In 2025, significant updates are coming to Canada Pension Plan (CPP) and Old Age Security (OAS) that will impact both current retirees and working Canadians.
These changes affect contribution amounts, eligibility age, and benefit increases, making it crucial for all Canadians to stay informed. Below, we delve into the three key modifications expected in 2025.
1. Phase Two of the CPP Enhancement
The Canada Pension Plan Enhancement is a multi-phase initiative aimed at increasing retirement benefits. The goal is to gradually raise the proportion of a retiree’s working-age salary covered by CPP from 25% to 33%. This enhancement is implemented in stages:
- Phase One (2019–2024): Focused on gradually increasing CPP payroll deductions.
- Phase Two (2025–2026): Involves raising the earnings ceiling, or the maximum salary on which CPP contributions are deducted.
What’s Changing in 2025?
Starting in 2025, the upper income threshold for CPP contributions will increase by 14% over two years. The first rise occurs this year, followed by another in 2026, completing the CPP enhancement process.
These increases mean that higher earners will contribute more towards their future CPP benefits.
2. Increase in OAS Eligibility Age
One of the most impactful changes to Old Age Security (OAS) is the gradual increase in the eligibility age. This adjustment is being implemented over several years to transition the eligibility age from 65 to 67.
Key Timeline for OAS Age Increase
| Year | OAS Eligibility Age |
|---|---|
| 2023 | Slight Increase Begins |
| 2024 | Further Increment |
| 2025 | Another Monthly Increase |
| 2029 | Final Transition to 67 |
In 2025, another incremental increase in the OAS eligibility age will take effect, following a similar adjustment made last year. This means Canadians will need to plan accordingly for their retirement income needs.
3. Inflation Adjustments for CPP and OAS
Both CPP and OAS benefits are adjusted annually to keep up with inflation. While this is not a new policy, the adjustment rate varies each year based on inflation data.
How Are Benefits Adjusted?
- CPP payments are indexed annually based on the average inflation rate from November to October of the previous year.
- OAS payments are adjusted quarterly based on the most recent inflation rate.
Expected Increase in 2025
Last year, CPP benefits increased by 2.7% due to inflation. While OAS will also see an increase in 2025, the exact percentage will be determined by quarterly inflation trends.
What to Do If CPP and OAS Are Insufficient?
Despite these enhancements and adjustments, some retirees may still find their CPP and OAS benefits insufficient for their financial needs. One way to supplement retirement income is through low-risk investments, such as index funds.
Investing in Index Funds
Index funds provide a balance of capital appreciation and dividend income. A strong option for Canadians is the iShares S&P/TSX Capped Composite Index Fund (TSX:XIC), which tracks the 240 largest publicly traded Canadian companies.
Why Consider TSX:XIC?
- 2.5% dividend yield, offering steady income.
- Low management fee of 0.05%, minimizing costs.
- No U.S. withholding tax, making it tax-efficient.
- Highly liquid and widely used in Canada.
For those with significant savings, index funds can provide additional income while remaining tax-free if held in a Tax-Free Savings Account (TFSA).
With CPP and OAS changes in 2025, Canadians need to be proactive about their retirement planning. The CPP enhancement’s second phase, OAS eligibility age increase, and inflation adjustments will shape the financial landscape for retirees and working individuals alike.
While these adjustments improve retirement security, those needing additional income should consider alternative financial strategies, such as index fund investments. As always, consulting a financial advisor is recommended to tailor investment decisions to your personal financial goals.
FAQs
How much will CPP contributions increase in 2025?
In 2025, the earnings ceiling for CPP contributions will rise by 14% over two years, requiring higher earners to contribute more.
When will OAS eligibility age reach 67?
The gradual increase from 65 to 67 began in 2023 and will be completed by 2029.
How is CPP adjusted for inflation?
CPP benefits increase annually based on the inflation rate recorded between November and October of the previous year.
Can OAS payments decrease?
No, OAS payments cannot decrease due to inflation adjustments. They either increase or remain the same.