Canada Pension Plan.

Canada Pension Plan. I INTRODUCTION Canada Pension Plan (CPP), program of the Canadian federal government that provides income for retired and disabled people and for survivors of deceased individuals. Federal legislation created the CPP in 1965, and the CPP took effect at the beginning of 1966. All provinces and territories participate in the plan, except for Québec, which created a similar plan, the Québec Pension Plan (QPP), in the same year, based on an agreement between the federal government and the provinces. The CPP is funded by employer and employee contributions. In 1997 the CPP had nearly four million beneficiaries, and total benefits paid exceeded C$17 billion. II CANADIAN PENSION SYSTEM Canada has a three-tiered pension system, made up of federal Old Age Security, the CPP, and private pension plans. In 1927 the federal and provincial governments established the first national old-age pension in Canada, the Old Age Pensions Act, which was funded jointly by the federal government and the provinces. In 1952 the Old Age Security Act shifted all funding for national old-age pensions to the federal government. With Old Age Security and the Guaranteed Income Supplement, all Canadians aged 65 or older who meet certain residency requirements can collect payments from the federal government. Old Age Security is funded by general federal revenues. Private pension plans in Canada include the Registered Retirement Savings Plan (RRSP), a program that allows Canadians to establish individual retirement savings accounts that are not subject to taxation until the money is withdrawn. In addition, private employers and unions sponsor a large number of pension plans. In 1966 the federal government introduced the CPP. The province of Québec opted to create its own plan, the QPP, rather than join the federal plan. The CPP and QPP are closely coordinated in major respects. Contribution and benefit levels in the two plans are similar, and benefits for employees who have worked in both Québec and other provinces during their career are combined. III FINANCING The CPP is financed by employer and employee contributions, as well as by investment income earned by the contributed funds. Every working Canadian who is over 18 and earns more than a defined minimum yearly income must contribute to the plan. Employee contributions are automatically deducted from wages and are matched by employers. Self-employed workers must pay both the employee and employer contributions. If a person does not earn above the minimum level, he or she is not subject to pension deductions. Earnings are only subject to pension deductions up to a yearly maximum limit, which is based on the average Canadian income. Any income a Canadian earns above that limit is not subject to the deductions. The income between the minimum and maximum is known as pensionable income. In 2000 the required contribution was 7.8 percent of a worker's pensionable income, of which the employee and the employer each paid half. The number of retired people in Canada, in relation to the number of people of working age, was expected to rise dramatically in the early 21st century. To ensure that the CPP would be able to cover these future retirees, the Canadian Parliament enacted a bill in 1998 that raised contribution rates to the pension plan. Under the new plan, rates will rise yearly until they reach a new stable rate of 9.9 percent of pensionable income in 2003. IV BENEFITS Participants in the CPP can start collecting full retirement pensions at age 65. An individual's monthly benefits are calculated by a formula that considers how long a person worked and the average amount that he or she earned over those years. The CPP allows parents to leave work for a period of time to look after a young child without having their low earnings in that period decrease their level of benefits. For 2000 the maximum monthly retirement benefit was set at C$762.92. In 1987 the government made it possible to retire early beginning at age 60 or to wait until age 70 to begin receiving benefits. Those who retire early reduce their monthly benefits by a percentage based on how early they begin taking the pension. Similarly, the monthly benefits of those who wait until after age 65 to begin their pensions are raised according to how long they postpone receiving the pension. In addition to benefits at retirement, the CPP also pays benefits when a participant in the plan becomes disabled or dies. A person who becomes disabled and cannot continue working can receive monthly disability payments, as can the disabled person's dependent children. If a CPP participant dies, the plan pays monthly survivor benefits to the individual's spouse and dependent children. A one-time death benefit, limited to C$2,500, is also paid to the estate of the deceased. All benefits except the death benefit are readjusted yearly to account for inflation. Contributed By: Lillian Zimmerman Microsoft ® Encarta ® 2009. © 1993-2008 Microsoft Corporation. All rights reserved.