Ten things to know about the CPP debate

This fall, Canada’s Parliament will debate a recent proposal to expand the Canada Pension Plan (CPP).[1] Indeed, since the 2008-2009 world financial crisis, Canada has witnessed a renewed public debate on the CPP.  Two factors have prompted this. First, as a result of the crisis, employer-sponsored pension plans lost substantial value. Second, partly in response to this loss in value, many employers either reduced their pension coverage or stopped offering them to workers altogether.

With all of the above in mind, here are 10 things to know about the CPP:

  1. The CPP is a mandatory social insurance program, compulsory for all Canadian workers. It is not financed by general tax revenues, but rather by workers and employers who each pay half of the total contribution cost. CPP often complements private employer-sponsored plans which are also jointly funded by employers and employees. The CPP was intended to pay out benefits amounting to 25% of the average industrial wage (i.e. average wage in the private sector). It was never intended to cover more than that. Early on, an earnings ceiling was set at the average industrial wage (i.e. no one could contribute beyond the ceiling; and you could only expect to get back 25% of the ceiling). The recent proposal to expand the CPP would increase the pay out (or ‘replacement rate’) from 25% to 33%. The recent proposal also seeks to increase the wage ceiling from $54,900 to $62,500.
  1. Politically, one can usually predict which groups will oppose, and which will favour, CPP expansion. Employers often view the mandatory CPP contributions as a payroll tax. For workers, contributions are considered deferred income and a form of forced savings to provide income security throughout retirement. Because employers see CPP as a tax, they are often opposed to CPP expansion; organized labour and retirement groups, by contrast, tend to favour it.  The recent CPP debate divided along these lines with the Canadian Labour Congress strongly campaigning for expansion and the Canadian Federation of Independent Business strongly opposing it. The government of Ontario, unhappy with the lack of progress on CPP expansion since 2010, had developed its own plan and was set to ‘go it alone’ unless an agreement was reached nationally to expand the CPP. A political compromise was reached in June 2016 for a scaled back version of the Ontario plan; that’s the proposal that will be debated in Canada’s Parliament this fall.
  1. The CPP was established in 1965 and implemented in 1966. It is viewed by political historians as one of the early examples of the “new federalism.” It was made possible by the election of a federal minority Liberal government led by Lester Pearson; and it was supported by the newly established New Democratic Party and by Jean Lesage (Premier of Quebec). Quebec’s support was crucial to provincial agreement with the plan. For the first 10 years, employers and employees contributed into the fund; but full benefits were not paid out until 1976, resulting in the creation of the Guaranteed Income Supplement (GIS) to bridge this gap. All of the provinces essentially signed on, although Quebec required that contributions collected in Quebec be put into a separate fund, namely, Le Régie des rentes du Québec. From its inception, the Government of Quebec would ensure that its pension fund would invest in the province. Contributions from workers in other provinces were collected by the federal government and lent back to the provinces; this money helped finance provincial infrastructure projects. Since the conditions of the Quebec and the Canada plan were the same, workers could move between provinces and continue their pension eligibility.
  1. The introduction of the CPP required a constitutional amendment in July of 1964. That’s because there was uncertainty as to whether the federal government had the authority to establish the CPP. The amendment made clear that this authority was not exclusive; the provinces also had the authority to introduce pension plans of their own, if they chose.  Still today, any major change to the CPP system must be approved by two-thirds of the provinces and territories, representing two-thirds of Canada’s total population. (This is more stringent than amending the Canadian Constitution, which requires support of seven provinces representing just 50% of Canada’s population.)
  1. One advantage of a publicly-administered pension plan is that administrative fees are lower.  A key argument for the CPP, as opposed to simply encouraging more private plans, is an actuarial one—i.e. a compulsory plan means a larger population to spread the risk and thus is more cost effective. The Management Expense Ratio (MER) is commonly used as a means to calculate and compare administrative fees for various plans; individual private mutual funds (e.g. Registered Retirement Savings Plans) have the highest MERs (i.e. cost to the holder) while the Canada Pension Plan Investment Board (CPPIB), the manager of the CPP funds, has one of the lowest.
  1. By the 1990s, a serious concern emerged: not enough money had been contributed to cover the liability that the fund was incurring (largely due to an aging population). This resulted in a national debate.  At end of the 1990s, the Chrétien government decided to increase the contribution rate from 5.85% to 9.9% over a six-year period. The government also announced that benefit levels would be reduced and that a new investment board would be created (ostensibly in an attempt to increase rates of return on invested funds).  The CPPIB was created by an Act of Parliament in 1997 to manage the funds it receives the from contributions from workers and employers outside Quebec—indeed, Quebec had already established its own fund (la Caisse de depots et placements) to invest contributions from Quebec. From 1997 on, the CPPIB has invested CPP funds in the stock market.  Today, the CPPIB’s assets are worth approximately $280 billion.
  1. CPP tends to advantage workers with strong labour market attachment; put differently, it’s not redistributive. Because the CPP benefits that a worker receives in retirement are based on the amount contributed into the fund, workers who make good salaries receive larger payouts than workers who earn less.  In other words, CPP extends income inequality among workers into retirement.
  1. Self-employed individuals pay ‘double premiums’—that is, they must pay both the employer and worker contributions. Back in the 1960s, those who designed the CPP generally felt this to be OK, in part because self-employed workers at that time were generally perceived to be receiving higher incomes (e.g. architects, lawyers, doctors, etc).  But in recent years, there’s been a proliferation of self-employed workers who have comparatively lower earnings (e.g. yoga instructors, Uber drivers, etc.). This adds a new twist into the current discussion.
  1. Today, CPP covers a smaller percentage of retiree income than similar schemes in most other OECD countries. In fact, even in the United States, the maximum benefit for the US-equivalent of the CPP is more than double the size of the maximum benefit in Canada. However, as noted in point #1, the objective of the CPP, in conjunction with Old Age Security and the GIS, was just to provide a base which would be built upon with private pensions and savings.  Consequently, the Canadian pension model is often viewed as being good in terms of poverty reduction, but ‘under developed’ in terms of income replacement for middle-income—and especially higher-income— earners.
  1. One pension expert has proposed that CPP be sufficiently expanded to the point where the need for private plans could be virtually eliminated. Indeed, a proposal by Bernard Dussault, Chief Actuary of the CPP in the 1990s, would provide a 70% replacement rate and thus effectively eliminate the need for all private pensions. Dussault’s proposal has been almost totally ignored by most politicians and journalists, possibly because the elimination of private pension plans would have negative implications for powerful people in the private pension world.  As noted many times by several pension commentators, political logic typically trumps actuarial logic.

Allan Moscovitch is Professor Emerita of Social Work at Carleton University. Richard Lochead is a retired public servant who researched the CPP debate between 2010 and 2016. Nick Falvo is Director of Research and Data at the Calgary Homeless Foundation.

The authors wish to thank Joel Harden, Michael Prince and Chris Roberts for feedback on an early draft. Any errors lie with the authors.

[1] For details on the proposed expansion, see this background document. For a news story on the ‘agreement in principle’ reached by most of Canada’s finance ministers in June, click on this link.

One comment

  1. The individual cap on contributions prevents high income earners (HIEs) using the CPP to replace their higher employment income. The act appears to have followed the philosophy of letting HIEs look after themselves. Financial intermediaries make substantial low risk profits on higher income earners investments (commissions and management fees) reducing the returns of HIEs. There is also no mechanism to insure that HIEs save for their retirement at all.

    High net worth individuals without employment income are locked out of the CPP system altogether. This is particularly galling for those who have assets that generate liveable, but not wealthy, levels of investment income and who have no access to a government guarantee for any portion of their future income stream indexed to inflation.

    The article does not touch on the disability benefit. CPP requires a much greater degree of disability than does US Social Security. One consequence is that older working class Americans claim the disability benefit while Canadians in similar positions have to turn to welfare or provincial programs for the disabled.

    In a truly bizarre twist, once you die, your estate cannot claim disability benefits. A friend died from brain cancer over a 6 month period, was disabled for all of those months, and supported financially by his spouse. Events moved so quickly, his care was so time consuming and his affairs were so complicated that no thought was given to the CPP benefit until after death.

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