Question Period Note: CANADA PENSION PLAN – GENERAL

What is the Canada Pension Plan and its enhancement?

• The Canada Pension Plan provides contributors and their families with partial income replacement in the event of their retirement, disability or death. Its benefits are intended to provide a secure base upon which individuals can add income from other sources, such as Old Age Security benefits, workplace pension plans and personal savings, to address their particular financial circumstances.

• The Canada Pension Plan was enhanced to increase the retirement security of today’s workers. Once mature, the enhancement will increase the Plan’s income replacement from one-quarter to one-third of pensionable earnings and also increase the amount of covered earnings. Benefits under the enhancement will grow slowly over time as individuals work and contribute.
• Canada Pension Plan benefits are fully indexed annually to ensure they don’t lose spending power, even in the face of a rising cost of living.
• Canadian workers can count on the Canada Pension Plan. The Office of the Chief Actuary confirms that it is sustainable for the long term at its current contribution rates.

The Canada Pension Plan (CPP) is a self-funded contributory social insurance program that provides partial income replacement for Canadian workers and their families in the event of retirement, disability or death. All monthly CPP benefits are indexed annually. The CPP covers employed and self-employed persons in Canada (outside of Québec). Québec has a separate but comparable Québec Pension Plan.

Originally, the CPP replaced 25 percent of average annual earnings below the Year’s Maximum Pensionable Earnings, which is approximately the average wage and is set at $68,500 in 2024. This is now called the base component of the Plan.

The CPP enhancement, which began its seven-year phase-in on January 1, 2019, works as a top-up to the base component of the Plan. The CPP enhancement will increase the CPP’s total income replacement rate from one-quarter (25.0%) to one-third (33.33%) of pensionable earnings. It will also increase the limit on pensionable earnings by 14 percent by 2025. Together, these two changes will increase the maximum retirement pension by more than 50 percent for today’s youngest workers.

In 2023, the first part of the phase-in was completed, with the CPP enhancement contribution rate reaching its permanent level of 1 percent (paid by employers and employees) on earnings up to the base CPP’s earnings limit, for a combined contribution rate (base and enhancement) of 5.95 percent (paid by employers and employees). The increase to the earnings limit is being phased-in in 2024 and 2025, and workers with earnings above the base CPP limit will contribute at a rate of 4 percent on those earnings, up to the new enhanced limit (employers will match these contributions). Self-employed individuals pay both the employee and employer shares.

The CPP enhancement is fully funded, as required by law. As a result, benefits will grow slowly over time as individuals work and contribute. Each year of contributing to the enhancement will allow workers to accrue partial additional benefits, with fully enhanced benefits available 40 years after full implementation. Monies cannot be transferred between the base and enhanced components.

To preserve their spending power, CPP benefits in pay are indexed each year in January based on increases in the Consumer Price Index (CPI). CPP legislation contains a guarantee that benefits can never be reduced, even in the event of a decline in the CPI. In 2024, benefits increased by 4.4%, compared to the previous year.

The CPP falls under the joint responsibility of the federal and provincial governments. As a result, the Government cannot make changes to the CPP unilaterally. Rather, major changes to the CPP, including its financing, require an Act of Parliament and the formal approval of two-thirds of provinces representing two-thirds of the population (including Québec, due to the fact that it provides a plan deemed comparable to the CPP).

CPP legislation requires that federal and provincial Ministers of Finance review the financial status of the Plan, including its benefits and contributions, every three years, to ensure its sustainability and to ensure that its benefits remain relevant in the face of the evolving needs of Canadians. Finance Canada leads the Review for the Government of Canada, with support from Employment and Social Development Canada (ESDC).

The 2022-2024 Triennial Review began in December 2022, when the Chief Actuary tabled the 31st Actuarial Report on the CPP in Parliament, demonstrating that the Plan remains sustainable at its current contribution rates for at least the next 75 years. Following that, federal and provincial officials studied various potential reforms and Canada’s Finance Ministers agreed at the end of 2023 to introduce a package of five modest reforms to come into force in January 2025. Those changes include:
• Adding a top-up of $2,500 to the CPP death benefit for contributors who die before claiming a retirement or disability pension and leave behind no survivor;
• Introducing a new CPP children’s benefit for part-time school attendance;
• Preserving eligibility for the Disabled Contributor’s Child Benefit in cases where the disabled contributor reaches age 65 and no longer receives a disability benefit;
• Extending the CPP’s incapacity provisions to also protect the disabled contributor’s child benefit; and
• Ending entitlement to the CPP survivor’s pension benefit for separated, but legally married individuals that request a CPP credit split in 2025 or thereafter.

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