The die is cast since 2016 regarding the increased Canada Pension Plan (CPP) contributions. Next year, the higher cut in salary is irreversible. About 5.45% of an employed individual’s annual income will go to the CPP.
Enhancements to the CPP have been happening and began in January 2019. The significant changes yearly from 2019 to 2023 are the CPP contribution rates, maximums, and exemptions. For contributors, it means smaller take-home pay in exchange for a higher pension upon retirement.
Pension-boosting contributions
The newly enhanced CPP’s goal is to significantly reduce the number of Canadians at risk of not saving enough for retirement. Likewise, it should benefit those without a pension plan.
Your benefits will gradually increase as you pay more to the CPP. An employed individual’s monthly contribution in 2020 is $241.50, or a maximum of $2,898 for the year. The employer contributes the same maximum amount, while a self-employed individual contributes double, or $5,796.
Because of the forthcoming 5.45% contribution rate in 2021, an employee’s monthly contribution will be $263.87, or $22.37 more. The increase is $268.45, or a total of $3,166.45 maximum per employee and employer for the year. Self-employed individuals will contribute $6,332.90 overall in 2021.
The gradual increases until 2023 are only the first phase of CPP enhancements. Phase two will commence in 2024 but will only affect CPP users in higher-income brackets. As to the basic exemption amount, you don’t have to contribute to the CPP if you earn $3,500 or less in a year.
Enhancement beneficiaries
The CPP benefit increases depend on the amount and length of contributions to the enhancement. Canadians just entering or who are new in the workforce can expect the largest increase. Those nearing retirement or about to exit the working life will see a small increase.
Thus, the CPP enhancement will benefit you the most if you work and contribute in 2019 or later. Nothing will change for retirees who are no longer working and not contributing to the CPP anymore.
Long-term investing
The Canada Pension Plan Investment Board (CPPIB), fund manager of the CPP pension fund, reminds Canadians that the CPP is a foundation, not a retirement plan. If you desire to live comfortably in retirement, strive to save more than the contributions. Follow the board’s lead and invest for the long term.
BCE (TSX: BCE)(NYSE: BCE), for example, is a buy-and-hold dividend stock. Canada’s largest telecom can be your source of lasting retirement income. The stock pays a generous 5.69% dividend. A yearly savings of $20,000 will produce $1,138 in passive income. Your earnings will increase as you increase your holdings.
Over time, you will benefit from dividend reinvesting and grow your retirement fund exponentially. BCE’s dividend history is solid. The $52.95 billion telecommunications and media company raised its dividends by more than 5% every year in the last 12 years.
BCE’s Bell Wireless, Bell Wireline, and Bell Media are here to stay and will continue to dominate the telecom services industry for years to come.
Bite the bullet
CPP users should brace for higher payroll deductions again in 2021 and two more years. Bite the bullet in the meantime, because something good is waiting when it’s your time to retire.
