Canada Pension Plan

The Canada Pension Plan (CPP), legislated in 1965 and in effect in 1966, is an earnings-related public PENSION plan that transfers income from workers to the retired. The CPP and its parallel QUÉBEC PENSION PLAN cover all Canadian throughout their working lives.

The CPP retirement pension is calculated as 25% of a worker's average lifetime earnings, up to the average wage; the maximum pension in 1997 is $8842, though the average benefit for new pensioners is only $4885 or 55% of the maximum. In addition to a retirement pension, the CPP provides disability, survivor, orphans and death benefits. Benefits are fully indexed to the cost of living each year (see CONSUMER PRICE INDEX).

The CPP is financed by payroll taxes ("contributions") levied on employers, employees and the self- employed. The current (1997) contribution rate is 3% of earnings between the basic exemption ($3500) and the maximum pensionable earnings ($35 800), which is about the average wage, split equally between employers and employees (the self-employed pay the full rate). Under an agreement reached between the federal and provincial governments in 1997, the contribution rate will increase more rapidly than under the previous system to reach 9.9% by 2003, after which it will remain at this "steady state rate" rather than continue to rise under the old system (to an estimated 14.2% by 2030). In addition, the year's basic exemption (below which contributions are not levied) will be frozen at its 1997 level of $3500.

Under the old system, the maximum annual employee contribution would have increased from $945 in 1997 to a forecast $2295 in 2030. The new arrangement will see the maximum employee contribution rise from $969 in 1997 to $1730 in 2030.

The CPP used to be funded on a "pay-as-you-go" basis, in which contributions were set at a level that would pay for current pension payouts and provide a contingency fund of 2 years of benefits. The surplus was lent to the provinces, invested in non-marketable securities of provincial governments. By accelerating the increase in the contribution rate, the 1997 reforms will move the CPP to a "partially funded" basis, accumulating a larger fund (equal to about 5 years of benefits) that will be invested more broadly in a diversified portfolio of securities to achieve a better rate of return.

The 1997 reforms also reduced CPP benefits. Pensions will be calculated on the average of maximum pensionable earnings in the last 5 years, instead of 3 years. The administration of disability pensions will be further tightened; applicants must have worked and made contributions in 4 of the last 6 years (instead of the old rule of 2 of the last 3 or 5 of the last 10 years); retirement pensions for disability beneficiaries will be calculated using the average wage at the time of disablement instead of when the recipient turns 65; and the ceiling on combined survivor-disability benefits will be set at one maximum disability pension. The one-time death benefit, currently equal to $3580 or 6 months of retirement benefits, will be reduced to $2500 and frozen.

These financing and benefit changes are intended to ensure the continued financial viability of the CPP in the face of rising expenditures from an aging population and to restore public confidence in the plan.