The Canada Pension Plan (CPP) is major part of Canada's public retirement income system. It is an earnings-related and contributions based, state backed pension scheme.
The other components of Canada's retirement system are:
- The state paid non contributory Old Age Security (OAS).
- Employer-sponsored private pensions
- Registered Retirement Savings Plan (RRSP), which are tax-deferred individual savings
Who’s in the Canada Pension Plan?
All Canadian employees over 18 have to contribute part of their salary to the Canada Pension Plan. The current contribution is 4.95%, which is matched by the employer. Self employed workers are also in the scheme. Self-employed workers must pay both the employee’s and employer’s shares of the contribution, which means they contribute 9.9% of their salary.
How it’s funded
The Canada Pension Plan is a hybrid between fully funded and pay-as-you-go plans. Fully funded plans are backed by income from investments, usually stocks. Pay as you go plans do not purchase investments, paying the liabilities out of current contributions. Under the present scheme it is expected to be stable for the next 75 years, without increasing contributions.
Until 1997 the Canada Pension Plan was funded purely as a pay as you go plan, but this was widely regarded as unstable with the growing proportion of retirees in the population. The contributions were increased by 40% over time to allow for an asset base to be built up. The Canada Pension Plan Investment Board was created as an independent crown corporation to manage this and it set up the Canada Pension Plan Reserve Fund to hold the assets like a normal private pension fund.
Currently the asset allocation is fairly aggressive, with publicly quoted stocks making up 51.8% of the fund, with fixed income at 25.6%, private equity of 10.9% and inflation sensitive assets at 11.7%. In 2007 45% of the fund's assets were invested abroad, largely in Western Europe and the United States.
The normal retirement age is 65, although it is possible to collect a reduced pension at 60. The normal payments are 25% of the average contributory maximum over a pensioner’s working life. This average can be raised by ignoring lower earnings years due to reasons such as raising children or disability. Benefit payments from the Canada Pension Plan are taxable in the same way as ordinary income.
Survivor benefits can also be paid out if a worker dies before collecting the benefits. Disability pensions can also be paid out at an earlier age if the worker becomes disabled due to work. Outside Quebec the Canada Pension Plan is run by Human Resources and Social Development Canada.
Quebec Pension Plan (QPP)
Although under the Canadian constitution all provinces can opt out of the Canada Pension Plan, so far only Quebec has done so. Quebec operates the Quebec Pension Plan, which although separate runs under broadly the same principles. As with the Canada Pension Plan, the Quebec Pension Plan benefits are taxed as normal income by both the federal government and by Quebec.