Canada Pension contributions to rise sharply from January 1! The middle class will be hit
On January 1, 2021, contributions to the Canada Pension Plan (CPP) will increase again. At the same time, CPP contributions will increase at a higher rate than originally planned, mainly due to the impact of the new crown pandemic on the country’s labour market, with middle-income wage earners being particularly hard hit. The Canadian federal and provincial governments have been working on a step-by-step plan to increase CPP contributions as early as four years ago in order to increase the pension benefits of working people. The first increase will be in 2019, followed by 2020 and the next one in 2021.
KPMG stated in November that the maximum contribution for employers and employees would be $3,166 in 2021, up from $2,898 this year. For the self-employed, the maximum contribution will increase from $5,796 this year to $6,332.
According to the plan, the contribution amount will be increased at the same time as the CPP insurable earnings limit, which should be $60,200 next year (i.e., the annual maximum insurable pensionable earnings (YMPE)), an increase of $1,500 over the 2020 earnings limit. However, the actual cap for next year will be higher, at $61,600.
The reason it will be higher is due to the pandemic causing more low-income people to lose their jobs, and the way the YMPE is calculated. The cap on CPP insurable earnings is based on average weekly earnings for the year ending June 30, and the increase in the earnings cap is also based on the increase in average weekly earnings compared to the previous 12 months.
Average weekly wages for Canadians rose during the pandemic, but not because people were earning more, but because more low-income wage earners lost their jobs between March and June of this year, allowing fewer low-income workers to be considered in the calculation formula. The federal chief actuary’s office says that’s why the income cap rose more than initially projected.
Dan Kelly, president of the Canadian Federation of Independent Business, expects CPP contributions for people close to the income cap to actually increase by 9.3 per cent. “Middle-income earners will pay hundreds of dollars more in CPP contributions, not because they got a pay raise, but because the formula was not adjusted for COVID.”
The provinces’ finance ministers have asked the federal government to suspend the increase in CPP contributions next year, pointing to the economic impact of COVID-19. But that’s easier said than done. Changing either the contribution rate or the income cap would require approval from Canada’s Parliament and the seven provinces, which account for at least two-thirds of the country’s population. That’s a higher requirement than a constitutional amendment. For their part, federal officials say the impact of the income cap increase is expected to fade as job creation continues to recover after a sharp rise in unemployment in early 2020.
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