The CPP Increase

By PAIP Canada staff

In the early 2000’s, Capital One aired an interesting commercial with the tag line “hand in my pocket”. It showed a well-dressed man in a suit with his hand in the pocket of many individuals. The commercial was meant to show the difference between other high interest credit cards and the Capital One credit card. It may have been a good commercial, but definitely annoyed a lot of people over time.

After studying their paystubs, many Canadians feel the same way about the federal government due to the increased premiums required by the Canada Pension Plan (CPP). In Quebec, it would be the Quebec Pension Plan (QPP).

The plan works as follows:

• The first $3,500 earned in each calendar year is not subject to CPP contribution premiums. This is called the yearly basic exemption (YBE).
• CPP contributions are paid on all amounts earned above the first $3,500 up to the yearly maximum pensionable earnings (YMPE), which for 2023 is $66,600. This amount is indexed to inflation every year, just as Canadians earn a higher amount of money each year, typically due to inflation.

For many years, the standard was to contribute 4.95% of the amount earned (up to the YMPE), and in return, they received retirement benefits which were slated to begin at age 65. To match the contributions made by the employee, their employers also contributed 4.95% of their earnings (up to the YMPE) to the plan. For many years, this worked out quite well.

In 2019 however, premiums started to increase gradually each year for a period of five years. The 2023 calendar year marks the final year of increases. Moving forward, employees and employers are required to contribute 5.95% of the employee’s salary (up to the YMPE). Starting next year, an additional higher limit will be introduced to allow for additional savings. The hope is that more Canadians will save a greater amount of their income for retirement. After all, the point of these premiums is for Canadians to receive monthly income from the plan during their retirement years.

Getting back to the “hand in my pocket” commercial, it’s clearly much more challenging to be a middle class Canadian than at any other time in recent memory. Before the average employee receives their paycheque, the money has already been taken from their pockets, albeit for a good reason.

On the employer’s side, the additional costs have been manageable up until recently. The country has experienced a bull market and demand has largely outstripped supply. Companies were hiring, not laying off employees.

The question now, is how will these increases impact businesses once the tide turns? With higher interest rates and layoffs beginning to take place in the technology sector, 2023 will definitely be an interesting year.