Things to know
Canada’s retirement income system consists of a mix of public pensions and private pension and retirement savings plans. The public programs referred to below (Old Age Security, Guaranteed Income Supplement and the Canadian Pension Plan or Quebec Pension Plan) are meant to be supplemented by other sources of income and benefits such as private plans and personal savings.
Universal Government Pension Benefits
- The Old Age Security program (OAS) provides a basic level of retirement income (up to $642.25 per month in 2022) to Canadian residents, along with additional support for low-income seniors (up to $959.26 per month in 2022) through the Guaranteed Income Supplement (GIS).
- As of July 2022, individuals aged 75 and over will receive an automatic 10% increase in their Old Age Security pension.
- These programs are funded from general tax revenues – no employer or employee contributions are required.
- Benefits under the OAS and GIS are income-based and may be scaled back as prescribed income thresholds are met.
Canada Pension Plan (CPP) and the Quebec Pension Plan (QPP)
- CPP (or QPP in Québec) are compulsory public retirement plans that provide additional retirement income for workers in Canada. On retirement (which can start as early as age 60 and as late as age 70), CPP/QPP replaces a maximum of 33.3% of earnings up to the Year’s Maximum Pensionable Earnings (YMPE) ($64,900 in 2022). The pension is based on earnings, years of participation and the retirement age. The maximum benefit in 2022 is $1,253.59 per month for a person retired at age 65.
- Both employers and employees are required to contribute a percentage of earnings to the CPP (or QPP if employed in Québec) up to the YMPE. In 2022, the employee must contribute 5.7% of his/her earnings (6.15% in Québec) up to $3,499 per year ($3,776 per year in Québec). The employer is required to contribute an equal amount.
- Many employers design their private retirement plan so as to integrate the benefits that employees will receive under the CPP/QPP and the benefits payable under the employer’s retirement plan (i.e. the contributions required and the benefits payable under the employer plan will take into account CPP/QPP contributions and benefits).
- CPP and QPP was enhanced gradually starting in 2019 and the income replacement ratio was increased from 25% to 33.33% of pensionable earnings, from the first dollar earned up to an increased YMPE (projected to be equal to roughly $82,700 in 2025). The exact increase will depend on how much and for how long an employee has contributed to the enhanced CPP. A worker will get the full increase after contributing to the enhanced CPP for 40 years. It is expected that the CPP enhancement will ultimately lead to an increase of the maximum CPP retirement pension by 50% once mature.
- Employer and employee contributions will increase in order to fund the enhancements. Increased contributions will be phased in over a seven-year period commencing in 2019 and ending in 2023. A second phase will commence in 2024 and will affect individuals in higher income bands.
Things to do
- Employers establishing private pension and retirement savings plans need to consider how to coordinate their plans with public retirement income programs to achieve the desired retirement outcome for their employees.
- In light of the recent CPP/QPP enhancement (and increased employer contributions), employers should assess whether they want to offset these increased employee costs through certain amendments to their pension plans and/or other employee benefit plans (e.g. lower employer contributions to private plans, reduce/eliminate certain benefits; limit salary increases, etc).