Next Year’s Increase in CPP Premiums Will Affect Some Workers More Severely Due to Pandemic

On January 1, Canada Pension Fund (CPP) contributions will rise again – more than what was originally planned. This is largely due to the impact of the epidemic on the labour market as observers argue that the impact of this will affect some workers more than others.

Why is the premium increased?

The planned increase on January 1 is part of a multi-year plan approved by the provinces and the federal government four years ago aims to gradually increase retirement benefits through the public plan by increasing contributions over time.

The first increase in premiums was in 2019, another at the beginning of this year, and the next in early 2021.

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.

During a pandemic, median weekly income went up – but not because people made 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

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.

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