A C/QPP overview
Raj K. Chawla and Ted Wannell
The Canada Pension Plan (CPP) came into effect in January 1966 to supplement the retirement incomes of working Canadians and provide survivor benefits in the event of their death.1 Contributions to the plan are mandatory for nearly all employed persons.
The CPP covers all provinces and territories except Quebec, which has opted to run its own plan—the Quebec Pension Plan (QPP). However, the two plans are similar and have full portability between them. Their administration is fully co-ordinated, and the maximum allowable benefits for retirement, disability, and survivors over age 65 are the same.
Although almost all Canadian workers belong to either the CPP or QPP, and the plans are considered main income pillars for seniors, some misunderstandings persist. For example, some people are not aware that they must apply for benefits—that these are not automatically triggered by age, retirement or disability. Also, some financial commentators continue to question the solvency of the CPP even though the Chief Actuary of Canada has certified its ability to meet obligations well into the future.
This article uses a question and answer format to provide some basic information on the Canada and Quebec Pension Plans, emphasizing recent changes that may not be well understood (see C/QPP milestones). It also highlights the increasing importance of C/QPP benefits for seniors in recent decades and the interaction of the plans with other income support programs.
Who is covered?
The plans cover all employed persons between the ages of 18 and 69 with earnings above an annual minimum ($3,500 in 2003) with certain exceptions: migratory agricultural and related enterprise workers, casual workers, exchange teachers, members of religious orders, members of the Canadian Forces or the RCMP, those employed by a foreign government, those employed in international transportation, or Indians as defined in the Indian Act (for more details, see CCH Canadian 1999).
How are the plans funded?
The plans are funded primarily through premium payments by workers and their employers. Assets accumulate when contributions received exceed benefits. Over time, then, a second component is investment income on these assets.
How are contributions calculated?
In 2003, employees paid 4.95% of all earnings up to $36,400—resulting in a maximum annual contribution of $1,801.80. Employers match these contributions so that total premiums equal 9.9% of maximum contributory earnings. Self-employed workers must cover both the employer and employee portion of the contributions, and so contribute the full 9.9% (to a maximum $3,603.60 in 2003).
Has the contribution rate been rising?
Yes. In 1967, an employee paid 1.8% of yearly contributory earnings to a maximum of $4,400 (or $79.20), with the employer paying a matching share. This rate remained in effect until 1986. Over the following decade, the rate rose by 0.1 percentage points per year, reaching 2.8% in 1996 (Chart A). Larger increases followed. In 2003, the rate reached a new plateau, 4.95%, which should hold for some years.
Why has the contribution rate risen?
The CPP was established as a pay-as-you-go system with the premise that the contribution of current workers plus the surpluses invested while the plan matured would always be sufficient to meet current payouts. The system was meant to be self-funded with no reliance on general revenues of either the federal or provincial government. Because of changing demographics, enriched benefits, and increased disability benefits, payouts exceeded premiums by the early 1990s (Chart B).2 The subsequent premium increases led to renewed annual surpluses by 1999.
Is the CPP now in a surplus position?
Although the CPP is now accumulating annual surpluses, these funds will be required in the future to pay benefits to the increasing number of retirees. Since 1998, the plan has been operating under 'steady-state financing,' which requires that contribution rates be sufficient to ensure the plan's long-term financial stability without recourse to further rate increases (HRDC 2002). The intent of these changes is to finance the plan collectively so that no individual or generation will contribute disproportionately.
How are the funds managed?
The CPP currently has two investment components. The CPP Investment Fund consists of long-term government bonds issued before 1998.3 Since 1999, the CPP Investment Board has been managing net inflows from contributions, investing in equity indexes. Legislation passed in April 2003 will eventually bring both components under the management of the CPP Investment Board. Assets of both components totalled $52 billion (or about 2.5 years of benefits) in March 2002.
QPP funds are managed by the Caisse de dépot et placement du Québec. The Caisse also manages funds for other public-and private-sector depositors and invests in a wide range of asset classes.
What types of benefits are available?
The plan provides retirement and disability benefits to participants, and survivor and death benefits to their families.
Retirement benefits are based on 25% of pensionable earnings, adjusted for growth in the annual maximum pensionable earnings averaged over the previous five years. Benefits are reduced if the participant opts to receive them before age 65 (as early as 60) and increased if initial receipt occurs after 65 (see C/QPP benefits).
Disability benefits are paid to participants who are unable to be gainfully employed because of a physical or mental disability, verified by a medical examination. Disability benefits combine a flat rate with 75% of the recipient's retirement benefit entitlements.
Survivor benefits are available to the spouses and dependent children4 of deceased participants who contributed to the plan for at least 120 months. Benefits are based on the participant's accumulated entitlements and the characteristics of the survivors. Survivors can also apply for a one-time death benefit (maximum of $2,500 in 2003).
Benefits are not sent out automatically. A retiree or their spouse, survivor, beneficiary, or estate must apply to Human Resources Development Canada for CPP benefits or to the Régie des rentes du Québec for QPP benefits.
How do these benefit calculations translate into dollar values?
In July 2003, the maximum C/QPP benefits were $801.25 per month for retirees, $971.26/$971.23 for disability recipients, and $480.75 for survivors aged 65 and over.5 However, these maximums apply only to participants who contributed the maximum premiums over the entire contributory period. Given varying contribution histories, benefit choices and demographic profiles, average benefit levels are somewhat lower, and differ between CPP and QPP recipients.
In July 2003, the average retirement benefit paid by the CPP was $448.21 (56% of the maximum) compared with an average disability benefit of $792.55 (82% of the maximum). The corresponding amounts from the QPP were $370.99 and $789.92—or 46% and 81% of the maximums (Table 1).
How many people are receiving benefits?
In July 2003, over four million people received $1.9 billion in benefits. Of these, 2.9 million received retirement benefits, 924,000 survivor benefits, and 287,000 disability benefits. Retirement benefits accounted for 71% of CPP payouts, survivor benefits for 14%, and disability for 12%.
The situation was similar for the QPP. The three main benefits accounted for 98% of the total: 70% for retirement, 20% for survivor, and 9% for disability. Of the 1.4 million beneficiaries, 1.0 million received retirement benefits and only 60,000 claimed disability benefits.
Are more people receiving benefits than in the past?
Yes. As the plan was phased in, recipient ranks grew rapidly. According to Human Resources Development Canada, 5.4 million persons received C/QPP benefits in 2001 compared with 1.8 million in 1981—a threefold increase over 20 years. Three-quarters of the net increase in recipients can be attributed to expanding numbers of seniors and higher rates of receipt.
According to the Survey of Labour and Income Dynamics, 3.4 million families, more than a quarter (27%) of the total, received benefits from the C/QPP in 2001. In 1981, just 1.3 million families received benefits (based on the Survey of Consumer Finances). Over the same period, total benefits paid by C/QPP jumped from $3 billion to $26 billion. On average, recipients in 2001 received $4,800—three times more than their counterparts in 1981 (unadjusted for inflation).
Do C/QPP benefits constitute a larger part of family income than in the past?
Yes. C/QPP benefits accounted for 16% of family income in 2001 compared with 10% in 1981, even as average income of recipient families grew by 17%. (Table 2).6
Over the same 20-year period, mean real income of the elderly with C/QPP benefits rose 22%—from $35,700 to $43,600. C/QPP benefits contributed 17 cents to each dollar of income in 2001 compared with 11 cents in 1981. Moreover, the gap between incomes of the elderly and of families with a major income recipient under 55 years narrowed considerably—from 32% in 1981 to 11% by 2001 (Table 3).
The influence on family incomes should continue to grow as more participants retire with full or nearly full benefits and the number of beneficiaries per family climbs as a result of the increased participation of women in the labour force.
Do C/QPP benefits help keep families out of low income?
Yes. In 1981, 42% of all recipient families would have fallen into low income if not for their C/QPP benefits. By 2001, this proportion of vulnerability reached 85%.
Among elderly families, fewer with C/QPP benefits had low incomes than those without benefits. However, non-elderly families with C/QPP benefits had a greater incidence of low income.
Is there a relationship between the C/QPP and Old Age Security?
No. The Old Age Security (OAS)7 program predates the C/QPP and is the other main government transfer to senior families. Unlike C/QPP retirement benefits, OAS payments are based on residency rather than past contributions. Another difference is that OAS payments can be reduced ('clawed back') at higher income levels, whereas other sources of income do not affect C/QPP retirement benefits. As more senior families have become eligible and the average retirement benefit has increased, the C/QPP has become the larger source of income.
In both 1981 and 2001, these two programs provided the lion's share of government transfer payments to senior families, at 92% and 91% respectively (Table 4). In 1981, OAS was the more important, accounting for 62% of transfers compared with 30% from the C/QPP. Twenty years later, the C/QPP share had jumped to 43% while OAS had dropped to 48%.
Even among senior families not receiving C/QPP benefits, OAS payments represented a declining proportion of both income and transfers. In 1981, such families received 44% of their income in transfers, and 87% of these transfers were simply the OAS benefits. Twenty years later, they were receiving 32% in transfers with 70% being OAS benefits.
- The Canada and Quebec Pension Plans are mandatory for nearly all workers.
- The plans provide pension and disability benefits to participants, and survivor and death benefits to their families.
- The C/QPP is funded by employee and employer contributions and investment income on the accumulated annual surpluses. A change to steady-state financing ensures the long-term actuarial stability of the plans and increases intergenerational equity.
- Contribution rates have increased to support the fiscal position of the plans, from 1.8% of maximum pensionable earnings in 1986 to the 2003 level of 4.95%. This rate is paid by both employees and employers, so the self-employed pay a rate of 9.9%.
- In July 2003, the maximum retirement benefit was $801.25. The average, however, was much lower: $448.21 for the CPP and $370.99 for the QPP.
- In 2001, 91.1% of elderly families received C/QPP benefits, averaging one-sixth of their total income.
- C/QPP payments have been growing in importance relative to the other main transfer to elderly families—Old Age Security.
Data sources and definitions
HRDC's The ISP Stats Book 2003, and the 2001/2002 Annual Report of the CPP; Canada Customs and Revenue Agency statistics for the calendar year 2001; Statistics Canada's CANSIM database.
The 1982 Survey of Consumer Finances (SCF) for 1981 income, and the 2002 Survey of Labour and Income Dynamics (SLID) for 2001 income. The survey estimates of C/QPP benefits compared well with the administrative data-85.1% for the 1982 SCF compared with 91.7% for the 2002 SLID. The higher reconciliation with SLID is largely due to the authorized matching of respondents' tax records compared with personal interviews in the SCF. Estimates from the surveys are subject to sampling and non-sampling errors.
Yearly maximum pensionable earnings (YMPE): Approximates the average Canadian wage based on Statistics Canada's industrial aggregate wage.
Yearly basic exemption (YBE): roughly 10% of the YMPE. Since 1996, its value has been fixed at $3,500.
Yearly maximum contributory earnings (YMCE): Equals (YMPE - YBE). The rate of C/QPP contribution is applied to these earnings in order to calculate a person's annual contribution.
Family refers to economic families and unattached individuals. An economic family is a group of persons sharing a common dwelling and related by blood, marriage (including common law) or adoption. An unattached individual lives alone or with unrelated persons.
An elderly family is one with a major income recipient aged 65 or over.
Spouses include common-law and same-sex partners.
Major income recipient: the person in the family with the highest income before tax. If two persons have exactly the same income, the older one is considered the major income recipient. The concept of major income recipient was used for the 2001 income data from the Survey of Labour and Income Dynamics (SLID). For 1981 income data from the Survey of Consumer Finances (SCF), the age of the family head was used. The husband was treated as the head in husband-wife families, and the parent in lone-parent families. The two concepts are not identical but similar enough not to distort any comparison of family income between 2001 and 1981.
Pre-tax family income: Sum of incomes received from all sources by family members, aged 16 and over for SLID, and 15 and over for SCF, over a calendar year. Sources include wages and salaries, net income from farm and non-farm self-employment, investment income (interest earned, dividends, net rental income, etc), government transfers, retirement pension income, and alimony. Excluded are income in kind, tax refunds, and inheritances.
Government transfers: All direct payments from federal, provincial and municipal governments to individuals or families. These include child tax benefits, Old Age Security, Guaranteed Income Supplement (GIS), Spouse's Allowance (SA), C/QPP benefits, Employment Insurance benefits, social assistance, workers' compensation benefits, GST and provincial tax credits, and other government transfers.
Low-income family: Families are classified using the pre-tax, low-income cutoffs for 1981 and 2001 (1992 base), published by Statistics Canada. For more details, see Income in Canada, 2001 (Catalogue no. 75-202-XIE).
1966: The plans came into effect. The federal government and nine provinces agreed on CPP while the province of Quebec opted to operate its own plan.
1970: The first disability pension was paid.
1974: Annual adjustments were introduced to reflect the full cost-of-living increase as measured by the Consumer Price Index.
1975: The CPP no longer required persons aged 65 to 70 to retire from regular employment before receiving benefits. The QPP followed suit in 1977.
1976: Full retirement benefits became payable on the plans' 10th anniversary. From 1967 to 1975, 10% of the potential maximum retirement benefits were paid.
1978: Splitting of CPP pension credits earned during a marriage was allowed in the event of a divorce or annulment.
1980: Employment of a spouse in an unincorporated family business was considered pensionable employment if the remuneration was deducted under the Income Tax Act.
1987: Persons were allowed to claim reduced benefits at 60 or increasing benefits after 65 up to age 70. Also, the contribution rate began to increase.
1988: Contributions were changed from a tax deduction to a non-refundable tax credit of 17% of contributions.
1998: The CPP Investment Board was created to manage and invest accumulated savings and contributions not used to pay benefits.
1999: The QPP extended benefits to common-law (including same-sex) surviving partners. The CPP implemented this provision in 2000.
Source: Anderson (2003)
A C/QPP retirement pension is about 25% of a person's average pensionable earnings, adjusted to reflect the average of the last five-year maximum pensionable earnings.
Full benefits are payable at age 65, but may begin as early as 60. Between age 60 and 65, the pension is reduced by 0.5% for each month (6% a year) preceding the 65th birthday, and increased the same amount for every month it is deferred past 65. In other words, contributors could decide to draw 100% of their benefits at age 65, 70% at age 60, or 130% at age 70. Those waiting until after 70 are not entitled to more than the 30% increase. After age 65, a retirement pension can be drawn irrespective of any other source of income. After 70, no contributions are made to the plan.
Contributors receive the maximum retirement pension at age 65 provided they have made contributions each year at the maximum level over the contributory period. Also, spouses in an ongoing relationship who are both contributors may share their retirement pension payments if they are 60 or over. The shared portion depends on the time spouses have lived together during their contributory periods and cannot exceed 50%.
Individuals are considered disabled if they are unable to pursue any substantially gainful employment because of a physical or mental disability. A person applying for a disability pension must supply the Minister of Human Resources Development Canada (HRDC) with a medical report on the disability along with a statement of earnings, education, employment, occupation, and day-to-day activities. Under current rules, to qualify for disability benefits, a person must have contributed to the plan for at least four of the previous six years. The monthly disability pension is a fixed sum plus 75% of the contributor's retirement pension. If approved, the pension commences in the fourth month following the month in which the contributor is considered to have become disabled. Since these benefits are not pensionable earnings, recipients are not required to make C/QPP contributions.
The disability pension stops in the month in which the recipient is no longer considered disabled, or at age 65 (when the disability pension is replaced by a retirement pension), or the month of death.
Children of disabled contributors also receive a pension if the contributor qualifies.
Pensions are payable to surviving spouses and dependent children provided the deceased contributor had contributed for the minimum qualifying period-one-third of the time between age 18 and date of death (minimum of three years) or 10 years, whichever is less. A surviving spouse aged 65 and over who has not contributed to the plan is entitled to receive 60% of the deceased contributor's retirement pension. Between age 45 and 64, a fixed monthly sum plus 37.5% of the deceased contributor's retirement pension is paid. Under 45, benefits are further reduced by 1/120 for every month the spouse is less than 45. Under 35, with neither disability nor dependent children, surviving spouses are not entitled to benefits until they reach 65. If a surviving spouse is entitled to both a disability and survivor pension, the combined amount cannot exceed the maximum disability benefit. Benefits are not terminated on re-marriage.
This benefit is paid as a lump sum to a deceased contributor's spouse or estate. It amounts to six times the deceased contributor's monthly pension, to a maximum of $2,500.
Once benefits have been established, they are adjusted each January by the annual rate of inflation measured in terms of the increase in the consumer price index as of the previous September.
Under the Income Tax Act, C/QPP benefits received are taxable. Prior to 1988, contributions were tax deductible, but have since changed to a non-refundable tax credit of 17% of contributions.
Administration of the CPP and QPP
The CPP is a separate account established by the Government of Canada. It records contributions, pensions and other benefits paid, interest income, and other administrative expenditures. The contributions are collected by the Canada Customs and Revenue Agency; benefits are determined and paid out on application to Human Resources Development Canada (HRDC). Any change in the rate of contribution, type and level of benefits, investment policy, or administration must be done through an act of Parliament. Changes require the agreement of at least two-thirds of the provinces representing at least two-thirds of the population.
As joint stewards of the CPP, the federal and provincial ministers of finance review the plan's financial situation every three years and make recommendations on changes to benefits or contributions. (They last met in December 2002.) Their decision is based on factors such as changing demographics, the economic situation, and the Chief Actuary's report on the financial soundness of the plan in the short, medium and long term. Under the legislation, this report is required every three years (in the year before the legislated ministerial review of the plan). The investment of unused annual contributions along with other accumulated investments are administered by the CPP Investment Board, created in 1998, which operates at arm's length from government.
The QPP is administered by the Régie des rentes du Québec, and its funds are managed by the Caisse de dépôt et placement du Québec, which operates independently from the Quebec government. The province of Quebec participates in all decisions affecting the CPP.
The CPP provides appeal procedures to resolve conflicts pertaining to both contributions and benefit claims. In the case of contributions, employees, employers or their representatives may appeal to the Minister of Revenue. If the Minister's decision is not acceptable, then within 90 days from the date of decision, a person can appeal to the Tax Court of Canada, whose decision is final and binding (subject to judicial review by the Federal Court). Similarly, beneficiaries or their representatives may file an appeal with the Minister of HRDC to review benefit claims. If the Minister's decision is not acceptable, it can be appealed within 90 days to the Office of the Commissioner of Review Tribunals. If this decision is not acceptable to either HRDC or the applicant, the appeal can be made to the Pension Appeals Board, whose decision is final (subject to judicial review by the Federal Court).
- Besides C/QPP retirement benefits, Canadians draw income from the publicly funded Old Age Security program, employer pension plans, RRSPs, annuities, earnings, personal savings, and other social assistance. Income in kind and the imputed value of owner-occupied homes are excluded.
- Canada's population is aging. In 2002, those 60 and over accounted for 17.0% of a population of 31.4 million, compared with 11.6% of the 22 million in 1971. As a result, the number of contributors to the C/QPP is likely to fall whereas the number of recipients will rise, resulting in a lower contributor/recipient ratio. In 2001, there were 342 recipients for every 1,000 contributors, compared with 122 in 1981.
In recessionary periods, the relatively higher rate of unemployment coupled with stagnant earnings may adversely affect C/QPP revenues but not expenditures (assuming that the recession does not encourage some to retire).
Persons claiming CPP disability benefits increased from 90,522 in 1981 to a peak of 298,966 in 1996, dropping to 281,263 by 2002; QPP numbers for the same years showed a steady increase—22,037; 47,460; and 57,041.
- Provinces have the option to renew maturing bonds for one term at market rates.
- Dependent children fall into two categories: under 18 years of age, or 18 to 25 and attending college or university full time.
- In 2001, the maximum monthly retirement benefit from the C/QPP was $775, or $9,300 a year, which in turn was less than the 1992-base low-income cutoff, which ranged from $10,201 for an unattached individual in a rural area to $15,559 for someone in an urban area with a population of 500,000 or more.
- The focus in this section is a family, including unattached individuals, since family income is a better measure of a family's economic well-being. Since unattached individuals could form a family over time and vice-versa, the analysis in this part is based using family as a unit (including unattached individuals).
- The OAS program provides a flat rate pension to Canadians aged 65 years and over. The amount depends on the recipient's age and years of residency in Canada (minimum 10). Full benefits are paid after 40 years of residency. Although the basic pension is paid to all those eligible, it can be clawed back, depending on income, when the income tax return is filed. In 2002, those with incomes up to $57,879 kept the full benefits; those between $57,880 and $92,434, partial; and those with $92,435 and over, none. OAS benefits are adjusted quarterly by the change in the consumer price index (CPI). In the calendar year 2002, the average monthly OAS payment was $431.62. OAS benefits are taxable.
Under the Old Age Security Act, a recipient of OAS benefits may receive a Guaranteed Income Supplement (GIS), depending on source and amount of income. This supplement is also adjusted quarterly by the change in the CPI. The average monthly GIS payment in 2002 was $321.56. Also pensioners' spouses and widowed persons aged 60 to 64 who have lived in Canada for a minimum of 10 years after age 18, and who qualify after an income test, are eligible to receive a monthly Spouse's Allowance or Widowed Spouse's Allowance. Its average monthly payment was $360.54. For more details on these programs, see CCH (1999) or HRDC (2003).
- Anderson, Robert D. 2003. "Canada and Quebec Pension Plans." In Canada's retirement income programs: A statistical overview (1990-2000). Chapter 2B. Statistics Canada catalogue no. 74-507-XIE. Ottawa.
- CCH Canadian Limited. 1999. Your Canada Pension Plan, 1999. North York, Ont.
- Human Resources Development Canada (HRDC). 2002. Annual report of the Canada Pension Plan, 2001-2002. Ottawa.
- ---. 2003. The ISP stats book 2003. Ottawa. Internet: www.hrdc-drhc.gc.ca/isp/studies/trends/stats_e.shtml.
Raj K. Chawla and Ted Wannell are with the Labour and Household Surveys Analysis Division. Raj Chawla can be reached at (613) 951-6901, Ted Wannell at (613) 951-3546, or both at firstname.lastname@example.org.
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