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 and personal savings and investments, 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.

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 sustainable 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.

The CPP replaces 25 percent of average career earnings up to the Year’s Maximum Pensionable Earnings which is approximately the average wage and is set at $66,600 in 2023.

The CPP enhancement began its seven-year phase-in on January 1, 2019. The CPP enhancement will increase income replacement rate from one-quarter to one-third of pensionable earnings. It will also increase the limit on pensionable earnings by 14 percent by 2025. Together, these two changes will increase retirement pensions by between 33 percent and 50 percent, depending on an individual’s career earnings.

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 will be 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 enhanced CPP will be fully funded. 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.

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. Following that, Canada’s Finance Ministers agreed to a set of priorities for this Triennial Review at their February 3, 2023, meeting. Officials are currently working together to develop potential reform packages to present to Finance Ministers in the Fall of 2023. Approvals of those amendments will be sought at the next meeting of Canada’s Finance Ministers. Should there be an agreement on a reform package, legislation would follow in 2024, with reforms likely to begin in 2025 after provincial Orders-in-Council are received.

None