Introduction to the Canada Pension System
The Canada Pension Plan (CPP) and Quebec Pension Plan (QPP) form the backbone of Canada’s public pension system. Established in the 1960s, the CPP and QPP provide retirement, disability, survivor, and death benefits to Canadians who have contributed into the plans through their working years. Together with Old Age Security (OAS) and the Guaranteed Income Supplement (GIS), the CPP and QPP form the key components of the country’s social safety net for seniors.
History of the Canada Pension System
The CPP was created in 1965 to provide portable, contributory pensions for Canadians in all provinces except Quebec. Quebec elected to establish its own QPP. In the 1990s, reforms were undertaken to make the CPP/QPP more financially sound as Canada’s population began to age. Additional changes in the 2010s enhanced CPP benefits and required higher contributions from workers.
Overview of the Canada Pension Plan (CPP)
The CPP is a compulsory, contributory social insurance plan that provides monthly retirement pensions and other benefits to eligible workers. It covers all provinces and territories except Quebec. Both employees and employers must contribute to the CPP during working years based on employee earnings. As of 2022, the contribution rate is 5.70% each for employees and employers. The maximum pensionable earnings amount in 2022 is $64,900.
Overview of the Quebec Pension Plan (QPP)
The QPP is a parallel public pension plan for the province of Quebec. It provides the same benefits and has similar contribution rates and premiums as the CPP. However, the QPP is administered separately by Retraite Québec. The QPP contribution rate in 2022 is 5.70% each for employees and employers, the same as the CPP.
Eligibility for CPP and QPP
To qualify for CPP or QPP retirement benefits, contributors must be at least 60 years old and have made sufficient contributions over their working life. Disability and survivor benefits have different eligibility requirements. People who have lived and worked in both Quebec and other provinces may receive pensions from both CPP and QPP.
Early CPP and QPP
It is possible to take CPP or QPP as early as age 55 or 60 subject to reductions. Conversely, benefits can be postponed until age 70 to receive higher payments. The normal eligibility age will rise from 65 to 67 starting in 2023.
How to Apply for CPP and QPP
Canadians must proactively apply to start receiving CPP and/or QPP pensions. Applications can be submitted online, by mail, or in person. Applicants must provide personal information and details of contributions made so their eligibility and benefit amount can be calculated. Advisors are available by phone and in offices to assist applicants.
Benefits of CPP and QPP
The CPP and QPP provide the following benefits, subject to eligibility requirements:
Retirement Pension
Monthly pension payments from age 60 provided sufficient contributions were made during working years. Maximum at age 65 in 2022 is $1,253.59 per month.
Disability Benefit
Monthly payments for CPP/QPP contributors who are disabled and cannot work. The 2022 maximum payment is $1,469.36 per month.
Survivor’s Pension
Monthly payments for the surviving spouse or common-law partner of a deceased CPP/QPP contributor.
Children’s Benefits
Monthly benefits for dependent children of deceased or disabled CPP/QPP contributors.
Death Benefit
One-time lump-sum payment to the estate of a deceased CPP/QPP contributor.
Comparison of CPP and QPP
The CPP and QPP are very similar in terms of contribution rates, maximum pensionable earnings, and eligibility criteria. The key differences are:
- The QPP is administered separately by Retraite Québec for Quebec residents.
- Someone who has worked in Quebec and other provinces can receive both CPP and QPP pensions.
- Slight variances in certain benefits and payment calculations.
Overall, the two plans provide near identical retirement, disability and survivor benefits.
Comparison of Canada Pension System with Social Security in the US
There are some notable differences between the Canada Pension Plan system and U.S. Social Security:
- CPP/QPP benefits are based strictly on contributions made, while Social Security considers lifetime earnings.
- CPP/QPP contributions and benefits are higher compared to Social Security.
- Social Security eligibility age is 66-67 in the U.S. vs. 65 in Canada.
- Social Security faces greater long-term funding challenges.
- Canada has the additional OAS and GIS programs for all seniors 65+, whereas Social Security is the only universal pension.
Early Retirement Trends in Canada
The percentage of Canadians choosing early CPP and QPP pensions at age 60 has risen steadily from under 10% two decades ago to over 30% today. This reflects a trend toward earlier retirement driven by factors like financial security, workplace stress, health issues and changing lifestyles.
Provincial Differences in Early Retirement Rates
According to Statistics Canada, Alberta had the highest percentage of early CPP & QPP claims in 2019 at 37%, followed by Nova Scotia and Newfoundland & Labrador at 33%. British Columbia and Ontario were both close to the national average at 32%. The lowest rates were in Prince Edward Island and the territories.
Public Pension Governance in Canada
Oversight and administration of the Canada Pension Plan is handled by several federal and provincial bodies:
- Federal finance ministry – sets contribution rates and benefit levels.
- Chief Actuary – conducts legislated reviews and reports on the CPP’s financial status.
- CPPIB – invests and manages the CPP Fund assets.
- EI and CPP commissions – hears appeals and resolves disputes.
The QPP has a parallel governance structure in Quebec, with Retraite Québec as the administering agency.
Investment Management Strategies of Canadian Pension Funds
The CPP Investment Board (CPPIB) invests surplus CPP funds to grow the pool available for future benefits. Key investment strategies include:
- Diversification across global public and private market assets.
- Significant holdings in real estate, infrastructure and natural resources.
- Over 50% of assets in foreign markets.
- Focus on long-term performance using active and passive strategies.
Other major plans like Ontario Teachers’ Pension Plan (OTPP) and Caisse de dépôt et placement du Québec (CDPQ) use similar diversified, global strategies.
Comparison of Canadian Pension Funds with US Pension Funds
Canadian public pension funds like CPPIB and OTPP are seen as global leaders, with some key advantages over many U.S. pension funds:
- Higher returns over the long term.
- Lower fees due to large size and internal management.
- Greater independence from government influence over investment decisions.
- Higher allocations to alternatives like real estate, infrastructure and private equity.
However, some large U.S. pension pools like CalSTRS have adopted similar successful strategies as their Canadian peers.
Analytical Considerations for Reforming the Canada Pension System
As Canada’s population ages, some analysts argue the CPP/QPP system needs reforms to ensure sustainability:
- Further gradual increases to contribution rates could provide more cushion.
- Raising the retirement age beyond 67 would reflect longer lifespans.
- Better accommodating non-traditional work and careers in the gig economy.
- Enhancing cpp disability and survivor benefits for vulnerable groups.
- Increased autonomy and independence for CPPIB/CDPQ to focus on long-term returns.
Any changes would need to balance sustainability with adequacy of benefits and consider impacts on young workers versus retirees.