CPP costs began its inexorable — and unavoidable — rise in January, 2019 — but many Payroll and HR Managers have not given the increases a high sense of urgency.
Those that do, will champion important changes to human resources management — becoming the future superheroes of budgets.
Although the real impact won’t be necessarily felt immediately, the increases will ultimately have a “rip tide” effect, as workforces age, and CPP cost increases. Many pension consultants have written reports on how the new higher mandatory contributions will have a significant inflationary impact on HR budgets, especially over the next five to seven years.
The changes to CPP, which came into effect January, increases costs in two major ways:
- Higher contribution rates from this year to 2023
- More annual income is subject to contributions starting in 2024.
For the employer, the contributions will be one percent higher by 2023 — as compared with 2018 — which can be significant in companies with large payrolls — especially if they operate on lean profit margins to remain competitive. Passing on the increased costs, in the face of competition, is often not possible. This puts the onus on Payroll Managers and HR Managers to try to preserve the company’s bottom line.
Do you have questions about how these increases will impact your payroll planning? Do you need help managing Payroll Management? Contact the experts at Pivotal Solutions (handy contact form below.)
Changes to CPP rates (in case you missed them)
Beginning this year, the Canadian government changed the Canadian Pension Plan (CPP), with the positive goal in improving quality of life for future retirement, disability and survivor pensions:
- 2019-2023: CPP contribution rate increases for both employees and employers — rising from 4.95% to 5.95% on earnings over $3,500 and up to the maximum annual limit.
- By 2025, the maximum limit to calculate earnings will increase by 14 percent
- For 2019: the CPP rate will be 5.10% (up from 4.95%) and the maximum annual limit will be $57.400 (This is already being felt, of course, in this year’s payroll.
- By 2024, employers and employees will start contributing 4% on a new range of earnings — titled “second earnings ceiling” starting at the maximum limit (estimated at $69,400 in 2025) and covering to the second tier earnings limit (estimated to be $79.400 in 2025).
“Employers will pay the same increase in contributions as their employees. If you are self-employed, you will contribute both the employee and employer portions. This means once the phase-in is complete you will pay a contribution rate of 11.9% on earnings up to the first earnings ceiling and 8% on the second earnings ceiling. This will, in turn, increase your benefit amounts,” according to the Federal Government site.
Changes to benefits and pensions plans
To mitigate the effect, Payroll and Benefits managers may try to tweak their plans. However, any changes in a plan are normally very emotionally-charged with existing teams. To preserve the company bottom line, and the employee team morale and satisfaction can be a herculean task. At the same time, supporting benefits providers will be changing programs. Tweaking programs now, so that bigger changes aren’t necessarily felt later, is a good approach since regardless of your benefits program and pension plan, most Canadian companies will see inflationary pressures. There is also the potential for more competitive hiring or even downsizing of some workforces. Competitive forces in some specific industries, make it impossible to absorb increases in HR costs without offsetting in other areas.
However, with good Payroll Management planning and Benefits tweaking, the impact can be minimized. The main issue is the low sense of priority, even after the increases started to roll out this year. The sense of urgency will shift as we move closer to the full implementation of the increases. Payroll and HR Managers who plan now will see minimal impact. According to many financial experts, very few companies have modified their programs and benefits plans since the increases began.
Companies with lower margins, or low income, may feel the impact of even small increases.
The effects of the program on post-retirement benefits
Up until 2019, the CPP retirement pension replaced one quarter of your average work earnings. This average is based on your work earnings, up to a maximum earnings limit each year. Other sources of income—such as the Old Age Security program, workplace pensions and private savings—make up the rest of your retirement income.
The enhancement means that the CPP will begin to grow to replace one third of the average work earnings you receive after 2019. The maximum limit used to determine your average work earnings will also gradually increase by 14% by 2025.
Your pension will increase based on how much and for how long you contribute to the enhanced CPP. The CPP enhancements will increase the maximum CPP retirement pension by up to 50% for those who make enhanced contributions for 40 years.
The enhancement also applies to the CPP post-retirement benefit. If you are receiving the CPP (or QPP) retirement pension and you continue to work and make CPP contributions in 2019 or later, your post-retirement benefits will be higher.
The enhancement will also increase the CPP disability pension starting in 2019. The increase you receive will depend on how much and for how long you contribute to the enhanced CPP. If you began receiving your CPP disability pension before 2019, it will not be affected by the enhancement.
The enhancement will also increase the CPP survivor’s pension, starting in 2019. The increase you receive will depend on how much and for how long your deceased spouse or common-law partner contributed to the enhanced CPP. If you began receiving your survivor’s pension before 2019, it will not be affected by the enhancement.
Do you have questions about how these increases will impact your payroll planning? Do you need help managing Payroll Management? Contact the experts at Pivotal Solutions.