Canada Pension Plan
The Canada Pension Plan is a contributory, earnings-related social insurance program. It is one of the two major components of Canada's public retirement income system, the other 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 June 30, 2024, CPP Investments manages over C$646 billion in investment assets for the Canada Pension Plan on behalf of 22 million Canadians. CPPIB is one of the world's largest pension funds.
Description
The CPP mandates all employed Canadians 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 require the approval of at least seven Canadian provinces representing at least two-thirds of the country's population.John Graham is the current CEO of the
CPP.
A province may choose to opt out of the Canada Pension Plan, as Quebec did in 1965, but must offer a comparable plan to its residents. Any province may establish an additional or supplementary plan anytime, as under section 94A of the Canadian Constitution, pensions are a provincial responsibility.
The CPP Fund is a professionally managed investment fund, overseen by the CPP Investments, an independent organization that reports to the federal and provincial governments. The CPPIB's investment strategy is guided by a set of principles that emphasize long-term benefits security, a focus on quality, and a commitment to sustainability and responsible investment practices. CPPIB also regularly reports on its investment performance and activities and is subject to oversight by the federal and provincial governments.
History
The Canadian Pension Plan was established in 1965 by the 26th Canadian Parliament. The bill was introduced by the Liberal minority government of Prime Minister Lester B. Pearson and was passed with the support of Tommy Douglas' New Democratic Party.The Canadian Pension plan bill had its first reading on November 9, 1964, second reading on November 18, 1964, and was passed on it's third reading on March 29, 1964. It was subsequently passed by the Senate on April 2, 1965 and receive Royal Ascent the following day.
Beginning in January 2024, a second earnings ceiling will be introduced, also known as CPP2. The first ceiling will be $68,500, while the second ceiling will be $73,200. The second ceiling is calculated "in accordance with the CPP legislation and
Benefits
The primary benefit provided by the CPP is a monthly retirement pension. Currently, this is equal to 25% 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 was $58,700 as of 2020. However, under changes being phased in by 2025, the pension benefit will rise to 33.33% of earnings on which contributions were made, and the maximum amount of income covered by the CPP will rise by 14% 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 17% 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, using the best forty years to calculate the benefit. This calculation effectively allows seven years to be dropped from the benefit calculation.
In October 2018, the average for a 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 for receiving the retirement pension is age 65; however, individuals may begin collecting a permanently reduced pension as early as age 60 or defer payment until age 70 to increase the monthly payment. For those who take the pension early, the reduction factor is 0.6% for each month that benefits are received before age 65. For those who defer, the adjustment rate is 0.7% for each month that one delays in receiving it, to a maximum increase of 42% 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 1986, the contribution rate was 3.6%. The rate was 1.8% for employees and 3.6% in respect of self-employed earnings. Contribution rates began rising by 0.2% per year in 1987. By 1997, this had reached combined rates of 6% of pensionable earnings.1998 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 about 20 years, due to Canada's changing demographics, increased life expectancy, 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 review, 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 again. As a result of this public consultation process and internal review, the following key changes were proposed and jointly approved by the federal and provincial governments in 1997:- Increase total CPP annual contribution rates from 6% of pensionable earnings in 1997 to 9.9% by 2003.
- Continuously seek out ways to reduce CPP administration and operating costs.
- Move toward 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, with this funding ratio to constantly increase thereafter toward 30% by 2075.
- Create the CPP Investments.
- Review the CPP and CPPIB every 3 years.
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% of men in 1971 to 25% 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 an individual works and makes contributions. Additionally, the enhancement 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 previously. Additionally, the maximum income covered by the CPP will increase by 14% by 2025. The combination of the increased replacement rate and increased earnings limit will result in individuals receiving retirement pensions that are 33% to 50% 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 by workers and their employers will each rise 1% from current levels to 5.95% over the existing band of covered earnings. This increase will be phased in over five years starting in 2019. The increase to the earnings threshold will be phased in over two years starting in 2024. Workers and their employers will contribute 4% on earnings in this range. To ease the impact of the increased contribution on near-term disposable income, worker contributions will become tax-deductible.