What is the CPP enhancement?

Now, the second CPP enhancement is introducing an additional “earnings ceiling,” which will affect some middle- and high-income earners. Does that include you? Learn everything you need to know about the CPP enhancement and the 2024 changes in this explainer.

Why are CPP contributions increasing?

The CPP is one of three primary government programs, along with Old Age Security (OAS) and the Guaranteed Income Supplement (GIS), designed to provide Canadians with income to last them throughout retirement. For some workers, this amount is supplemented by an employer-provided defined benefit (DB) plan, which guarantees a certain amount of income for life, while others save for retirement using vehicles like registered retirement savings plans (RRSPs).

According to Evan Parubets, head of the advisory services team at Steadyhand Investment Funds Inc., this approach worked for many decades. “We used to have average savings rates of over 20% in Canada, back in the early ’80s,” he says, “but saving rates have basically been falling for decades.”

Declining personal savings isn’t the only issue. “Over the last several decades, companies have let go of defined benefit plans and replaced them with defined contribution plans,” Parubets says. These packages have employers matching employee contributions for investment. “This brought in more unpredictability towards retirement.”

By 2019, it became clear that many Canadians were not going to have sufficient savings or assets for their retirement, says Parubets. “The government made a decision to essentially enhance the government benefits to make up for the lack of private benefits.” 

The CPP enhancement

Introduced in 2016 and begun in 2019, the CPP enhancement is a seven-year program designed to boost retirement pensions by increasing the amount of CPP contributions.

How CPP contributions are calculated

Since the CPP was introduced in 1965, Canadian workers have contributed by way of payroll deductions or, in the case of self-employed people, at tax time.

Each Canadian worker can earn up to $3,500 (the “basic exemption amount”) without paying into CPP. Think of this as your personal base rate when you file your taxes. Any money you earn after that is subject to CPP deductions—up to the year’s maximum pensionable earnings (YMPE). The YMPE is also called an “earnings ceiling”—that is, anything earned above this amount will not be subject to additional CPP contributions.

In 2018, prior to the first enhancement, the rate for Canadian employees was 4.95% (with employers matching this contribution). Self-employed Canadians paid double—or 9.9%—because for these purposes, they serve as both the employer and employee. So, with a YMPE of $55,900 in 2018, an employed person earning that much or more would pay 4.95% in CPP on $52,400 ($55,900 minus the basic exemption amount of $3,500), for a total of $2,593.80. A self-employed person making $55,900 or more would pay double, for a total of $5,187.60.

The first enhancement (CPP1)

The federal government introduced the CPP enhancements as a seven-year plan with two phases, each with escalating YMPEs and CPP contribution rates. This way, Canadians wouldn’t have to absorb the new costs all at once.

The first enhancement, CPP1, went into effect in 2019 with a YMPE of $57,400 and a CPP contribution rate of 5.1% (10.2% for self-employed people). Over the next five years, both the YMPE and the contributions rates increased marginally. In 2023, the YMPE was $66,600 with a contribution rate of 5.95% (11.9% for self-employed people).

The second enhancement (CPP2)

The final phase of the CPP enhancement starts in January 2024. Instead of raising the rates further, this phase adds a year’s additional maximum pensionable earnings (YAMPE), or second earnings ceiling, with a contribution amount of 4% for employees and 8% for freelancers and other self-employed Canadians. In other words, the second earnings ceiling is meant to capture a portion of the income of higher-earning Canadians.

To understand how the CPP enhancements work, let’s use an example of someone with an annual salary of $100,000, to make the math clear. 

How much are CPP contributions going up in 2024?

As of 2024, the CPP contribution rates for employees and the self-employed are the same as in 2023: 5.95% and 11.9%, respectively, unless they make more than the YMPE, which is $68,500 in 2024 and an estimated $69,700 in 2025.

Workers who make more than the YMPE will contribute more—at a rate of 4% for employees and 8% for freelancers. This rate will only apply to the earnings between the first and second earnings ceilings.

How does the CPP enhancement affect freelancers?

Self-employed Canadians have always had to pay both the employer and employee portions of their CPP contributions, and it’s no different with these enhancements.

“Compared to employed individuals, they are certainly at a disadvantage in the sense they have to pay double,” Parubets says. “Nevertheless, it is a form of savings. You’re getting that money back.” Plus, everyone can claim a federal tax credit of 15% of their CPP contributions. Self-employed contributors can also deduct the employer portion of their CPP contributions yielding tax savings at their marginal tax rate.

As with Canadian employed workers, just how much a Canadian freelancer will pay depends on their income. For example:

What about low-income Canadians?

Most Canadians, no matter their incomes, will benefit from the raised CPP rates when they retire due to a higher pension, with one notable exception—retired workers who qualify for the GIS.

“Say you’ve been working low-income jobs all your life and contributing to CPP. Eventually you’ll get your money back,” says Parubets. “But if you’re still low-income and on GIS, they’ll claw back the GIS pension money that you would have otherwise been entitled to.” (A clawback is a means-tested reduction in government benefits.) The clawback rate hovers somewhere between 50% and 75%. “A person who’s never worked and never contributed to CPP will likely get most if not all their GIS benefits.”

Read more about CPP:

• CPP and disability: When should you retire and start your pension?
• Planning for retirement with little or no savings to draw on
• What’s the average monthly retirement income in Canada?
• What is the CPP Survivor’s Pension? How can Canadians claim this benefit?
• Delaying CPP and OAS to age 70: Is it worth the wait?

About Keph Senett

Keph Senett writes about personal finance through a community-building lens. She seeks to make clear and actionable knowledge available to everyone.