Backgrounder: A Stronger Canada Pension Plan
The Government of Canada is committed to helping Canadians achieve a safe, secure and dignified retirement. As joint stewards of the Canada Pension Plan (CPP), the federal and provincial Ministers of Finance review the CPP every three years to ensure it continues to respond to the needs of retirees, workers and employers.
As part of the 2016-2018 Triennial Review, the Ministers agree in principle to move forward with five changes to CPP benefits, as well as regulations to ensure the sustainability of the CPP Enhancement, and will make best efforts to bring these changes into force by January 1, 2019. These changes would not require increases to legislated contribution rates.
Further details on the changes will be forthcoming once legislation and regulations are developed.
Base CPP and CPP Enhancement
The CPP is a mandatory public pension plan financed by employer and employee contributions and provides a “defined benefit” in retirement based on an individual’s contributory history. The Base CPP retirement benefit replaces a maximum of one-quarter of pensionable earnings, with an earnings limit that approximates the average Canadian wage.
Following federal and provincial approval to enhance the CPP, legislation was brought into force in March of 2017. Once mature, the CPP Enhancement will increase the maximum CPP retirement pension by about 50 per cent.1 The CPP Enhancement will also increase the survivor and disability pensions.
Further support for parents and persons with disabilities in the CPP Enhancement
On December 11, 2017, Finance Ministers agreed in principle to introduce features to the CPP that help further protect the value of retirement benefits during periods of low or no earnings for parents and persons with disabilities. The mechanism used will take the form of a “drop-in”. Drop-in provisions are a feature of public pensions in many jurisdictions intended to help protect the value of benefits during periods of low or no earnings (e.g., due to child rearing or disability). An imputed income is assigned for these periods for the purposes of calculating retirement benefits. This approach is also consistent with the design of the CPP Enhancement.
Child rearing drop-in
The proposed measure would support parents who stop working or reduce their work hours to become the primary caregiver to their young children. In each year while a child is under the age of seven, the CPP Enhancement would “drop in” an amount equal to the parent’s average earnings during the five years prior to the birth or adoption of the child, if that amount is higher than their actual earnings during that period. This would increase the pensions of parents who reduce their income to take care of their children. About 125,000 people each year, mostly women, would benefit from this.
The proposed measure would support people with severe and prolonged disabilities by “dropping in” earnings for the years when they received the CPP disability pension. The drop-in amount would be 70 per cent of their average earnings in the six years prior to the onset of the disability. This would increase retirement pensions for people with disabilities, as well as their spouse or common-law partner’s survivor’s pension. All disability beneficiaries would benefit when they retire. The number of beneficiaries is projected to increase from 42,000 in 2019 to more than 400,000 in 20 years.
Other measures to improve the CPP
Eliminating the reductions in survivor’s pension for survivors under age 45
Under the current CPP rules, survivors who are not disabled and do not have dependent children have their survivor’s pension reduced by 10 per cent for each year they were under the age of 45 when their spouse or common-law partner died. This reduction lasts until age 65, when the survivor’s pension is recalculated. This means that survivors under the age of 35 who are not disabled and do not have dependent children do not receive a survivor’s pension until age 65.
With the proposed measure, survivors would no longer have their survivor’s pension reduced or eliminated due to their age at the time they become widowed. This means that the surviving partner or spouse of any CPP contributor who made enough contributions would receive an unreduced survivor’s pension. In total, around 40,000 individuals are estimated to benefit from the proposed change in 2019, about half of them being young survivors who would become eligible to receive their survivor’s pension before age 65.
Providing disability protection for retirement pension recipients under age 65
At present, recipients of the CPP retirement pension who become disabled cannot receive the larger CPP disability pension, even if they are still under age 65 and otherwise meet eligibility requirements.
With the proposed measure, the CPP would provide an additional payment to recipients of the retirement pension who develop a severe and prolonged disability while under the age of 65. It is estimated that 3,600 individuals would benefit from the change in 2019. This number would increase to about 8,000 by 2024.
Changes to the death benefit
The death benefit is a one-time, lump sum payment made to a CPP contributor’s estate. It is equal to six months of the deceased contributor’s CPP retirement pension at age 65, up to a maximum of $2,500.
With the proposed measure, this benefit would be converted to a flat-rate payment of $2,500 for all eligible contributors, regardless of actual earnings. This change would be particularly beneficial for families of lower-income workers.
Financial sustainability regulations
Ministers also agreed to move forward with regulations to ensure that Canadians can be confident that the CPP Enhancement remains appropriately funded over time. These regulations will set out:
- The methodology for the actuarial calculation of the funded state of the CPP Enhancement;
- The acceptable range of the minimum contribution rates, as determined by the Chief Actuary, vis-à-vis the legislated rates; and,
- The default mechanisms to bring the Plan back to sustainability, in the event that the minimum contribution rates are calculated to be outside their prescribed range and Ministers cannot reach an agreement on Plan changes.