ultimately increase the maximum CPP earnings by more than 50% for someone making enhanced contributions over a 40-year period.
This means if you’re just starting out in your career, you will benefit the most from CPP2.
For example, in 2024, the maximum annual base CPP payment is $16,015 per person. However, after 2025 and 40 years of contributions, this maximum amount will increase to $24,340 per person.
For couples this could be as high as $48,680 per year in CPP payments.
If you both chose to delay taking CPP until age 70, this amount would be even higher.
How will the CPP enhancement affect your OTPP or OMERS pension?
Nothing will change; you will still collect a pension from both plans (although only those just starting out in their career will fully benefit from CPP2 come retirement). And since education members tend to retire earlier than the average Canadian, you’ll receive a bridge benefit from OTPP/OMERS to supplement your retirement income over and above your lifetime pension amount until you reach age 65 (when you’re eligible for unreduced CPP payments).
A few things to keep in mind for when you turn 65:
- Your bridge benefit ends the month after your 65th birthday (or earlier if you start a CPP disability pension)—which means you’ll see a decrease in OTPP/OMERS pension income
- To help offset this decrease, you will most likely be eligible to start collecting Old Age Security (OAS) benefits at age 65
- If you wait until age 65 or later to begin collecting CPP (and you’ve contributed to CPP for your entire career), you most likely won’t see a significant difference in your pension income when your bridge benefit ends
How will the CPP enhancement affect CPP disability pension and survivor’s pension?
The amount of the disability pension increase will depend on how much you contributed to the enhanced CPP and for how long.
For the CPP survivor’s pension, the amount of the increase will depend on how much your deceased spouse or common-law partner contributed to the enhanced CPP (and for how long).
If you began receiving your disability pension and/or survivor’s pension before 2019, the CPP enhancement will not affect either.
Key takeaways when it comes to the CPP2 and you:
- It’ll take 40 years of maximum contributions to reach the new maximum CPP payment (which means only recent entrants to the workforce will experience the full benefit of the enhancement)
- Since the income threshold is increasing by 14%, you may not be able to maximize CPP in 2025 and beyond—even if you were maximizing CPP in the past (i.e. you would need to earn $79,600 per year or more to maximize your CPP benefits and this higher threshold might be harder to achieve going forward, particularly if you’re at the beginning of your career and on the lower end of the pay grid)
- If you’re retiring soon, you may see a small increase in your CPP income
- If you retired before 2019, you’ll see no increases in your CPP income (beyond annual inflation increases of course)
Regardless of where you happen to be on the CPP2 spectrum, we can help you to maximize your financial path to retirement.
And it all begins with educator-specific advice.
