CPP PENSION: HOW TO INCREASE YOUR INCOME BY 50%

The Canada Pension Plan (CPP) is a social insurance program that was formed by Lester B. Pearson’s Liberal government in 1965. This earnings-related social insurance program was designed to provide a more concrete safety net for Canadians who entered retirement. Today, I want to discuss how the CPP has changed since its initial inception. Moreover, I’ll discuss how Canadians can hope to boost their CPP income by 50% under new reforms. I also want to focus on an alternative for Canadian retirees who are hungry for retirement income. Let’s jump in.

How the CPP was constructed and developed in the 20^th and 21^st centuries

When it was first introduced, the CPP was designed to provide a monthly retirement pension that would be equal to 25% of earnings. Annual CPP earnings are subject to an annual limit. In 2023, that annual limit stands at $66,600.

For the first 20 years of the CPP, which stretched from 1966 to 1986, the contribution rate for Canadians was capped at 3.6%. Moreover, that rate stood at 1.8% for regular employees and only self-employed individuals were able to take advantage of the maximum 3.6% rate. The first reforms to the CPP were introduced in 1996 by yet another Liberal government, this time led by Jean Chretien. Some of the changes included an increase to total CPP annual contribution rates, the creation of a CPP investment board, and a pledge to review the program every three years.

In 2017, another Liberal government, this time led by Justin Trudeau, moved forward with the biggest reforms to the program since its inception in 1965.

The ruling Liberals have pushed forward with the biggest reforms in decades

The federal government moved forward with radical reforms to the CPP in 2017 as it acknowledged the changing retirement landscape for Canadians. Defined-benefit pensions (DBP) have experienced a huge decline, particularly in the private sector. This means that many more Canadians are now solely responsible for constructing their retirement nest egg, instead of getting an assist from their employer. In response, the federal government has moved to significantly bolster the income future retirees could receive from their CPP.

Here’s how Canadians can boost their CPP income by 50%

Annual CPP contribution rates started to rise gradually in 2019 over a planned seven-year stretch. However, the CPP increase you receive will depend on the length of time you have contributed to this new system. When it reaches full maturity, the CPP enhancement will bolster the maximum retirement income you can receive by 50%. However, to take advantage of the 50% increase you will need to contribute for 40 years under the new system.

Canadians should not discount an alternative for generating retirement income . . .

Instead of relying on the CPP enhancement, Canadian investors might want to take their destiny into their own hands and invest in a reliable dividend stock like Canadian Utilities (TSX:CU). This Calgary-based company is engaged in the electricity, natural gas, and retail energy businesses in the United States, Australia, and around the world. Shares of this utility stock have dropped 7.6% so far in 2023.

This utility stock currently possesses a favourable price-to-earnings ratio of 14. Meanwhile, Canadian Utilities offers a quarterly dividend of $0.449 per share. That represents a strong 5.2% yield. This stock has achieved 51 straight years of dividend growth. That makes Canadian Utilities the only dividend king on the TSX.

The post CPP Pension: How to Increase Your Income by 50% appeared first on The Motley Fool Canada.

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Fool contributor Ambrose O’Callaghan has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.

2023-07-25T18:10:55Z dg43tfdfdgfd