Final steps in a decade of CPP enhancements

We’re now through the Canada Pension Plan (CPP) enhancements announced in 2016, commenced a few years later, and completed in 2025. 

Phase One was a multi-stage increase in premium contribution rates spread across five years, followed by the introduction of a second layer of contributions in Phase Two that ran for another two years. 

Over the long term, with continuing annual indexation of both contribution components, these enhancements are designed to raise the CPP income replacement level from one-quarter to one-third of eligible earnings.

Phase One ended its five-year run in 2023

Phase One, which began in 2019, increased employer and employee contribution rates by 1% over five years, bringing the prevailing 4.95% rate in 2018 to 5.95% for 2023 and following years. For the self-employed, who bear both parts of the premium obligation, it was double the ascent from 9.9% to 11.9%.

The rate is applied to the year’s maximum pensionable earnings (YMPE). The YMPE for 2026 is $74,600. At that rate, the maximum contribution is $4,230 each for employer and employee. Self-employed individuals pay both parts, totalling to $8,460.

 

 

Personal budgeting in the wake of higher premiums

Over the five-year phase-in period, that cumulative 1% addition to the 4.95% rate worked out to an increase of just over 20%. While each annual addition over the five years may not have been all that noticeable to workers, in total it eroded as much as $631 on a person’s annual paycheque in 2023 from what it would have been without the changes. For those self-employed it’s as much as double that, or $1,262. 

Keep in mind that, though some people may call it a ‘payroll tax’, it truly is a premium payment that contributes to that person’s own CPP retirement pension down the road. As well, on a current basis employees get some relief when they claim a tax credit for CPP premiums paid when filing their annual income tax return, and for the self-employed the employer-side premium is deductible against business income.  

Still, this bit of imposed belt-tightening does affect paycheque to paycheque cash flow for employees at low to average income levels. And for those with income that pushes beyond the YMPE, the Phase Two changes have further implications for budgeting expectations. We turn to the details of that second phase next. 

Phase Two introduction of a second layer of contributions

Phase Two added a second earnings limit beyond the YMPE, that new figure now known as the year’s additional maximum pensionable earnings (YAMPE). The YAMPE began as 107% of the YMPE in 2024 alone, then moved to 114% of YMPE for 2025 and later years. Though the YMPE and YAMPE thresholds are separately indexed, they use the same standard indexation factor, so the YAMPE will remain at 114% of YMPE ongoing.

Employer and employee contributions up to the YMPE will continue at the 5.95% rate, while the premium rate between the YMPE and YAMPE is 4% for each of the parties. 

• For employers, all contributions are deductible, whether on income below the YMPE, or on income between the YMPE and YAMPE. 
• For employees, contributions up to the YMPE continue be entitled to a tax credit claim. For contributions between the YMPE and YAMPE, a deduction is allowed, which better aligns to the employee’s cost since it’s effectively at the individual’s marginal tax rate, rather than the low bracket rate accorded to the credit.

The YAMPE for 2024 is $85,000, being 114% of the YMPE, resulting in a maximum premium of $416 if income is at or over the YAMPE for the year. Alternatively, if the employee’s income is less than the YAMPE, the additional premium is based on income minus YMPE, so for example if the employee’s income is $5,000 over the YMPE then the YAMPE premium that year would be 4% of $5,000 = $200. 

Past, present, and future events prompting more changes?

The CPP is funded by employer and employee contributions. Excess cash flow is invested by the CPP Investment Board in financial markets to fund anticipated future cash shortfalls as the ratio of beneficiaries to contributors rises due in large part to the ageing of the Canadian population. 

In its fiscal sustainability report in 2020 – in the midst of the Covid-19 pandemic – the parliamentary budget officer (PBO) raised the spectre that additional funding may be required for the CPP. At the time, the PBO estimated that increased contributions or reduced benefits amounting to 0.1% of GDP may be required for the CPP to meet its 75y ear sustainability metric. In subsequent fiscal updates in 2021 and 2022, the PBO was no longer seeing a fiscal gap in the 75-year measure. 

Still, the pandemic brought to light how the global economy can be disrupted by unpredictable (or at least unpredicted) events. At time of article publication in 2026, we’re experiencing historic climate-related water and fire events (having both ecological and economic effects), multiple major military conflicts, and the pain and uncertainty of a trade tariff war with our closest trading partner. These will be important considerations when economists and policymakers eventually revisit the CPP (as it’s actually required to be reviewed triennially), so it may not be too long before we see further CPP adjustments beyond the current enhancement process.