Did you know that Canada Pension Plan (CPP) benefits are set to increase?
Thanks to some changes the Federal Government is rolling out, CPP pension benefits will be higher for those who paid into the system in 2019 or later. The new changes will not have any effect on those who retired before 2019, but those who work all through the 2020s will see a marked increase in their benefits. In this article, I will explore the new policy changes that will lead to higher benefits for those who are paying into the system now.
CPP enhancement
CPP enhancement is a program that aims to take CPP benefits from one-fourth of a Canadian’s working-age income to one-third. That might not sound like a big increase, but it could be more than you think. Currently, CPP premiums are only being taken out on your first $66,600 worth of income. The CPP enhancement will take the maximum pensionable earnings threshold to $81,000.
Additionally, CPP premiums were increased from 5.1% to 5.9% of income between 2019 and 2023. This phase of enhancement is basically complete; over the next two years, we will see the pensionable earnings threshold increase. Once that’s done, enhancement will be complete, and those paying into the system will see higher CPP benefits than those who retired earlier.
How much you could earn
How much you could earn from CPP enhancement depends on a number of factors, like how long you pay into the “enhanced” system. Millennials will have spent most of their working lives in the post-enhancement world, and Gen Z will have almost their entire working lives. So, these groups will see the biggest benefit from CPP enhancement. Gen X and Baby Boomers will see comparatively smaller benefits, unless they delay retirement.
Miss out on enhancement? Consider investing
If you retired in the past and now are bemoaning your lack of enhanced CPP benefits, you may be in a better position than you think. Remember that the younger people who will get higher benefits in a few decades will get the benefits because they’ll have paid higher premiums. Arguably, it’s no great privilege.
However, you have plenty of tools at your disposal to boost your retirement income. Index funds and Guaranteed Investment Certificates (GICs) tend to be fairly safe and reliable, providing regular tax-free/tax-deferred income if held in a Tax-Free Savings Account or Registered Retirement Savings Plan.
There are also individual stocks. These are riskier than index funds but have higher “best-case scenario” returns. In many cases, their dividend yields are far higher than that of the stock market as a whole. Consider Royal Bank of Canada (TSX:RY) stock, for example. It’s a high-dividend bank stock that has a 4.5% dividend yield. If you invest $100,000 into RY stock, you’ll get $4,500 in annual cash back, assuming the yield doesn’t change. Historically, the yield has changed — it has risen! So, RY investors have historically done well.
Of course, that’s no guarantee that Royal Bank investors will do well in the future. The current macroeconomic environment is a mixed picture for banks. On the one hand, interest rates are high, which means higher interest revenue from variable-rate loans. On the other hand, the yield curve is inverted, which pressures banks to raise interest rates on deposits, squeezing their margins. These uncertainties are why you should own diversified portfolios of stocks rather than “putting it all on red.” Nevertheless, Royal Bank stock is a time-tested name that probably merits inclusion in your portfolio.
