What is the YMPE and why are pension contributions affected by it?

Sandra Marcellus

YMPE stands for Yearly Maximum Pensionable Earnings—the maximum amount of earnings used to calculate contributions and pensions under the Canada Pension Plan (CPP). The YMPE for 2004 is $40,500. Teachers and their employers make CPP contributions on salary up to the YMPE and stop paying into CPP at that point in the year when the annual earnings have reached the YMPE.

Many pension plans, like the Teachers' Pension Plan (TPP), were designed to provide employees with pensions worth 70 per cent of pre-retirement income. To retire with an unreduced pension in 1966, teachers had to be 65 years of age. Service was counted from age 30 onward so the plan assumed that teachers would have 35 years of service at retirement. In order to provide 70 per cent of pre-retirement income, the pension formula was based on two per cent of salary times 35 years of service.

The Canada Pension Plan came into effect in 1966. Two resolutions were passed at the Alberta Teachers' Association's 1965 Annual Representative Assembly that called for CPP pension benefits to be integrated into the TPP. The government of Alberta and the Association negotiated the integration, and the Teachers' Pension Plan Act was changed accordingly. As a result, the benefit was changed to recognize that teachers would receive a pension from CPP equal to 0.6 per cent of salary up to the YMPE. In order to maintain the same two per cent benefit, teachers would receive 1.4 per cent from the TPP. Since no CPP is paid for income over the YMPE, the TPP pays two per cent on income above the YMPE.

At the same time, contributions were reduced. The contribution rate in effect prior to the CPP integration was five per cent of salary. Contributions were reduced to 3.5 per cent up to the YMPE and five per cent thereafter. Therefore, because the TPP plan design changed to reflect CPP benefits, both the benefit and the contribution rates differ below and above the CPP maximum earnings.

For more information, ­contact Sandra Marcellus at Barnett House in Edmonton:
(780) 447-9403; toll-free outside Edmonton, 1-800-232-7208.