Scheduled for a staggered rollout starting August, the government is making extensive changes to the Canada Pension Plan (CPP) in response to the rising cost of living and an aging population. In particular, starting August 2025, the employee and employer rates will both increase from 5.95% to 6.15% of pensionable earnings. As a result, paychecks will experience a small reduction. However, the CPP will be more sustainable, and retirement benefits will be more generous in the future. For the self-employed, who pay both halves of the contributions, forward tax planning is vital to avoid tax time surprises, especially for estimated tax filings.
Starting August 2025, both employers and employees will face a marginal increase in the contribution rate from 5.95% to 6.15% of pensionable earnings.
This change is in response to the cost of living and associated wage increases within industries, to ensure that high earners are making commensurate contributions to the pension scheme. This is a positive change whereby, Canadians who are at the high end of the pay scale will pay a higher contribution on a larger portion of their income and in return receive an increased retirement benefit. Companies should act swiftly to ensure that payroll systems are updated in anticipation of the new cap so that deductions are accurate.
Updating Drop-Out Provisions
The CPP’s drop-out provisions have been updated where certain low-earning years are excluded from the benefit calculation. The new rules are more equitable for the periods of childcare, caregiving for elderly parents, or gig-work, preventing a drive for life’s ups and downs. This policy change enhances equity for Canadians whose careers include non-linear trajectories with family responsibilities. It provides a more accurate measurement of CPP benefits for a lifetime of earnings.
Incentives for Post-Retirement Contributions
The post-retirement benefit (PRB) has been bump for those CPP beneficiaries who wish to continue working after the age of sixty. For those who do wish to continue working, additional benefits will accrue to those CPP beneficiaries who continue to contribute after CPP benefits have commenced.
For salaried employees, there is a need to check paychecks and discuss with HR about the new deduction levels. Independent professionals and the self-employed must adjust their forecasters for tax payment to consider the contribution increase. For those who are close to retirement, weighing the merits of deferring CPP benefits past the age of 65 would be beneficial—a new strategy that is likely to be even more rewarding. The overarching goal of these updates to the CPP is to provide a more secure and generous retirement plan for workers and reduces the midlife retirement age for retirees.