Canada Pension Plan

From 1966 to 1996, the contribution rate was 3.6 per cent. The rate was 1.8 per cent for employees (and a like amount for their employers) and 3.6 per cent in respect of self-employed earnings. By 1997, this had reached combined rates of 6 per cent of pensionable earnings.

By the mid-1990s, the 3.6 per cent contribution rate was not sufficient to keep up with Canada's aging population.[10] and it was concluded that the "pay-as-you-go" structure would lead to excessively high contribution rates within 20 years or so, due to Canada's changing demographics, increased life expectancy of Canadians, a changing economy, benefit improvements, and increased usage of disability benefits (all as 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 major review process, 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 once again. As a direct result of this public consultation process and internal review of the CPP, 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 per cent of pensionable earnings in 1997 to 9.9 per cent by 2003.
• Continuously seek out ways to reduce CPP administration and operating costs.
• Move towards 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 per cent funded by 2014, such funding ratio to constantly increase thereafter towards 30 per cent by 2075 (that is, the CPP Reserve Fund will equal 30 per cent of the "liabilities" - or accrued pension obligations).
• Create the CPP Investment Board (CPPIB).
• Review the CPP and CPPIB every 3 years.

As of 2019, the prescribed employee contribution rate was 4.95 per cent of a salaried worker's gross employment income between $3,500 and $57,400, up to a maximum contribution of $2,668. The employer matches the employee contribution, effectively doubling the contributions of the employee. Self-employed workers must pay both halves of the contribution, or 9.9 per cent of 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.[11] 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 per cent of men in 1971 to 25 per cent by 2011.[11] 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.[11]

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 individuals work and make contributions. Additionally, the enhancement of the Canada Pension Plan 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 per cent) of covered earnings, up from the quarter (25 per cent) provided prior to the enhancement. Additionally, the maximum amount of income covered by the CPP will increase by 14 per cent 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[7]). The combination of the increased replacement rate and increased earnings limit will result in individuals receiving retirement pensions 33 per cent to 50 per cent higher, depending on their earnings across their working years. (The maximum retirement pension will increase by 50 per cent, 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).[11]

To finance the expanded pensions and maintain the soundness of the plan, contributions to the CPP from workers and their employers will each rise 1 per cent from current levels, to 5.95 per cent over the existing band of covered earnings. This increase will be phased in over 5 years, starting in 2019. The increase to the earnings threshold will be phased in over 2 years, starting in 2024. Workers and their employers will contribute 4 per cent on earnings in this range (which is to say earnings above the normal earnings limit and below the new increased one). To ease the impact of the increased contribution on near-term disposable income, worker contributions will become tax-deductible.[11]

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. Such a 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.[12]

The enhancement to the CPP will be fully funded, such that each generation will contribute and pay for the benefits they receive. 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 Canada Pension Plan has an enormous unfunded liability. As at December 31, 2015, the unfunded liability was $884 billion, which is the difference between CPP's liabilities of $1.169 trillion and the CPP's assets of $285 billion.[13]

The unfunded liability is increasing at a rate of about $25 billion per year. The unfunded liabilities reported in the last few Actuarial 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.[17] This approach uses a different definition of the term "assets". "Assets" are the sum of: (i) the CPP's current assets and (ii) the present value of future contributions for the next 150 years, totalling $2.544 trillion.[17]

Unlike most pension plans, the unfunded liability is not reported on the balance sheet of the Canada Pension Plan's financial statements.[18] Consequently, the balance sheet reports that the CPP's assets exceed its liabilities by $269 billion as at March 31, 2015.

The projections in the actuarial reports fluctuate over time. For example, as at Dec 31, 1997 the projected contributions for the year 2040 were $170 billion.[19] However, in the Dec 31, 2015 actuarial report the projected contributions for the year 2040 were only $117 billion.[20]

The projected CPP contributions for 2040 were:

• per 1997 Actuarial Report - $170 billion [19]
• per 2000 Actuarial Report - $146 billion [21]
• per 2003 Actuarial Report - $136 billion
• per 2006 Actuarial Report - $132 billion [22]
• per 2009 Actuarial Report - $130 billion [23]
• per 2012 Actuarial Report - $127 billion [24]
• per 2015 Actuarial Report - $117 billion [20]

Similar reductions were reported for all other forecast years.

The projected return on investment on CPP assets has decreased over time. The projected long-term returns were:

• per 2000 Actuarial Report - 7.15 per cent [25]
• per 2003 Actuarial Report - 6.81 per cent [26]
• per 2006 Actuarial Report - 6.72 per cent [27]
• per 2009 Actuarial Report - 6.33 per cent [28]
• per 2012 Actuarial Report - 6.21 per cent [29]
• per 2015 Actuarial Report - 6.02 per cent [20]

The contribution rate was 9.9 per cent prior to 2012. In accordance with the 2011-12 Budget of the Government of Quebec, the contribution rates were increased by 0.15 per cent per year for six years from 2012 to 2017. Consequently, the contribution rate increased to 10.8 per cent for 2017 and subsequent years.[31][32][33]