The ongoing Canada Pension Plan (CPP) enhancements aim to ensure retirement financial security for plan users or contributors. The rollout began in 2019, and the phase-in of the enhanced benefits would be in seven years or 2025. For all employees, employers, and self-employed, pension contributions are gradually increasing.
Based on the CPP rate table, the employee and employer contribution rate for 2021 will increase to 5.45% from 5.25% in 2020. It means, too, that the new self-employed contribution rate will be 11.9% from 10.5%. The enhancements will reduce paychecks once more, although the payouts would be bigger when you retire.
Impact on financial well-being
A report by the Canadian Institute of Actuaries and the Society of Actuaries said the CPP enhancements would translate to a 44% increase in benefits by 2070. The authors of the study also noted that 62 cents of every dollar of new CPP benefits earned by a user would make its way into a senior’s pocket.
The same report estimated that 9% of CPP users would be overly prepared for retirement, especially middle-income earners with workplace pensions. However, and despite the enhancements, the study projects that nearly 25% of Canadians are still not ready to sustain their living standards in retirement.
Also, retirement experts say the enhancements’ impact would be significant if you’re 30 years old or less. Retiring baby boomers can expect their CPPs to replace 25% of the average pre-retirement income. For the younger generation, the replacement level will increase to 33.3% after the enhancements.
Average CPP payout in 2021
Under the enhanced plan, the contributions until 2023 will be applied up to a maximum annual income ceiling. The ceiling also rises most years using an established formula. For 2021, the Year’s Maximum Pensionable Earnings (YMPE) will be $61,600. You can’t make contributions if your income reaches this limit.
If you’re 65 today and starting the CPP payments, the maximum CPP monthly payment amount is $1,203.75 ($1,175.83 in 2020). Since most users don’t qualify for the maximum benefits, a new beneficiary can expect to receive $689.17 (as of October 2020), on average.
Most Canadians supplement their CPP and Old Age Security (OAS) pensions with investment income. The Bank of Montreal (TSX:BMO)(NYSE:BMO), the dividend pioneer, is among the favourite income stocks of retirees. Canada’s fourth-largest bank has been paying dividends since 1829, even during the harshest recessions and economic downturns.
Currently, BMO’s market capitalization stands at $49.88 billion, while the share price is $76.67. If you purchase this investor-friendly stock today, the dividend yield is $4.26. The dividends should be safe as BMO maintains a less than 60% payout ratio. A $150,000 investment will generate $6,390 in annual income.
Similarly, the capital could swell through the power of compounding. If your holding period is 20 years, you would have a nest egg of $345,498.11. BMO proved its resiliency again in 2020. The stock price has sunk to as low as $37.13 in March 2020 but has since substantially appreciated. Its price today is 1.7% higher than it was a year ago.
While the enhanced CPP increases the core guaranteed income, it leaves a considerable income gap. Users must have other income sources to have the desired quality of life in retirement.