Young Investors: How to Boost Your CPP Income by 50%!

Young investors in Canada will be able to take full advantage of the CPP, but they should also seek out stocks like Emera Inc. (TSX:EMA).

| More on:
data analyze research

Image source: Getty Images

The Canada Pension Plan (CPP) is one of the two major components that make up the Canadian public retirement income system. Both programs were introduced in the decades following the Second World War. The post-war prosperity saw the baby boomer demographic explosion, unprecedented economic growth, and substantial growth of the middle class in the Western world. These programs were essential in guaranteeing a social safety net for an increasingly prosperous population in the second half of the 20th century.

Today, I want to discuss changes to the CPP and explore why a new generation of Canadians is in a great position to take advantage of these tweaks. Let’s jump in.

How the CPP has changed from its inception to recent reforms in 2017

Prime Minister Lester B. Pearson and the ruling Liberals established the CPP in 1965. Since then, the system has undergone many tweaks and reforms to ensure that it can effectively cater to Canadians in the present day. For example, in 1996, another Liberal-led government determined that the original 3.6% contribution rate was insufficient to service the country’s aging population. Moreover, it shuttered the outdated “pay-as-you-go” structure.

In 2017, yet another Liberal-led government introduced the most radical reforms to the CPP in decades. These reforms aimed explicitly at providing more income for Canadians when they reached retirement. Defined-benefit pension plans have undergone a significant decline for working people over the past several decades. Acknowledging this, the federal government moved to assist its citizens. While Canadians of all ages should be pleased with this, it is young investors who are set up to gobble up the greatest rewards.

Here’s why young investors can take the most advantage of the CPP enhancement

The 2017 CPP reforms kicked into effect in 2019, and the changes would be implemented over a seven-year period. From 2019 to 2023, the first additional CPP component was introduced. For this portion, the contribution rate for Canadian employees was phased in by one percentage point on earnings between $3,500 and the original earnings limit. That meant the employer/employee rate could increase from 5.1% in 2019 to 5.95% in 2023, and the self-employed rate could jump from 10.2% to 11.9% over the same stretch.

In 2024, the second additional component will be introduced. This will introduce a higher earnings limit, allowing the CPP to protect a higher portion of your overall earnings. This establishes two different ranges of earnings that are now protected by the CPP: the original range that covers the original limit, and the additional range that covers earnings between the original limit and the new one.

This combination will allow Canadians to receive retirement pensions that are 33-50% higher. However, there are caveats. The maximum retirement pension will increase by 50%, but it will require 40 years of contributions at the new maximum rate. Young investors have reason to celebrate a much-needed change that should provide additional security.

Young investors: An alternative for building a nest egg without relying on the CPP

The CPP enhancement is a laudable reform from the federal government. However, young investors cannot rely solely on the public retirement income system. Instead, Canadians just starting their careers should seek to build a nest egg of their own. Young investors can earn tax-free capital gains and tax-free dividend income in registered accounts like a Tax-Free Savings Account (TFSA) or a Registered Retirement Savings Plan (RRSP).

Emera (TSX:EMA) is a Halifax-based energy and services company that is engaged in the generation, transmission, and distribution of electricity to various customers. Shares of this utility stock have jumped 3% month over month as of close on July 25. The stock has climbed 4.8% so far in 2023.

This utility stock currently possesses a very favourable price-to-earnings ratio of 13. Better yet, Emera offers a quarterly dividend of $0.69 per share. That represents a strong 5% yield. Emera has delivered 16 consecutive years of dividend growth, which makes this utility a dependable Dividend Aristocrat.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium service or advisor. We’re Motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer, so we sometimes publish articles that may not be in line with recommendations, rankings or other content.

Fool contributor Ambrose O'Callaghan has no position in any of the stocks mentioned. The Motley Fool recommends Emera. The Motley Fool has a disclosure policy.

More on Investing

close-up photo of investor Warren Buffett

The Best Warren Buffett Stocks to Buy With $300 Right Now

An investing lessons by Warren Buffett was to buy the dip. The market is giving you buying opportunity with these…

Read more »

man sitting in front of 3 screens programming
Tech Stocks

2 Growth Stocks to Hold for the Next 10 Years

Are you interested in growth stocks? Here are two picks to hold for the next 10 years!

Read more »

Canadian Dollars
Dividend Stocks

Buy 734 Shares of This Top Dividend Stock for $9,574 a Year in Passive Income

Are you looking to earn regular income? Now is an opportune time to buy Dividend Aristocrats at discounts and accelerate…

Read more »

A plant grows from coins.
Dividend Stocks

This Ultra-High Yield Stock Just Hit a 52-Week Low, and it’s Still a Buy Today

Enbridge Inc (TSX:ENB) stock recently hit a 52-week low. Here's why.

Read more »

Payday ringed on a calendar
Dividend Stocks

This 6% Dividend Stock Pays Cash Every Month

Are you looking to earn cash every month from October 15 onwards? This 6% dividend stock gives you monthly payouts.

Read more »

Person slides down a stair handrail
Dividend Stocks

With a 7.6% Dividend, This TSX Stock Is One to Buy Now and Hold for Decades

Now is an opportune time to invest in this no-brainer TSX stock and get +$30 extra dividend for decades on…

Read more »

A person builds a rock tower on a beach.
Energy Stocks

CPP Enhancement: Here’s How Much Your Benefits Could Increase

You may or may not receive higher CPP benefits thanks to CPP enhancement. You can receive passive income from Fortis…

Read more »

Portrait of woman having fun in the street.
Dividend Stocks

CPP Benefits Will Be Higher for Millennials and Gen Z

Older Canadians won't get enhanced CPP, but they may invest in dividend stocks like Royal Bank of Canada (TSX:RY).

Read more »