Module 2 - Optimizing the Canada Pension Plan/Québec Pension Plan (CPP/QPP) for Income Security Flashcards
Describe the role of CPP/QPP in providing income security to Canadians
Pensions and benefits payable under CPP/QPP are in addition to the Old Age Security (OAS) pension. The objective of these public income security programs is not to provide an individual’s total retirement income. Rather, the combination of benefits paid by OAS and CPP/QPP is intended to ensure a basic level of retirement income for Canadians. CPP/QPP was initially intended to provide a contributor with a retirement pension of 25% of the person’s income, with income capped at Canada’s average industrial wage.
2019 enhancements to CPP/QPP, phasing in over a 7-year period that started January 1, 2019, have the objective of ultimately increasing target benefit levels to 33% of the person’s income. This objective will be achieved through:
1) A gradual increase in contributions rates every year over the 7-year period
2) In 2024 and 2025, an increase in the level of annual earnings subject to contributions (i.e., over and above the original earnings limit of the average wage in Canada).
These two steps mean that individuals will contribute more of their annual earnings to CPP/QPP which, along with their employers’ higher contributions, will finance the increases to the CPP/QPP benefit amounts.
Despite the enhancements being made to CPP/QPP, the objective of providing a basic retirement income and the maximum target benefit levels inherent in the plan design continue to give importance to private sources of retirement income such as employer-sponsored and individual retirement savings plans.
Enhanced benefits will gradually build up as individuals pay into the enhanced CPP, with maximum enhanced benefits achieved in about 40 years. Current retirees and those retiring before 2019 did not contribute to the CPP enhancement and therefore do not receive enhanced benefits.
Describe how the 2019 enhancements to the CPP/QPP are being implemented.
In keeping with the requirement for incremental full funding of new or higher benefits, contribution levels began increasing on January 1, 2019.
Each of the CPP/QPP has two sections. The first is known as the “Base Canada/ Quebec Pension Plan”, and it corresponds to all aspects of the CPP/QPP that existed before 2019. The second, corresponding to all aspects of the enhancements, is known as the “Additional Pension Plan.”
Two stages of contribution increases will fund the CPP/QPP enhancements. The increases are applicable to both employer and employee contributions while self-employed workers must pay both the employee and employer portion.
Stage one of CPP/QPP contribution increases applied to each of the years from 2019 through 2023 inclusive. Over this period CPP/QPP contribution rates increased 1%, from 4.95% to 5.95% for CPP and from 5.1% to 6.1% for QPP.
These contribution rates are applied to earnings up to the “year’s maximum pensionable earnings” (YMPE) in CPP and “maximum pensionable earnings” (MPE) in QPP. The original YMPE and MPE are called the “first earnings ceiling.”
In 2024 and 2025 CPP and QPP will be expanded to cover some earnings beyond the YMPE/MPE. This extended level of covered earnings will be known as the “year’s additional maximum pensionable earnings” (YAMPE) for CPP and “additional maximum pensionable earnings” (AMPE) for QPP, or more generally as the “second earnings ceiling.” For 2024 and 2025 the YAMPE/AMPE is defined as:
- In 2024 the YAMPE/AMPE will be 107% of the 2024 YMPE/MPE
- In 2025 the YAMPE/AMPE will be 114% of the 2025 YMPE/MPE.
After 2025 the YAMPE/AMPE will increase each year to reflect wage growth in Canada.
Tied to this increase in coverage is the implementation of an additional CPP/QPP contribution for those persons whose annual earnings are above the first earnings ceiling (the YMPE/MPE). For those persons, starting in 2024, contributions will be required in respect of earnings between the YMPE/MPE and the YAMPE/AMPE. The contribution rate applicable to that range of earnings will be 4% required by each of the employee and employer, with self-employed individuals contributing 8%.
Describe the legislative structures that govern the existence and operation of CPP/QPP.
CPP falls under federal jurisdiction and is governed by “An Act to establish a comprehensive program of old age pensions and supplementary benefits in Canada payable to and in respect of contributors” commonly cited as “the CPP Act.”
The CPP Act allows a province or territory to not be a part of the federal pension plan if it sets up a comparable program. Québec established the QPP to operate in that province in place of CPP. The legislation that governs the QPP program is the “Act respecting the Québec Pension Plan,” cited as the “QPP Act.”
CPP is administered by the Minister of Employment and Social Development Canada (ESDC). The Minister of National Revenue is responsible for collecting contributions. The Minister of Finance and its provincial counterparts are responsible for setting CPP contribution rates, pension and benefit levels, and funding policy. The Crown corporation, CPP Investments, is responsible for managing investments of the CPP assets.
QPP is administered by Retraite Québec. The Minister of Finance is responsible for setting QPP contribution rates, pension and benefit levels, and funding policy.
Revenu Québec is responsible for collecting contributions. The Caisse de dépôt et placement du Québec (CDPQ) is responsible for managing the investments of assets in respect of QPP.
Changes to CPP legislation governing the general level of benefits, the rate of contributions or the investment policy framework can be made only through an Act of Parliament. Notice of any proposed changes must be given by the federal government to each participating province (not including the territories). All such changes require the agreement of at least two-thirds of the included provinces, representing at least two-thirds of the population. Changes come into force only after two years’ notice unless all provinces waive this requirement.
Québec participates in decision making regarding changes to CPP, even though it administers its own plan, to help to ensure the portability of QPP and CPP across Canada.
Explain how CPP/QPP is funded.
CPP and QPP, unlike OAS, are not funded through general tax revenues. Both plans are “contributory” plans with contributions made by employees, their employers and self-employed people, and contribution rates are actuarially determined.
CPP was initially designed as a pay-as-you-go plan with a small reserve. Benefits for one generation would be largely paid from the contributions of later generations.
Several amendments to the CPP were put in place in the late 1990s with the goals of moving away from a pay-as-you-go financing method to one that now requires:
(a) Steady state funding to build a reserve of assets that would generate investment earnings to contribute to future benefits costs
(b) Incremental full funding of benefit increases or the addition of new benefits. That is, the cost of new or higher benefits would be paid as the benefit was earned, and any costs associated with benefits that were paid but not earned would be amortized and paid for over a defined period, consistent with actuarial practice.
The amendments also called for an increase to contribution rates from 1997 to 2023 inclusive, a reduced rate of benefit growth over the long term and the creation of the Canadian Pension Plan Investment Board (now called CPP Investments) to operate within private capital markets to achieve higher rates of return on CPP funds. Virtually identical changes were made to the QPP through this period; the QPP contribution rate increased to be slightly higher than required under CPP.
In 2016, an agreement was reached among all government stewards of CPP and QPP to increase benefits payable under both programs. In keeping with the requirement for incremental full funding of new or higher benefits, contribution levels began increasing on January 1, 2019.
Identify who is covered by CPP/QPP and required to contribute. (4)
Pensionable employment: Determines whether individuals are covered by CPP/QPP. Both CPP and QPP define pensionable employment as “all employment” with specific exceptions or other exceptions defined by legislation. Both employees and their employers (including the self-employed) must contribute to CPP/QPP.
Employee: Defined as an individual who is compensated for services performed and whose duties are under the control of an employer. To be covered by QPP, an employee must report to work at the employer’s establishment situated in Québec (or be paid from a Québec establishment if the employee does not have to report to work anywhere). Otherwise, the employee or self-employed individual in pensionable employment is covered under CPP.
Employer: Defined as any person liable to pay wages, salary or other remuneration for services performed in employment.
Self-employment: Defined as earning one’s livelihood directly from one’s own trade or business rather than as an employee of another. A self-employed person must be a resident of Canada to be covered for CPP (and a resident of Québec for QPP), whereas this is not a requirement for employees.
Explain what an international social security agreement might enable an individual to do
If an individual working in Canada and contributing to CPP/QPP is sent by their employer (including self-employed) to work abroad on a temporary basis, an international social security agreement might enable them to:
(a) Continue contributing to CPP/QPP for their work abroad and have the periods abroad considered as residence in Canada for eligibility purposes
(b) Be exempt from contributions to the other country’s social security system.
When working abroad temporarily, an individual should obtain a certificate of coverage from the Canada Revenue Agency (CRA) to inform the other country of the individual’s coverage under CPP. Under QPP, an individual working abroad temporarily should obtain a certificate of coverage from the Bureau des ententes de sécurité sociale (BESS) to inform the other country of the individual’s coverage under QPP
Identify who is excluded from coverage by CPP/QPP
“Excepted employment” is addressed in the CPP/QPP regulations and includes a long list of jobs in various kinds of industries—agriculture, fishing, logging, etc.— either when payment is under $250, or fewer than 25 days are worked, plus a list of other special situations (religious orders where a vow of poverty is taken and wages are paid to a religious order, etc.). “Excepted” employment under CPP and QPP are similar, with some exceptions.
Outline the mandate of CPP Investments and the key governance documents used in the implementation of its mandate.
The mandate of CPP Investments is to:
(a) Invest the CPP fund in the best interests of CPP contributors and beneficiaries
(b) Maximize long-term investment returns without undue risk, with consideration of the factors that may affect the funding of CPP and its ability to meet its financial obligations
(c) Provide cash management services to CPP so that it can pay benefits.
CPP Investments cannot conduct any business or activity that is inconsistent with these objectives. Two key governance documents reflecting the CPP Investments’ mandate are the:
(a) Statement of Investment Objectives, Policies, Return Expectations and Risk Management for the Investment Portfolio of the Base Canada Pension Plan and the Additional Pension Plan. This document applies to the assets of the long-horizon CPP investment portfolio.
(b) Statement of Investment Objectives, Policies, Return Expectations and Risk Management for the Cash for Benefits Portfolio of the Base Canada Pension Plan and the Additional Pension Plan. This document applies to the assets required to pay CPP benefits in the near term.
Describe the relationship between CPP Investments and the government.
CPP Investments operates within a governance structure that is enshrined in legislation and carefully designed to support its distinct mission. The assets of the CPP fund are strictly segregated from government funds. The Canadian Pension Plan Investment Board Act (CPPIB Act) has safeguards against any political interference. CPP Investments operates at arm’s length from federal and provincial governments with the oversight of an independent, qualified professional Board of Directors. This board, not governments, approves investment policies, determines with management the organization’s strategic direction and makes critical operational decisions such as the hiring of the president and chief executive officer (CEO) and the setting of executive compensation. The board hires the president and CEO who, in turn, hires and leads the management team. CPP Investments’ management reports not to governments, but to the CPP Investments’ independent Board of Directors. These investment professionals make portfolio decisions within policies agreed to by the board of directors.
Describe the entity that invests contributions directed by employees and employers to the QPP as well as a key piece of disclosure issued by that entity.
The Caisse de dépot et placement du Québec (CDPQ) was created in 1965 by a law passed in the National Assembly of Québec, with the initial role of managing the funds of the newly created QPP. Revenues collected over and above those required for the immediate payment of benefits and administration costs are invested by the CDPQ as prescribed by the QPP Act. The CDPQ now invests funds for several other Québec entities as well as QPP funds.
An annual report is required to be made by CDPQ before April 15 of each year outlining its operations for the prior year.
Describe when CPP/QPP contributions are required and the use of the term “contributory periods.”
CPP/QPP contributions are required by employees (including the self-employed) and their employers:
(a) In respect of all pensionable employment
(b) If pensionable employment continues and the retirement pension has started, to the maximum of age 70. A person who is over age 65 and receiving their CPP retirement pension can opt out by filing a request with their employer to cease contributing. This opt-out is not allowed under QPP.
“Contributory periods” are defined as the amounts of time a contributor was making CPP/QPP contributions from employment or self-employment income. Contributory periods are used to calculate the retirement pension, death benefit, survivor’s pension or surviving child’s/orphan’s benefit.
Note that this definition is not used to calculate the disability pension or disabled contributor’s child’s benefit; for these benefits, a different definition of “contributory period” is used.
Describe the three categories of contributions made by employees, employers and self-employed individuals to CPP/QPP
Employee contributions are required:
– At rates of 5.95% under the CPP and 6.1% under the QPP, applied against the range of earnings between the year’s basic exemption (YBE) and year’s maximum pensionable earnings (YMPE for CPP, MPE for QPP), plus,
– After 2023, at a rate of 4% applied against the range of earnings (if any) between the YMPE/MPE and the YAMPE/AMPE.
YBE, YMPE/MPE and YAMPE/AMPE are expected to change each year, although the YBE has been constant for many years.
Individuals receiving the CPP/QPP disability pension are not required to contribute to CPP/QPP.
Employers are required to contribute the same amount as the employee contributions.
Self-employed individuals contribute both the “employee” and “employer” portions.
Explain what is the same and what is different regarding CPP contribution
calculations for self-employed individuals.
“Pensionable employment” determines whether individuals are covered by CPP/ QPP. Both plans define pensionable employment as all employment, with specific exceptions or other exceptions defined by legislation. Both employees (including the self-employed) and their employers must contribute to CPP/QPP for periods of pensionable employment.
The key difference is that self-employed individuals would pay both the employee and the employer contribution.
Identify rules that apply in determining the deduction of CPP/QPP contributions for employers of employees who are in receipt of a CPP/QPP retirement pension.
If an employer employs an individual who receives a CPP retirement pension, the rules regarding the deduction of CPP contributions depend upon the age of the employee:
(a) If the employee is 60 to 64 years of age, the employer must deduct CPP contributions
(b) If the employee is 65 to 70 years of age, the employer must deduct CPP contributions unless the employee has filed an election with the employer to stop paying contributions (opt out). Once the election has been filed with the employer, contributions must stop in the following month. Contributions stop at age 70.
Under QPP, contributions are required if pensionable employment continues after the retirement pension has started, to the maximum of age 70. The opt-out described under CPP is not allowed under QPP.
Explain how the amount of earnings subject to CPP/QPP contributions is determined.
Earnings subject to CPP/QPP contributions are generally all income from pensionable employment, per the Income Tax Act/Taxation Act (Québec). This generally means the person’s gross income (i.e., before deductions) from an office or employment, including salary, wages, or any other remuneration including tips and gratuities and stock options received by the person in the year. Taxable benefits or allowances are also generally considered pensionable income.
