now with the enhanced CPP that amount of earnings replacement is being increased to 33 and a third percent. but that increase is going to take a is going to happen gradually over a 40-year transition period. Welcome Jason Y to the Steady Hand coffee break series. Morning my

pleasure to be here. Now Jason is an advice only financial planner who has chosen to focus his energies on helping Canadians consider their CPP options. Helping us to simplify by arguably a very complex topic and CPP or the Canada Pension Plan is indeed a hot topic for a

lot of Canadians. It is said that there are over a thousand of us turning 65 every single day which is often the trigger for starting either old age security or CPP. Now we did a video with Jason Evans another advice only planner that was focused on retirement planning

and the basics of CPP, and there's a link to that video in the notes below. So Jason, let's dive in. Let's deal with the first issue and that is how has CPP been enhanced over the last few years? Sure, so to explain that I'm going

to uh introduce or remind people that retirement income in Canada has a framework called often referred to as the three-pillar framework. And what this is, is identifies the traditional sources of retirement income. So pillar number one is government sponsored programs, the CPP, QPP, old age security, guaranteed

income supplement. Pillar number two is employer sponsored programs. So the, you know, tradition, historically this has been your defined benefit plans and more recently there's been a lot of other varieties from the component that your employer provides to you as a as as an incentive and a retirement benefit and

pillar number three is your own personal savings well recently there's been and so the idea with the three pillars is all three are meant to work together to provide you enough to maintain your standard of living in retirement or with your own personal savings to pursue your own ambitions.

Beyond maintaining your own standard of living but the CPP is really meant to provide just a minimum level and work together with pillars number two and number three and Jason just going back if I may just going back uh in history I would imagine that chronologically the first thing we had

were was our own personal savings the second thing we had were defined benefit or def you know largely defined benefit plans and then CPP and OAS came in more recently there's been unfavorable Trends with pillars number two and number three and so uh specifically there's been a a

quite a drastic decline in the availability of defined benefit pensions and so what this means is there's more pressure on individuals to get things right themselves whether that's through do-it-yourself or the advisers that they hire more of uh the income available or the the

pools of money that it's available to Canadians is exposed to Market risks and so to to address the weakening of pillars number two and number three it was decided to strengthen pillar number one which encompasses which the CPP is a part of and so that's basically

why the CPP was enhanced to address the growing amount of retirement income sources that are exposed to Market risks and replace that with a component that has you know CPP has that guaranteed income component and so that's why and pillar number one and so that's why the

CPP was enhanced, so what the CPP enhancement does is it increases the amount of earned earnings replacement available to Canadian citizens. So the way the CPP works is the more you put in, the more you'll get back out. A single number that is meant to represent what you put in is your

lifetime average of earnings, and what you get back out is a percentage of your lifetime average earnings. So originally, the original program, the base CPP was originally designed to replace 25% of your lifetime average. Now, with the enhanced CPP, that amount of earnings replacement

is being increased to 33 and a third percent, but that increase is going to take, is going to happen gradually over a 40-year transition period. So someone who is older now, uh, so I'll back up, the enhancement has two parts. The first part started in 2019, and the second part

started this year in 2024. And so someone who has is older and has less opportunity to contribute into the enhanced CPP will only get a smaller amount back out. Someone who's younger and can contribute into the enhanced part of the enhanced parts of the CPP

for a longer period of time, or the full 40 years, they're going to get more of that 33 and a third back out. So someone like me who just turned 65 this year and is very interested in what you're saying, um, I will be making increased

contributions while I continue to work, but I won't necessarily have much benefit from it because in the next five years at some point I'm gonna have to start drawing. That's correct, and so I made a reference tool that sort of both visually shows that proportion and also

has a way to give you a number, an effective earnings replacement rate, uh that's smaller than the full 33 and a third for people that have only contributed into the enhanced parts for a shorter period of time. So it's, you know, you could think of it as a proportionally

smaller amount of time relative to that full 40-year transition period. Prior to 2024, we were making contributions at a rate of, was it 5.95%? So the base CPP, or the original part, the contribution rate was 4.95% starting in 2019. The first part of

the enhanced CPP increased the amount of contribution on the same earnings threshold as the base gradually up to another 1%, and so that's how, and so that gradual implementation ended in 2023. So right now, the first part of the enhanced CPP, the contribution rate for that part

is 1%, and so the total amount of contribution on the original earnings threshold is that 5.95%. But technically, that 5.95% consists of 4.95 of base and 1% of the first additional, okay? And as a salaried

employee, I'm basically uh putting 5.95% of my salary into CPP. How does the employer part work? Is it subject to the same enhancement? Yes, so for any contribution the employee has to make, the employer has to make uh an equal matching part. So, so

again on, on, on the up to the original earnings threshold, the employer would have to make uh a fully matched 5.95% of your earnings as their portion of the contribution. Self-employed individuals have to pay both the employee and the employer part, and what

I mean by that self-employed, um, sole proprietors, self-employed incorporated business owners. Again, there's both an employee and an employer portion. Technically the employee pays the employer's portion, and it's their company that pays the employer's part. So even though they control the company and

ultimately that's going to flow through and affect them. Technically, like from the accounting, bookkeeping point of view, it's the company or their, their technical employer that pays the employer's portion, okay? And just help me understand this last question around complexity. Um, does somebody making

50,000 contributing, call it 6% to round it up, uh, make the same contribution that somebody, you know, percentage terms, that's making 100,000 or 200,000? Do they make, like, if I'm making 100,000, do

I make a contribution of 6% or $6,000? No, so that's where that earnings threshold comes in. And so once you reach what's referred to as the year's maximum pensionable earnings, or YMPE, going back to the original base

program, there would be no more earnings required beyond that. So no more contribution. So your contribution would max out the same way your earnings max out using that 100,000 though as an example. Now, with the second part of the enhancement, there's a new higher

earnings threshold called the year's additional maximum pensionable earnings. I don't recall the number off the top of my head, but so once you reach the first threshold, you stop making the 5.95% contributions, you're done those, but you have to make a new contribution

on the second additional enhanced part that contribution rate is 4% and it's the same idea, the individual, the employee makes 4% and their employer makes uh fully matched 4% contribution, but that applies only on your earnings between the first threshold and the new

higher threshold and and uh remind us what those thresholds are. The first earnings threshold, the original earnings threshold YMP for 2024 is $68,500 and for 2024 the second threshold is $73,500. Okay, so if you're making $100,000

you're paying 5.95% up to the first threshold and then you're paying 4.95% on the balance between the first and the second threshold. Exactly. Well, Jason, we've covered a lot today on CPP enhancements. Thank you so much for

sharing the work that you've done, your insights and your knowledge on this hot topic for so many Canadians. If people are interested in learning more about the work that you're doing at Fineo Solutions, how can they connect with you? How can they keep up with the work that

you're doing? Sure, so I have all the resources that I that I make on the company website, fivepointsolutions.com. Or questions that you might have on today's coffee break uh in the comments below. And again, I invite you to subscribe to the Steady Hand

YouTube channel and ask to be notified whenever we load up new content. Thanks again, Jason, and thank you all for watching and bye for now. [Music]

CPP Enhancements Explained: What Every Canadian Needs to Know

CPP Enhancements Explained: What Every Canadian Needs to Know