The Canadian Pension Plan (CPP) is a federally run, earnings based contributory program in which all Canadian workers over the age of 18 participate. It is one of two significant retirement programs available to Canadians when they reach retirement. The second program is Old Age Security (OAS), which is also a federal program.
Contributions and Payments
According to the Canada Revenue Agency, CPP contribution rates as of 2010 were 4.95 percent of their annual income between 3,500 Canadian dollars and CA$47,200 to a yearly maximum contribution of CA$2,163.15. Employers are required to match contributions made by employees, and workers who are self-employed must pay both halves of the contribution. Contributions continue until the worker reaches the age of 65. There is an option to start receiving the pension at age 60; however the monthly benefit will be reduced. Pension payments are calculated by taking 25 percent “average contributory maximum” for the entire working life of the individual.
CPP Investment Strategy
In 1997, federal Finance Minister Paul Martin created the CPP Investment Board to oversee investment and management of the CPP and to create a CPP Reserve Fund. The move allowed the CPP to be invested like a mutual fund. Before this change, the fund had been invested entirely in federal government bonds. Growth for the CPP Reserve Fund results from CPP contributions of workers and performance of the investments held in the fund. Growth targets, set by the Office of the Superintendent of Financial Institutions in 2003, for the fund are CA$147 billion by 2010, CA$200 billion by 2015, CA$592 billion by 2030 and CA$1.55 trillion by 2050.
Will It Be There?
"Canadians will need to save more if they want to retire comfortably," says David Dodge, former governor of The Bank of Canada. One the most commonly asked questions by Canadians is whether the CPP will be there when future generations retire. In its annual report on the CPP, Human Resources and Skills Development Canada indicated the need to have additional funds in the plan to compensate baby boomers as they start to retire. This was one of the reasons for the plan change in 1997. Until then the CPP was referred to as a “pay as you go” plan, where current contributions funded current payments. In 2010 the monthly pension payment received by Canadian retirees increased from CA$908.75 to CA$934.17. OAS payments remained the same at CA$516.96 per month. There is an additional payment that low-income retirees can apply for. The Guaranteed Income Supplement is available to retirees who have an annual income of CA$15,672 for individuals or CA$20,688 for couples. The maximum combined OAS and GIS monthly payment is CA$1,169.47.
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