Canada Pension Plan

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The Canada Pension Plan (CPP; French: Régime de pensions du Canada) 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 (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).^[1] As of June 30, 2024, CPP Investments (CPPI) manages over C$646 billion in investment assets for the Canada Pension Plan on behalf of 22 million Canadians.^[2] CPPI is one of the world's largest pension funds.^[3]

The CPP mandates all employed Canadians 18 years of age and over to contribute a prescribed portion of their earnings income (with an equal matching amount contributed by their employer) 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.^[4]

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.^{[5]: §3(1)} 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 (CPPI), an independent organization that reports to the federal and provincial governments. The CPPI'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. CPPI also regularly reports on its investment performance and activities and is subject to oversight by the federal and provincial governments.^[6]

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

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 [taking] into account the growth in average weekly wages and salaries in Canada".^[7]

The primary benefit provided by the CPP 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.^[8] 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.^[9]

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^[10] 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 (for an individual who begins contributing at age 18 and ends at age 65).

In October 2018, the average monthly benefits for a new retirement pension (taken at age 65) 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 majority), the reduction factor is 0.6% for each month that benefits are received before age 65 (to a maximum reduction of 36%, at age 60). 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.^[11]

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 (having made sufficient contributions).

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.

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. Contribution rates began rising by 0.2% per year in 1987. By 1997, this had reached combined rates of 6% of pensionable earnings.

By the mid-1990s, the 3.6% contribution rate was not sufficient to keep up with Canada's aging population,^[12] 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 (all 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 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.^{[citation needed]} 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 (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 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 (that is, the CPP Reserve Fund will equal 30% of the liabilities, or accrued pension obligations).
• Create the CPP Investments (CPPI).
• Review the CPP and CPPI every 3 years.

As of 2019, the prescribed employee contribution rate was 4.95% of a salaried worker's gross employment income between $3,500 and $57,400, to a maximum contribution of $2,668. The employer matches the employee contribution, effectively doubling the employee's contributions. Self-employed workers must pay both halves of the contribution, or 9.9% of their pensionable income, when filing their income tax return. These rates have been in effect since 2003.

The federal government and its provincial counterparts moved to enhance the Canada Pension Plan to provide working Canadians with more income in retirement.^[13] 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.^[13] 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.^[13]

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 (33.33%) of covered earnings, up from the quarter (25%) provided previously. Additionally, the maximum income covered by the CPP will increase by 14% by 2025 (projected by the Chief Actuary of Canada to be $79,400 in 2025, compared to the projected normal limit of $69,700 in the same year in the 28th Actuarial Report on the CPP^[9]). 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. (The maximum retirement pension will increase by 50% but will require 40 years of contributions on earnings at the new maximum.) Workers earning the 2016 maximum covered wage of $54,900 a year would receive an additional $4,390 annually (approximately $365.83 monthly).^[13]

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 (i.e., earnings above the normal earnings limit and below the new, higher one). To ease the impact of the increased contribution on near-term disposable income, worker contributions will become tax-deductible.^[13]

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. This 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.^[14]

The enhancement to the CPP will be fully funded, meaning that each generation will pay for the benefits it receives. 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.

As noted in the 27th Actuarial Report on the Canada Pension Plan, if one uses the "closed group approach", the plan has an enormous unfunded liability. As of December 31, 2015, the CPP's unfunded liability was $884 billion, which is the difference between its liabilities ($1.169 trillion) and its assets ($285 billion).^[15]

While the unfunded liability has been increasing with every published Actuarial Report, the assets as a percentage of liabilities using the closed group approach has also been increasing since the 1996 reforms. The unfunded liabilities reported in the last few 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.^[20] This approach uses a different definition of the term "assets". "Assets" are the sum of (1) the CPP's current assets and (2) the present value of future contributions for the next 150 years, totalling $2.544 trillion.^[20]

Unlike most pension plans, the unfunded liability is not reported on the balance sheet of the Canada Pension Plan's financial statements.^[21] Consequently, the balance sheet reports that the CPP's assets exceed its liabilities by $269 billion as of March 31, 2015.

Under the direction of then Finance Minister Paul Martin, CPP Investments (CPPI) was created in 1997 as an organization independent of the government to monitor and invest the funds held by the CPP. In turn, the CPPI 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 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.^[22]

Quebec is the only province that opted out of the CPP upon its formation in 1965; the government of Quebec runs its own pension program. The Quebec Pension Plan (QPP; French: Régime des rentes du Québec; RRQ) is Quebec's version of the Canada Pension Plan. The QPP is managed by Retraite Québec, which was formed from a merger of the Commission administrative des régimes de retraite et d'assurances (CARRA) and the Régie des rentes du Québec (RRQ) in 2016. 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 tax benefits are paid from the QPP.

The QPP's contribution rate was 9.9% prior to 2012. In accordance with the 2011–12 Budget of the Government of Quebec, the contribution rate was increased by 0.15% per year for six years from 2012 to 2017. Consequently, the contribution rate increased to 10.8% for 2017 and subsequent years.^[23][24][25]

• Fiscal imbalance in Australia
• Pensions in Canada

• Canada Pension Plan Act
• CPP and payroll calculations
• CPP Investment Board website
• CPP website
• 2017 Annual Report
• 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)
• 27th Actuarial Report (as at December 31, 2015)
• The Régie des rentes website