Canada Pension Plan
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The Canada Pension Plan (CPP) is a contributory, earnings-related social insurance program. It forms one of the two major components of Canada's public retirement income system, the other component being Old Age Security (OAS). Other parts of Canada's retirement system are private pensions, either employer-sponsored or from tax-deferred individual savings (known in Canada as a Registered Retirement Savings Plan).
The CPP program mandates all employed Canadians who are 18 years of age and over to contribute a prescribed portion of their earnings income to a nationally administered pension plan. The plan is administered by Human Resources and Social Development Canada on behalf of employees in all provinces and territories except Quebec, which operates an equivalent plan, the Quebec Pension Plan. Changes to the CPP require the approval of at least 2/3 of Canadian provinces representing at least 2/3 of the country's population. In addition, under section 94A of the Canadian Constitution, pensions are a provincial responsibility, so any province may establish a plan anytime.
The CPP is funded on a "steady-state" basis, with its current contribution rate set so that it will remain constant for the next 75 years, by accumulating a reserve fund sufficient to stabilize the asset/expenditure and funding ratios over time. Such a system is a hybrid between a fully funded one and a "pay-as-you-go" plan. In other words, assets held in the CPP fund are by themselves insufficient to pay for all future benefits accrued to date but sufficient to prevent contributions from rising any further. While a sustainable path for this particular plan, given the indefinite existence of a government, it is not typical of other public or private sector pension plans. A study published in April 2007 by the CPP's chief actuary showed that this type of funding method is "robust and appropriate" given reasonable assumptions about future conditions. The chief actuary submits a report to Parliament every three years on the financial status of the plan.
The Liberal government of Prime Minister Lester B. Pearson in 1965 first established the Canadian Pension Plan. Contribution rates were first set at 1.8% of an employee's gross income per year with a maximum contribution limit. By the mid-1990s though this low contribution rate was not sufficient to keep up with Canada’s aging population. As a result the total CPP contribution rates for both employee and employer together were raised to an annual rate of 9.9 per cent by 2003.
At its inception, the prescribed CPP contribution rate was 1.8% of an employee's gross income up to an annual maximum. Over time, the contribution rate was increased slowly. However, by the 1990s, it was concluded that the "pay-as-you-go" structure would lead to excessively high contribution rates within 20 years or so, due to Canada's changing demographics, increased life expectancy of Canadians, a changing economy, benefit improvements and increased usage of disability benefits (all as referenced in the Chief Actuary's study of April 2007, noted above). The same study reports that the reserve fund was expected to run out by 2015. This impending pension crisis sparked an extensive review by the federal and provincial governments in 1996. As a part of the major review process, the federal government actively conducted consultations with the Canadian public to solicit suggestions, recommendations, and proposals on how the CPP could be restructured to achieve sustainability once again. As a direct result of this public consultation process and internal review of the CPP, the following key changes were proposed and jointly approved by the Federal and provincial governments in 1997:
- Increase total CPP annual contribution rates (employer/employee combined) from 6% of pensionable earnings in 1997 to 9.9% by 2003.
- Continuously seek out ways to reduce CPP administration and operating costs.
- Move towards a hybrid structure to take advantage of investment earnings on accumulated assets. Instead of a "pay-as-you-go" structure, the CPP is expected to be 20% funded by 2014, such funding ratio to constantly increase thereafter towards 30% by 2075 (that is, the CPP Reserve Fund will equal 30% of the "liabilities" - or accrued pension obligations).
- Create the CPP Investment Board (CPPIB).
- Review the CPP and CPPIB every 3 years.
Contributions and benefits
In 2013, the prescribed employee contribution rate was 4.95% of a salaried worker's gross employment income between $3,500 and $51,100, up to a maximum contribution of $2,356.20. The employer matches the employee contribution, effectively doubling the contributions of the employee. Self-employed workers must pay both halves of the contribution, or 9.9% of pensionable income, when filing their income tax return. These rates have been in effect since 2003.
When the contributor reaches the normal retirement age of 65, the CPP provides regular pension benefit payments to the contributor, equal to 25% of the earnings on which CPP contributions were made over the entire working life of a contributor from age 18 to 65 in constant dollars. There is a general drop out provision that enables the lower-earnings years in a contributor's contributory period to be dropped from the calculation of the average. In 2014, the lowest 17% of earnings will be dropped in this way, accounting for up to eight years of contributory earnings.
In March 2013, average monthly benefits for new retirement pension (taken at age 65) was $596.66 and the maximum amount was $1,012.50. Monthly benefits are adjusted every year based on the Consumer Price Index. CPP benefit payments are taxable as ordinary income.
An application must be filed at least six months in advance in order to receive CPP benefits, and there is a provision for starting benefits anytime between the age of 60 to 70. Benefits are adjusted accordingly. Historically, the adjustment rate was 0.5% for each month before or after one's 65th birthday. From 2012 to 2016, the Plan is gradually changing the early pension reduction from 0.5% to 0.6% for each month you receive it before age 65. This means that by 2016, an individual who starts receiving their CPP retirement pension at the age of 60 will receive 36% less than if they had taken it at 65. Conversely, as of 2013, the adjustment rate for retiring after age 65 has increased to 0.7% for each month that one delays in receiving it up to age 70 (8.4% per year).
The CPP also provides disability pensions to eligible workers who become disabled in a severe and prolonged fashion, and survivor benefits to survivors of workers who die before they begin receiving retirement benefits. If an application for disability pension is denied, an appeal can be made for reconsideration, and then to the Canada Pension Plan / Old Age Security Review Tribunals or Pension Appeals Boards (POA).
CPP Investment Board
Under the direction of then Finance Minister Paul Martin, the CPP Investment Board (CPPIB) was created in 1997 as an organization independent of the government to monitor and invest the funds held by the CPP. In turn, the CPP Investment Board created the CPP Reserve Fund. The CPP Investment Board is a crown corporation created by an Act of Parliament. It reports quarterly on its performance, has a professional management team to oversee the operation of various aspects of the CPP reserve fund and also to plan changes in direction, and a board of directors that is accountable to but independent from the federal government.
Quebec Pension Plan (QPP)
Quebec is the only province in Canada that opted out of the CPP. The Quebec Pension Plan, or QPP, (French: Régie des rentes du Québec; RRQ) is the province of Quebec's own version of the Canada Pension Plan. Almost mirroring the CPP exactly, the QPP is a contributory earnings-related pension plan that pays benefits in the event of the earner becoming disabled, retiring, or dying. Both Quebec and the federal government tax benefits paid from the QPP.
- "Canada's Retirement Income System". Archived from the original on 2009-06-09.
- Optimal Funding of the Canada Pension Plan: Actuarial Study. Office of the Superintendent of Financial Institutions Canada. Accessed on 20 April 2007. (Dead Link)
- "Canada Pension Plan mulls Yahoo buy, report says - Business - CBC News". Cbc.ca. 2011-10-20. Retrieved 2014-06-04.
- Service Canada. Canada Pension Plan Retirement Pension (booklet - March 2014), ISPB-147-03-14E.
- Service Canada. Canada Pension Plan Retirement Pension (booklet - March 2014), ISPB-147-03-14E
- Canada Pension Plan Act
- CPP and payroll calculations
- CPP Investment Board website
- CPP website
- 21st Actuarial Report (as at December 31, 2003)
- 23rd Actuarial Report (as at December 31, 2006)
- 25th Actuarial Report (as at December 31, 2009)
- 26th Actuarial Report (as at December 31, 2012)
- Canada Pension Plan Formula