The Canada Pension Plan (CPP) was introduced in the middle of the 20th century by the Lester B. Pearson Liberal government. Since then, Canadians have relied on the CPP to provide an extra boost when they reach retirement. In 2022, Statistics Canada reported that over 6.7 million Canadians were active members of a registered pension plan (RPP) in 2021. That was up by 118,000 citizens compared to 2020. This should not come as a huge surprise as the baby boomer generation is entering retirement en masse.
Today, I want to discuss how Canadians can look to bolster their CPP benefits in the wake of recent reforms. Moreover, I want to explore how you can churn out additional income by playing with the registered investment accounts you already have available to you. Let’s jump in.
How CPP benefits have changed in the new decade
As work and retirement needs have changed, so has the CPP changed. We have seen fundamental changes in work, pensions, and retirement planning in the new millennium. Roughly 65% of Canadians work in the private sector, compared to a smaller chunk of the population that works in the public sphere. Several decades ago, defined-benefit pension plans (DBPP) were relatively common in the private sector. Unfortunately, that trend has shifted dramatically in the 21st century.
The decline of DBPP has been remarked by analysts and experts for decades. Indeed, a report from the Association of Canadian Pension Management all the way back in 2005 noted that DBPP in the private sector was “in danger” in Canada.
This trend was one of several concerns the ruling Liberals aimed to address when they unveiled their 2017 CPP reforms.
Here’s how Canadians can take advantage of the new CPP enhancement
The CPP retirement pension replaced 25% of your average work earnings up until 2019. However, the CPP enhancement now means that the CPP will replace 33.3% of the average work earnings a worker receives after 2019. Moreover, the maximum limit of earnings protected by the CPP will rise by 14% between 2024 and 2025.
This enhancement will be based on how long you contribute to the CPP. Indeed, the CPP enhancement will increase the maximum CPP retirement pension by more than 50% for those who make this enhanced contribution for at least 40 years. However, the enhancement will also cover the CPP post-retirement benefit if you are receiving the CPP and if you continue to work and make contributions in 2019 and beyond. So, if you can extend yourself over that threshold, that simple change can help you gobble up extra retirement income.
Retirees: Here’s another way to significantly bolster your retirement income
The CPP enhancement is good news for younger Canadians who are facing the steep decline of DBPP. However, Canadians who are nearing retirement or who have just entered retirement may be disappointed in the incremental increase. Fortunately, retirees have other tools at their disposal. Canadian retirees who want extra income should consider targeting a top dividend stock like Enbridge (TSX: ENB) in a Tax-Free Savings Account (TFSA). All capital growth and income generated in the TFSA is entirely tax free.
Enbridge stock has dipped 2.8% month over month as of close on Friday, August 25. Its shares have now dropped 12% so far in 2023.
Retirees should feel good about Enbridge’s long-term prospects. This company is the largest energy infrastructure firm in North America, and it boasts a massive project pipeline. Shares of Enbridge currently possess a price-to-earnings ratio of 25, which puts this dividend stock in favourable value territory compared to its industry peers. Moreover, it offers a quarterly distribution of $0.887 per share. That represents a very tasty 7.5% yield.
