NOTE: This resolution was not supported by CCC and therefore withdrawn
Issue: Canada Pension Plan benefits paid by the government to employees or self-employed individuals upon retirement are significantly lower than if the contributions made during the employees working years were permitted to be invested in alternative types of investments and benefits paid from these investments.
Background: The Canada Pension Plan (CPP) was established in 1966 to provide basic benefits when a contributor to the plan becomes disabled or retires. There are three kinds of CPP benefits:
-the retirement pension;
-disability benefits (for contributions with a disability and their dependent children); and
-survivor benefits (including the death benefit, the survivor’s pension and the children’s benefit).
The CPP operates throughout Canada. The province of Quebec administers its own program, the Quebec Pension Plan (QPP), for workers in Quebec. The two plans work together to ensure that all contributors are protected.
The CPP retirement pension is designed to replace approximately 25 percent of the earnings on which a person’s contributions were based. The CPP retirement pension is based on how much, and for how long, you contributed to the plan (or to both the CPP and the Quebec Pension Plan). The age at which you choose to retire also affects the amount you receive.
The retirement pension normally starts the month after your 65th birthday. The pension can start as early as age 60 or any time up to the age of 70.
The CPP is a “contributory” plan. This means that all costs are covered by the financial contributions paid by employees, employers and self-employed workers, and from revenue earned on CPP investments. The CPP Investment Board has been created to operate at arm’s length from the federal and provincial governments. The Board invests CPP funds in financial markets, broadly following the same investment rules as other pension plans.
With very few exceptions, every person in Canada over 18 who earns more than the basic exempted amount of $3,500 per year must pay into the CPP or QPP in Quebec. The employee and the employer each pay half the contributions. Self employed individuals pay both portions. The amount paid is based on employment earnings. The minimum level is $3,500 meaning you do not pay CPP contributions on earnings up to $3,500. The maximum level in 2006 is $42,100 with maximum contributions by employees of $1,910.70 matched by their employers resulting in a total contribution per person in 2006 of $3,821.40.
Example:
John starts working on January 1, 2006. Assume his yearly contribution for CPP is maxed by him and his employer at $3,821.40. Then assume he works until age 60 and his contributions are invested by the CPP Investment Board earning 5% per annum. At age 60 John and his employer will have contributed $137,570.40 in CPP contributions that if invested at 5% will have earned interest of $237,912.74 resulting in a total investment amount of $375,483.14.
Then assume at age 60 John decides he is going to apply for his CPP benefits. Under the current structure he would receive a maximum payment per year of $10,135 if he took his pension at age 65. Assuming he took it at age 60, his pension would be reduced by 30%. Thus he would receive 7,094.50 per year. If the amount is annuitized the $375,483.14 until age 80 (for 20 years) his annual payment would be $30,427.30. The net difference would be a difference in pension per year of $23,332.80.
Recommendations:
The Canadian Chamber of Commerce urges the Government of Canada to:
1. Allow the CPP to function more like an investment plan where amounts paid out match the amounts put in plus investment income.
2. Allow employers to invest their share and the employee’s share of CPP contributions with private firms and restructure the types of investments to a very restrictive portfolio (ie government bonds etc). Then on retirement the employee would have access to the funds invested during their working years as a life annuity with a payout to the estate if he or she dies prematurely.