Canada Pension Plan

Description

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 ⅔ of Canadian provinces representing at least ⅔ 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.

History

The Liberal government of Prime Minister Lester B. Pearson in 1965 first established the Canadian Pension Plan.

CPP Benefits

When the contributor reaches the normal retirement age of 65, the CPP provides regular pension benefit payments to the contributor. Currently, this is 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. However, under changes being phased in by 2025, the pension benefit will rise to 33% of earnings on which contributions were made, and the maximum amount of income covered by the CPP will rise from $54,900 to about $82,700.

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 2016, average monthly benefits for new retirement pension (taken at age 65) was just over $550.00 per month and the maximum amount was $1,092.50. 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).

1966 to 1996

From 1966 to 1986, the contribution rate was 3.6%. The rate was 1.8% for employees (and a like amount for their employers) and 3.6% in respect of self-employed earnings. By 1997, this had reached combined rates of 6% of pensionable earnings.

1996 reforms

By the mid-1990s, the 3.6% contribution rate was not sufficient to keep up with Canada’s aging population. and 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:

Currently, 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.

2017 reforms

Following consultation with the Provinces in 2016, the Liberal government of Justin Trudeau moved to expand the contributions to and value of CPP pensions. These changes were principally motivated by the declining share of the workforce that was covered by an employer defined-benefit pension plan, which had fallen from 48% of men in 1971 to 25% by 2011. They were given additional impetus by moves on the part of the provincial Liberal government of Ontario to launch a supplementary pension plan in 2018, after having been rebuffed by the Conservative Federal government of Stephen Harper.

Under the expanded system, which will fully take effect in 2025, the maximum amount of income covered by the CPP will rise from $54,900 to about $82,700, and the pension provided will rise from about 25% of preretirement earnings to 33%. Thus workers earning the current maximum covered wage of $54,900 a year would receive an additional $4,390 annually in pension.

To finance the expanded pensions and maintain the soundness of the plan, CPP contributions to CPP from workers and companies combined will rise 1% from current levels, to 5.95 per cent of covered earnings over the period 2019-2025. To ease the impact of the increased contribution on near-term disposable income, worker contributions will become tax-deductible.

Description

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.

Assets

As noted in the 27th Actuarial Report on the Canada Pension Plan, if one uses the 'closed group approach', the Canada Pension Plan has an enormous unfunded liability. As at December 31, 2015, the unfunded liability was $884 billion, which is the difference between CPP's liabilities of $1.169 trillion and the CPP's assets of $285 billion.

Unfunded liability

The unfunded liability is increasing at a rate of about $25 billion per year. The unfunded liabilities reported in the last few Actuarial Reports are:

Using the 'open group approach' ("one that includes all current and future participants of a plan, where the plan is considered to be ongoing into the future, that is, over an extended time horizon") the plan is reported to have assets in excess of $2.5 trillion. This approach uses a different definition of the term "assets". "Assets" are the sum of: (i) the CPP's current assets and (ii) the present value of future contributions for the next 150 years, totalling $2.544 trillion.

Unlike most pension plans, the unfunded liability is not reported on the balance sheet of the Canada Pension Plan's financial statements. Consequently, the balance sheet reports that the CPP's assets exceed its liabilities by $269 billion as at March 31, 2015.

Fluctuations in the projected CPP contributions

The projections in the actuarial reports fluctuate over time. For example, as at Dec 31, 1997 the projected contributions for the year 2040 were $170 billion. However, in the Dec 31, 2015 actuarial report the projected contributions for the year 2040 were only $117 billion.

The projected CPP contributions for 2040 were:

Similar reductions were reported for all other forecast years.

Fluctuations in the projected return on investments

The projected return on investment on CPP assets has decreased over time. The projected long-term returns were:

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. The board reports annually to Parliament through the federal Minister of Finance.

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.

Increase in Contribution Rate

According to the 2011-12 Budget of the Government of Quebec, the government began increasing contribution rates by 0.15% each year for a six year period. Consequently, the contribution rate will increase from 9.9% to 10.8%.

The contribution rate for 2016 is 10.65% and the rate will be 10.80% for 2017.