Planned Jan. 1 increase in CPP premiums will hit some workers harder due to pandemic
On Jan. 1, Canada Pension Plan contributions are going up again — by more than what was originally planned. That’s largely due to the pandemic’s effect on the labour market — and observers say the impact will be felt by some workers more than others.
Here’s a rundown of what’s happening and how long the effect might last.
Why premiums are going up
The planned increase on Jan. 1 is part of a multi-year plan approved by provinces and the federal government four years ago to boost retirement benefits through the public plan by increasing contributions over time.
The first premium bump was in 2019, another was earlier this year and the next is due at the beginning of 2021.
A KPMG note in November said the maximum employer and employee contributions will hit $3,166 each in 2021, an increase from the $2,898 this year. For self-employed contributions, the maximum amount will be $6,332, up from $5,796.
Why next year is different
The plan requires contributions to go up alongside the upper limit on earnings that are subject to those premiums.
For next year, the earnings ceiling — known as the yearly maximum pensionable earnings, or YMPE — was supposed to be $60,200, an increase of $1,500 over the 2020 limit. But the actual amount is going to be higher — $61,600.
The reason is due to the pandemic’s effects on the labour market and how the YMPE is calculated.
The formula to calculate the earnings limit relies on increases in the average weekly earnings recorded over the year ending June 30, compared to the same figure during the preceding 12-month period.
Over the course of the pandemic, average weekly earnings have increased — but not because people are earning more.
More lower-income workers than higher-wage workers lost their jobs between March and June, meaning there were fewer low-wage workers taken into account by the calculation. The federal chief actuary’s office says that’s why the overall increase is larger than originally projected
Dan Kelly, president of the Canadian Federation of Independent Business, estimates that anyone around the maximum earnings limit will effectively see a 9.3 per cent increase in premiums, beyond the just over five-per-cent bump baked into law.
“That’s going to be hundreds of dollars of new CPP premiums out of paycheques of middle-income Canadians, not because they got a raise, but because the formula has not had a COVID adjustment,” Kelly said.
“We think this is deeply unfair.”
Provincial finance ministers had asked the government to put a pause on increases for next year, pointing to the economic fallout from COVID-19, but that was easier said than done.
Any changes to contribution rates or the earnings ceiling at which point contributions top-out would need the approval of Parliament and seven provinces representing at least two-thirds of the national population. That’s a higher bar than what’s required to amend the Constitution.
Federal officials say they expect to see the effect of the higher earnings limit dissipate over time as jobs continue to come back after steep losses earlier in 2020.