Canada’s senior population is expected to rise at a rapid pace in the next two decades. According to reports, the country’s senior population may increase by a whopping 68% by 2037 compared to 2017. This trend will expectedly build pressure on government agencies that primarily look after the social benefits of residents, such as the Canada Pension Plan, or CPP.
But what is the CPP, and how does it work? Let’s dive deep into the recent changes made to this pension plan and how retirees can take advantage of new benefits.
An overview of the CPP
Introduced in 1965, the CPP is a monthly taxable benefit that aims to replace a portion of your income in retirement. To qualify for the CPP, you need to be a Canadian resident over the age of 60. The individual should also have made one valid contribution to the pension plan.
The monthly CPP amount disbursed primarily depends on your average earnings and the age at which you begin these payments. While the average age to begin a CPP payment is 65, there is an option to start the CPP at 60 or delay it till the age of 70.
The maximum monthly amount a 65-year-old recipient would receive via the CPP is approximately $1,306.57 in 2023, while the average payout is much lower at $760.07.
What is the CPP enhancement, and how does it work?
In 2017, the Canadian government first disclosed plans to enhance the CPP to provide retirees with much-needed breathing space and account for the higher cost of living. Moreover, pension coverage in the private sector declined to 25% in 2011 from 48% in 1971, making the CPP enhancement even more crucial.
From 2019, Canadian residents were allowed to increase CPP contributions, also called enhancements. While the CPP initially looked to replace 25% of your employment income, once the enhancements are phased in, the increase in payout will replace 33% of the income.
Canadian residents who will contribute towards the CPP for at least 40 years will see an increase of 50% in retirement benefits.
Use dividend stocks to supplement your CPP payout
Canadians can supplement their CPP payout by investing in quality dividend stocks such as Hydro One (TSX:H). A utility-based TSX giant, Hydro One, operates as an electricity transmission and distribution company. Valued at a market cap of $23 billion, it pays shareholders an annual dividend of $1.19 per share, translating to a dividend yield of 3.2%.
The company connects 35 local distribution companies and 85 industrial customers directly to its transmission network. It operates 309 transmission stations and 30,000 circuit kilometres of high-voltage lines.
Hydro One also serves 1.5 million residential and business customers, primarily in rural areas, covering 75% of Ontario’s geographic region.
Hydro One expects to end 2023 with a rate base of almost $25 billion. It has also allocated $2 billion towards capital projects which should drive future cash flow and earnings higher. Armed with an investment-grade balance sheet and one of the lowest debt costs in the utility sector, Hydro One remains a top long-term investment for income-seeking investors.
In the last five years, Hydro One stock has more than doubled investor returns, easily outpacing the broader markets.
