Canada Pension Plan


The Canada Pension Plan 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. Other parts of Canada's retirement system are private pensions, either employer-sponsored or from tax-deferred individual savings. As of September 2017, the CPP Investment Board manages over C$328.2 billion in investment assets for the Canada Pension Plan on behalf of 20 million Canadians. CPPIB is one of the world's biggest pension funds.

Description

The CPP mandates all employed Canadians who are 18 years of age and over to contribute a prescribed portion of their earnings income to a federally administered pension plan. The plan is administered by Employment and Social Development Canada on behalf of employees in all provinces and territories except Quebec, which operates an equivalent plan, the Quebec Pension Plan. Because the Constitutional authority for pensions is shared between the provincial and federal governments, stewardship for the CPP is jointly shared. As a result, major changes to the CPP, including those that alter how benefits are calculated, require the approval of at least seven Canadian provinces representing at least two-thirds of the country's population.
Provinces may choose to opt out of the Canada Pension Plan, but must offer a comparable plan to its residents. In addition, under section 94A of the Canadian Constitution, pensions are a provincial responsibility, so any province may establish an additional/supplementary plan anytime.

History

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

Benefits

The primary CPP benefit is the monthly retirement pension. Currently, this is equal to 25 per cent of the average earnings on which CPP contributions were made over the entire working life of a contributor from age 18 to 65 in constant dollars. The earnings upon which contributions are made are subject to an annual limit, which, in 2020, is $58,700. However, under changes being phased in by 2025, the pension benefit will rise to 33.33 per cent of earnings on which contributions were made, and the maximum amount of income covered by the CPP will rise by 14 percent from the projected 2025 limit of $69,700 to $79,400.
The CPP enhancement will serve as a top-up to the existing, or base, CPP. For individuals who work and make contributions in 2019 or later, enhanced components of benefits will be calculated and added to the base portion of the benefit. These calculations are similar, but follow different formulae.
When calculating the base portion of the CPP, 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. Since 2014, the lowest 17per cent of earnings are dropped in this way, accounting for up to eight years of contributory earnings.
Benefits under the CPP enhancement will be calculated based on a forty-year period, taking the best 40 years to calculate the benefit. This calculation effectively allows seven years to be dropped out of the benefit calculation.
In October 2018, average for new retirement pension was just over $664.00 per month and the maximum amount in 2019 was $1,154.58 per month. Monthly benefits are adjusted every year based on the Consumer Price Index. CPP benefit payments are taxable as ordinary income.
The standard age to receive the retirement pension is age 65, however, individuals may begin collecting a permanently reduced pension as early as 60, or defer until age 70 to increase the monthly payment. For those who take the pension early, the reduction factor is 0.6 per cent for each month you receive it before age 65. For those who defer, the adjustment rate is 0.7 per cent for each month that one delays in receiving it up to a maximum increase of 42 per cent at age 70. There is no financial benefit to delaying beyond age 70.
The CPP also provides disability pensions to eligible workers under the age of 65 who become disabled in a severe and prolonged fashion, and a monthly survivor's pension to the spouse or common-law partners of contributors who die.
An application must be filed at least six months in advance in order to receive CPP benefits. If an application for disability pension is denied, an appeal can be made for reconsideration, and then to the Social Security Tribunal. All CPP benefits in pay are indexed annually to the Consumer Price Index.

Contribution rates

1966 to 1996

From 1966 to 1996, the contribution rate was 3.6 per cent. The rate was 1.8 per cent for employees and 3.6 per cent in respect of self-employed earnings. By 1997, this had reached combined rates of 6 per cent of pensionable earnings.

1996 reforms

By the mid-1990s, the 3.6 per cent 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. 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:
, the prescribed employee contribution rate was 4.95 per cent of a salaried worker's gross employment income between $3,500 and $57,400, up to a maximum contribution of $2,668. 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 per cent of pensionable income, when filing their income tax return. These rates have been in effect since 2003.

2017 reforms

The Federal Government and its provincial counterparts moved to enhance the Canada Pension Plan to provide working Canadians with more income in retirement. 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 per cent of men in 1971 to 25 per cent by 2011. They were given additional impetus by moves on the part of the government of Ontario to launch the Ontario Retirement Pension Plan, a supplementary provincial pension plan intended to begin in 2018.
Unlike the existing, or base, CPP, the enhancement to the Canada Pension Plan will be fully funded, meaning that benefits under the enhancement will slowly accrue each year as individuals work and make contributions. Additionally, the enhancement of the Canada Pension Plan will be phased-in over a period of seven years, starting in 2019. When fully mature, the enhanced CPP will provide a replacement rate of one third of covered earnings, up from the quarter provided prior to the enhancement. Additionally, the maximum amount of income covered by the CPP will increase by 14 per cent by 2025. The combination of the increased replacement rate and increased earnings limit will result in individuals receiving retirement pensions 33 per cent to 50 per cent higher, depending on their earnings across their working years.. Workers earning the 2016 maximum covered wage of $54,900 a year would receive an additional $4,390 annually.
To finance the expanded pensions and maintain the soundness of the plan, contributions to the CPP from workers and their employers will each rise 1 per cent from current levels, to 5.95 per cent over the existing band of covered earnings. This increase will be phased in over 5 years, starting in 2019. The increase to the earnings threshold will be phased in over 2 years, starting in 2024. Workers and their employers will contribute 4 per cent on earnings in this range. To ease the impact of the increased contribution on near-term disposable income, worker contributions will become tax-deductible.

Funding

Description

The base 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 enhancement to the CPP will be fully funded, such that each generation will contribute and pay for the benefits they receive. Contributions made to the enhancement will be directed into a separate account.
The chief actuary submits a report to Parliament every three years on the financial status of the plan. Future reports will report on both the base and enhanced components 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:
YearActuarial ReportUnfunded Liability
199717th$428 billion
200018th$443 billion
200321st$516 billion
200623rd$620 billion
200925th$748 billion
201226th$829 billion
201527th$884 billion

Using the 'open group approach' 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: the CPP's current assets and 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 projected 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:
Under the direction of then Finance Minister Paul Martin, the CPP Investment Board 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

Quebec is the only province in Canada that opted out of the CPP. The Quebec Pension Plan, is the province of Quebec's own version of the Canada Pension Plan and is managed by the Caisse de dépôt et placement du Québec. Closely mirroring the CPP, 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

The contribution rate was 9.9 per cent prior to 2012. In accordance with the 2011-12 Budget of the Government of Quebec, the contribution rates were increased by 0.15 per cent per year for six years from 2012 to 2017. Consequently, the contribution rate increased to 10.8 per cent for 2017 and subsequent years.