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I know the Canada Pension Plan's Yearly Maximum Pensionable Earnings value (YMPE) is used for the following:

  • to determine the annual limit for payroll contributions to the Canada Pension Plan for those currently employed, and
  • to calculate benefits when somebody elects to receive their CPP retirement pension.

My questions:

  • Who decides by how much the YMPE will increase each year?
  • Is the amount of the increase in YMPE defined exactly according to some other series, e.g. annual inflation data from Statistics Canada, or some other amount? If there is a specific series, where can it be referenced?
  • Are the increases in the YMPE identical, percentage-wise, to the annual indexing increases to those already receiving CPP benefits?
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1 Answer

up vote 4 down vote accepted

Increases in the YMPE are calculated from a formula detailed in Section 18 of the Canada Pension Plan. The pattern is defined like this: the YMPE for 2014 is calculated by multiplying the current YMPE by (average monthly wage measure for the 12-month period ending June 30, 2012) / (average monthly wage measure for the 12-month period ending June 30, 2011).

The law also states that if the amount calculated by the above formula is less than the YMPE for the preceding year, the YMPE remains the same instead of shrinking.

The wage measure is the average weekly wages, salaries, and other earnings, measured monthly, of the Industrial Aggregate, as published by Statistics Canada. Although the law stipulates procedures for changing the definition of this measure, I couldn't find any sources that indicate it's changed since the law's passage.

The general data table has a breakdown by sector, and I believe it's the earnings value for "Industrial aggregate excluding unclassified businesses" that's used. I downloaded the raw data from the table and tried to match the published maximum to the data. I went to the download tab and used Option 2.

The calculated numbers are a fairly close fit.

average wage measure

For example, the 2011 estimate is calculated 47200 * 835.46 / 816.964 ≈ 48268, and the 2012 estimate is calculated 48300 * 866.645 / 835.46 ≈ 50100, etc.

Increases in the YMPE are technically different from increase in CPP payments; CPP payments amounts are linked to inflation. Although earnings theoretically grow at the rate of inflation, these growth rates aren't the same in practice.

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Awesome! I'd almost forgotten I asked this question. :) This is actually relevant to one of the projects in my personal projects list. I knew I had to find an answer to this eventually, and my plan was to come back and write it here once I did the research, so you've saved me some legwork :) Thank you. –  Chris W. Rea Jul 30 '13 at 21:23
    
FWIW, the reason I'm after this is to decide, in a scenario where one wants to estimate future CPP benefits a couple of decades out, whether one ought to use distinct inflation assumptions for the pre-retirement YMPE growth vs. post-retirement benefits growth, or if these series have been close enough, in practice. My research on the U.S. side of things showed that, for Social Security, the Average Wage Index has outpaced inflation. e.g. 1985's AWI of ~$16,822 would have rose to a 2011 value of ~$35,168 using U.S. CPI, but actually rose to $42,979. –  Chris W. Rea Jul 30 '13 at 21:36
    
@ChrisW.Rea I'm always a sucker for an unanswered question because they often require a little more research than the average question. Gives me something to do at lunch. I'll look into this a bit more too, but let me know if you figure out exactly how the Industrial Aggregate wage measure is used to scale the YMPE, because I'm bothered that the numbers don't line up perfectly. –  John Bensin Jul 31 '13 at 13:33
    
Did some checking. There's an error in your "Estimated" column. The first looks OK, i.e. to get 2011's YMPE from 2010's YMPE: (47200*835.46/816.96 ≈ 48268). But the next one should be (48300*866.65/835.46 ≈ 50103), because the 2012 calc would use the 2011 YMPE as starting point, not 2010's. Similarly, the 2013 calc would start with the 2012 YMPE. With this fix, numbers are closer: (48268, 50103, 51040). However, still leaves some discrepancy vs. actuals. I'm guessing rounding rules account for some remainder, but rounding down to nearest 100 (per the Act) still won't match 100%. –  Chris W. Rea Sep 9 '13 at 15:16
    
Anyway, given the fix, your answer is almost spot on. I'll mark it as accepted once corrected :) I'm not as concerned about the precise semantics of the rounding rule -- my primary goal was discovering the series used to inflate the YMPE itself, and that's been found and demonstrated. –  Chris W. Rea Sep 9 '13 at 15:21
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