Planned Jan. 1 increase in CPP premiums will hit some workers harder due to pandemic

On Jan. 1, Canada Pension Plan contributions are goingup again by more thanwhat wasoriginally planned. That's largely due to the pandemic's effect on the labour market and observers saythe impact will be felt by some workers morethan others.

Here's a rundown of what's happeningand how long the effectmight last.

Why premiums are going up

The planned increase on Jan. 1 is part of a multi-year planapproved by provinces and the federal government four years ago toboost retirement benefits through thepublic plan by increasingcontributions over time.

The first premium bump was in 2019, another was earlier this yearand the next is due at the beginning of 2021.

A KPMG note in November said the maximum employer and employeecontributions will hit $3,166 each in 2021, an increase from the$2,898 this year. For self-employed contributions, the maximumamount will be $6,332, up from $5,796.

Why next year is different

The plan requires contributions to go up alongside the upperlimit on earnings that are subject to those premiums.

For next year, the earnings ceiling known as the yearly maximumpensionable earnings, or YMPE was supposed to be $60,200, anincrease of $1,500 over the 2020limit. But the actual amount isgoing to be higher $61,600.

The reason is due to the pandemic's effects on the labour marketand how the YMPE is calculated.

The formula to calculate the earnings limit relies on increasesin the average weekly earnings recorded over the year ending June30, compared to the same figure duringthe preceding 12-monthperiod.

Over the course of the pandemic, average weekly earnings haveincreased but not because people are earning more.

More lower-income workersthan higher-wage workers lost their jobs between March and June, meaning there were fewer low-wage workers taken into accountbythe calculation.The federal chief actuary's office saysthat's why the overall increase is larger than originally projected

The reaction

Dan Kelly, president of the Canadian Federation of IndependentBusiness, estimates that anyone around the maximum earnings limitwill effectively see a 9.3 per cent increase in premiums, beyond thejust over five-per-cent bump baked into law.

"That's going to be hundreds of dollars of new CPP premiums outof paycheques of middle-income Canadians, not because they got araise, but because the formula has not had a COVID adjustment,"Kelly said.

"We think this is deeply unfair."

Provincial finance ministers had asked the government to put apause on increases for next year, pointing to the economic falloutfrom COVID-19, but that was easier said than done.

Any changes to contribution rates or the earnings ceiling atwhich point contributions top-out would need the approval ofParliament and seven provinces representing atleast two-thirds ofthe national population. That'sa higher bar than what's required to amendthe Constitution.

Federal officials say they expect to see the effect of the higher earningslimit dissipate over time as jobs continue to come back aftersteep losses earlier in 2020.