Today I want to talk to you about some important changes that are coming to the Canada Pension Plan (CPP) in 2024. If you are working as employee or self-employed in Canada, you should pay attention to these changes because they will affect how much you contribute and how much you can get from CPP when you retire.
What is CPP and CPP2?
CPP is a social insurance program that provides income replacement to eligible Canadians who retire, become disabled, or die. CPP is funded by contributions from workers, employers, and the self-employed, as well as investment income. CPP2 is a new enhancement to CPP that started in 2019 and will be fully phased in by 2025. CPP2 aims to increase the retirement benefits for future generations of Canadians by raising the amount of earnings covered by CPP and the replacement rate of those earnings.
How will CPP change in 2024?
There are three main changes to CPP that will take effect in 2024:
- The maximum pensionable earnings under CPP will increase from $65,400 in 2023 to $68,500 in 2024. This means that more of your income will be subject to CPP contributions and benefits.
- The basic exemption amount for CPP will remain unchanged at $3,500. This is the amount of income that is exempt from CPP contributions and benefits.
- A second earnings ceiling of $73,200 will be introduced for CPP2. This means that you will also contribute to CPP2 on your earnings between $68,500 and $73,200. This second earnings ceiling will increase each year until it reaches $79,400 in 2025.
How much will I have to contribute to CPP in 2024?
The contribution rates and amounts are the percentages and dollar amounts that workers, employers, and the self-employed pay into CPP each year.
The contribution rates and amounts for CPP and CPP2 in 2024 are as follows:
- If you are an employee, you and your employer will each have to contribute 5.95% of your pensionable earnings (up to $68,500) to CPP, plus 4.00% of your additional pensionable earnings (between $68,500 and $73,200) to CPP2. The maximum contribution for each of you will be $4,055.50 ($3,867.50 for CPP and $188.00 for CPP2).
- If you are self-employed, you will have to contribute 11.90% of your pensionable earnings (up to $68,500) to CPP, plus 8.00% of your additional pensionable earnings (between $68,500 and $73,200) to CPP2. The maximum contribution for you will be $8,111.00 ($7,735.00 for CPP and $376.00 for CPP2).
Why should I care about these changes?
These changes will affect your retirement income and your tax situation in several ways:
- By increasing the amount of earnings covered by CPP and CPP2, you will be able to accumulate more retirement benefits over time.
- By increasing the contribution rates and amounts for CPP and CPP2, you will have to pay more taxes on your income in the year of contribution.
- By increasing the contribution rates and amounts for CPP and CPP2, you may also be eligible for a larger tax deduction or credit on your tax return.
If you earn less than $68,500 in 2024, your contributions and benefits will not change much from 2023. However, if you earn less than $3,500 in 2024, you will not contribute or receive anything from CPP.
The changes for 2024 are part of a larger plan to enhance CPP over seven years. By 2025, the CPP enhancement will increase the maximum CPP retirement benefit by about 50% for those who make enhanced contributions for 40 years. The CPP enhancement will also increase the amount of income replacement from one-quarter to one-third of your average work earnings.
What should I do next?
The best way to prepare for these changes is to plan ahead and save for your retirement. If you want to learn more about the CPP changes for 2024, you can visit the Canada Revenue Agency (CRA) website or talk to a professional accountant. You can also use the online calculator to estimate your future CPP benefits based on different scenarios.
If you have any questions or comments, please feel free to leave them below.