Going back memory lane, a single person’s income could easily feed a family of four. But today, that doesn’t seem possible. The standard of living and inflation have increased to such great lengths that most households have double income. To keep up with the changing lifestyle, the Canada Revenue Agency (CRA) Canada Pension Plan (CPP) enhancement program aims to give you 33–50% more CPP payout when you retire.
The rising CPP contribution
But a higher payout needs a higher contribution. The CRA cannot increase the CPP contribution drastically as most people live paycheque to paycheque. Hence, it is increasing CPP in two phases. In the first phase, the CRA increased your CPP contribution rate from 4.95% in 2019 to 5.95% in 2023. This contribution was on the maximum pensionable earnings, which the CRA increases annually.
Up to $3,500, no CPP is deducted. Any income above that qualifies for CPP up to the maximum limit. For instance, the 2023 maximum limit is $66,600. So a 5.95% CPP contribution applies to $63,100 ($66,600-$3,500). The 2023 maximum CPP contribution for employees is $3,754.45 ($6,100 x 5.95%).
How will the 2024 CPP contribution impact your salary?
In 2024 and 2025, phase two of the CPP enhancement will begin. You will continue paying a 5.95% CPP contribution on the maximum pensionable earnings the CRA determines. But if your annual income exceeds the maximum, you qualify for Phase 2 CPP with higher maximum pensionable earnings.
Your employer will deduct a 4% CPP contribution on the income you earn above the phase one maximum and up to the phase two maximum pensionable earnings limit. I have prepared an estimated increase in your CPP contribution for 2024 and 2025.
| Year | 2023 | 2024* | 2025* |
| Original Maximum Pensionable Earnings | $66,600 | $67,700 | $69,700 |
| Maximum contributory earnings Phase 1 | $63,100 | $64,200 | $66,200 |
| Phase 1 CPP contribution (5.95%) | $3,754.45 | $3,819.90 | $3,938.90 |
| Phase 2 Maximum Pensionable Earnings | NA | $72,400 | $79,400 |
| Enhanced earnings – Phase 2 | NA | $4,700 | $9,700 |
| Phase 2 CPP contribution (4%) | NA | $188 | $388 |
| Total CPP contribution | $4,007.90 | $4,326.90 |
Let’s understand this table with an example. Amy is an employee and earns $80,000 in annual income in 2023 and 2024.
- In 2023, her CPP contribution will be $3,754.45 (5.95% of $63,100).
- In 2024, her total CPP contribution could increase to an estimated $4,007.90 as she qualifies for phase two CPP enhancements. Phase one CPP contribution (5.95% of $64,200*) + Phase two CPP contribution (4% of $4,700*). This $4,700 figure is the surplus earnings ($72,400*-$64,200).
To sum it up, if your annual income is around $80,000, expect a $200–$400 increase in CPP contributions in the coming two years.
Even the enhanced CPP is not enough
If you contribute the maximum CPP for 40 years, only then will you get the maximum 50% increase in CPP payout. But what if the enhanced CPP is not enough? The CRA says that the CPP enhancement will replace 33% of your average earnings. You have to find a passive alternative for the remaining 66% and ensure those earnings grow with inflation.
You can use the Tax-Free Savings Account (TFSA) and Registered Retirement Savings Plan (RRSP) to create multiple passive income sources. Going by the 50:30:20 rule of budgeting, spend 50% on needs, 30% on wants, and 20% on savings.
With an annual salary of $80,000, you have a bandwidth of $16,000 for savings, of which $4,000 goes into CPP. You can split the remaining $12,000 into TFSA and RRSP. A $6,000 investment every year in dividend reinvestment (DRIP) stocks can compound to a sizeable amount.
A DRIP stock for retirement income
BCE (TSX:BCE) is a DRIP stock that can give you a decent passive income and even grow it annually alongside inflation. The telco will fuel the modern world where drones and cars are connected to the cloud through its 5G network. BCE’s DRIP has been running for over 20 years. The company has been growing dividends at a 5% average annual growth rate. It has an average dividend yield of 5.56%, but you can lock in a 6.58% yield if you invest now while the stock trades closer to its 52-week low.
