Did you know that CPP benefits are set to increase in 2024?
It’s not well known, but it’s true.
Unlike defined benefit pensions (e.g., Federal Government employee pensions), the CPP is inflation-indexed. This means that the benefit goes up a little bit each year as the price level rises. This increase in CPP benefits will occur in 2024, as it occurs every year.
There’s another form of “CPP benefit increase” that will be occurring in 2024. One that not as many people know about. This second form of benefit increase will benefit those who continued paying into CPP through to the end of 2023. Unfortunately, this latter benefit increase doesn’t benefit those already drawing CPP – though they have other ways of increasing their passive income, as I’ll show momentarily.
CPP enhancement
CPP enhancement is an ongoing program that aims to increase the CPP benefits Canadians earn. It works in two phases:
- In phase one, CPP premiums (the amount you pay in to CPP) increase from 5.1% to 5.9% of pensionable income. This phase runs from 2019 to 2023, so it will conclude at the end of this year.
- In phase two, the maximum pensionable earnings threshold increases. Currently, it’s about $66,000. As a result of the enhancement, it will go to $81,000. This phase of CPP enhancement continues until the end of 2025.
Because phase one of CPP enhancement is complete, those who retire in 2024 will earn far more in CPP benefits than their peers who retired prior to 2019. Any year in which you paid enhanced CPP premiums increases your CPP benefits marginally; having paid enhanced premiums all the way to the end of 2023 increases your benefits a lot.
How much can you get in CPP if you take benefits for the first time in 2024?
CPP benefits have historically been considered pretty paltry. The average amount is only about $770 per year. As a result of CPP enhancement, they will go higher. Today, the maximum if you take benefits at 65 is $1,306 per month. The maximum if you take benefits at 70 is $1,855 per month. The 2024 amounts haven’t been announced yet, but they’ll be larger than those just mentioned. The goal of CPP enhancement is to take benefits from one-quarter of employment income to one-third. So, if you pay enhanced CPP your entire career and earn $60,000, you should earn $20,000 in benefits, compared to $15,000 in ages past.
What to do if you need extra passive income but can’t get enhanced CPP
The big downside of enhanced CPP is that if you retired in 2019 or earlier, you can’t get it. If you wish to boost your retirement income after already withdrawing CPP benefits, you’ll need to invest in dividend stocks and interest-bearing bonds.
Consider The Toronto-Dominion Bank (TSX:TD), for example. It’s a Canadian bank stock with a 4.6% dividend yield. It has a mere 45.2% payout ratio, meaning that it’s paying out less than half of its earnings as dividends. This means that the bank’s dividend is fairly safe, and likely to continue being paid for the foreseeable future. If the company grows its earnings, it may even raise its dividend. Over the last five years, TD’s dividend has increased by 8% per year. If that track record continues, then TD Bank will have a higher yield-on-cost in the future than it has today. On the whole, it’s a stock worth adding to your portfolio.
