Changes to the Canada Pension Plan Coming

In this Update, I am sharing some information* from the Government of Canada about proposed future changes to the Canada Pension Plan (CPP). As the CPP is a key component of the income security system, it is important for community members to be informed about how it will be evolving.

The federal and provincial Ministers of Finance review the CPP every three years. 

As part of the 2016-2018 Triennial Review, the Ministers agreed in principle to make five changes to the CPP and its regulations to ensure the sustainability of the CPP Enhancement.  These changes are expected to come into force by January 1, 2019 and will not increase contribution rates.

Base CPP and CPP Enhancement

The CPP is a mandatory public pension plan.  Employers and employees contribute to it.  The CPP provides a “defined benefit” in retirement based on an individual’s contributions. The Base CPP retirement benefit replaces a maximum of one-quarter of pensionable earnings, with an earnings limit that approximates the average Canadian wage.

Legislation came into force in 2017, to enhance the CPP.

Up until 2019, the CPP retirement pension replaces one quarter of your average work earnings. This average is based on your work earnings, up to a maximum earnings limit each year. Other sources of income—such as the Old Age Security program, workplace pensions and private savings—make up the rest of your retirement income.

In 2019, the CPP will begin to grow to replace one third of your average work earnings. The maximum limit used to determine your average work earnings will also gradually increase by 14% by 2025.

As a result, pension amounts will increase by more than 33%. Your pension will increase based on how much and for how long you contribute to the enhanced CPP. You will get the full increase if you contribute to the enhanced CPP for 40 years.

The enhancement also applies to the CPP post-retirement benefit. If you are receiving the CPP (or QPP) retirement pension and you continue to work and make CPP contributions in 2019 or later, your post-retirement benefits will be larger.

Further support for parents and persons with disabilities in the CPP Enhancement

On December 11, 2017, Finance Ministers agreed to introduce “drop in” measures to the CPP to protect the value of retirement benefits from periods of low or no earnings for parents and persons with disabilities. During these periods an estimated income is used for the purpose of calculating retirement benefits.

Disability drop-in

The proposed measure would benefit 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. It is expected the number of beneficiaries could increase from 42,000 in 2019 to more than 400,000 in 20 years.

Child rearing drop-in

The proposed measure would benefit parents who stop working or reduce their work hours to look after their young children. 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.

Other measures to improve the CPP

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. Approximately 3,600 individuals would benefit from the change in 2019.

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.

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.

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.

~ Jewelles Smith
  Chairperson
  Council of Canadians with Disabilities

*The information in this Update is based upon:
“Canada Pension Plan enhancement” available at https://www.canada.ca/en/services/benefits/publicpensions/cpp/cpp-enhancement.html
“Backgrounder: A Stronger Canada Pension Plan” available at http://t http://www.fin.gc.ca/n17/data/17-122_2-eng.asp