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Lecture

Actuarial Science 2427A/B Lecture Notes - Disability Pension, Canada Pension Plan, Cpp Investment Board


Department
Actuarial Science
Course Code
AS 2427A/B
Professor
Kopp/ Davies

Page:
of 5
(III) Government Plans
Canada Pension Plan (CPP)
Introduction
The CPP came into effect Jan. 1/66
Quebec opted out of the Federal plan and created the QPP – similar to CPP
CPP is compulsory
covers practically all employed people (including the self-employed)
CPP benefits are supported by contributions from ers and ees; there is NO gov’t subsidy
benefits are earnings related and indexed annually
The level of benefits was set to provide, along with OAS, a replacement ratio of approximately 40% of income up to the
national average wage
15% from OAS
25% from CPP
Contributions
Contributions are paid on earnings between the:
YBE – year’s basic exemption
YMPE – year’s maximum pensionable
earnings
From 1966 to 1986, the contribution rate was:
1.8% for ees
1.8% for ers
3.6% for self-employed
In the 1985 Actuarial Report on the CPP, it was determined that the 3.6% rate was inadequate to meet the long-term
benefit obligations of the CPP
the contribution rate was progressively increased starting in 1987:
Year Rate Year Rate
1987 3.8% 1992 4.8%
1988 4.0% 1993 5.0%
1989 4.2% 1994 5.2%
1990 4.4% 1995 5.4%
1991 4.6% 1996 5.6%
1997 5.8%
In the 1997 Actuarial Report, it was reported that if the contribution rate continued to rise by only 0.2% per year, CPP
would run out of money by 2015
Suggested Solutions
1. Continue to raise the rate by 0.2% per year until reaching 14.2%, OR
2. Start raising contribution rates by more than 0.2% per year until reaching 9.9% in 2003
(this was the solution that was adopted!)
Contributions are required from workers who are age 18 to the earliest of:
death
start of CPP retirement pension
attainment of age 70
Employee contributions are based on all earned income in excess of YBE until the max. for the year has been paid
deducted from pay
if ee works for more than one er in any year, deductions are made by each er
Qualifying Conditions
(a) Retirement Pension
normal retirement age is 65
must apply to receive pension
can retire and start receiving pension anywhere from age 60 to 70
a earnings test must be satisfied to retire before age 65 (but not after)
you can continue to work and receive CPP
benefits prior to age 65, but your income < yearly max. CPP benefit
If retire before age 65, pension is reduced by 0.5% for each month
If retire after age 65, pension is increased by 0.5% for each month
(b) Disability Benefits
Disability is defined to be “unable to engage in any substantial gainful employment”
rules were tightened up in 1998
Former Eligibility Rules (pre 1998)
must have made contributions to CPP in 2 of last 3 years OR 5 of last 10 years in order to receive some disability
benefit
New Eligibility Rules (1998 and beyond)
must have made contributions to CPP in 4 of the last 6 years to receive some sort of disability benefit
Disability pension is payable as long as ee is disabled OR until age 65
1st payment begins in 4th month following month of disability
(c) Survivor Benefits
Benefits consist of a pension payable to an eligible spouse and to dependent children
Eligibility Rules
Benefits payable if contributions were made to CPP for not less than 1/3rd of the total number of calendar years within
the contributory period OR for at least 10 yrs
a small lump sum death benefit is also payable (max. = $2500)
Benefit Payments
(a) Retirement Pension
The CPP benefit is calculated based on all of the contributor’s past earnings (up to the YMPE) from age 18 to the date of
retirement
To compensate for periods of
unemployment,
low earnings, and
sickness/disability,
certain periods of a person’s working lifetime can be “dropped” or “ignored” in computing average earnings
These include:
15% of lowest earning years
low earnings months after age 65
any month where you were eligible for a CPP disability pension
periods when you stopped working to look after children under age 7
Note: You are allowed to substitute months of earnings after age 65 in place of low months of earnings prior to 65
Benefit Calculation
1. Every year of your earnings from age 18 to the age of retirement are used
2. The allowable “dropped” earning years are subtracted
3. Any remaining years where earnings are less than YMPE in that year are adjusted, using the factor:
avg. YMPE for the 5 years ending with
the year in which the pension begins
YMPE for the year in question
4. After all the above is done, your yearly earnings are added up and then divided by the number of years in the
contributory period to obtain your adjusted career average earnings.
The CPP/QPP retirement pension is then calculated to be 25% of your adjusted average career earnings
Note
If you earned more than the YMPE in every year you worked, then you are eligible for the max. monthly CPP benefit. It
is calculated as follows:
(b) Disability Pension
Consists of 3 parts:
flat rate pension + earnings related component (= 75% of disabled’s retirement pension, calculated as if the person
had attained age 65 as of date of disability) + pension for dependent children (= same amount that is paid to
dependent children as if CPP contributor had died)
(c) Survivor Pension
Payable to surviving spouse if spouse if 35 or older OR is under 35 and disabled, OR is under 35 with dependent
children
If Spouse is age 45 to 64
benefit = flat rate + (0.375)contributor’s
pension retirement pension
If spouse if age 35 to 44
pension is reduced 1/120 for each month under 45
If spouse is 65 or over
benefit = 60% of deceased’s calculated retirement pension
Note: A surviving spouse may receive both a survivor’s pension and their CPP retirement pension
But there are limits which may not equal the total of the two
Notes Survivor Pension
benefit must be applied for
can only get a maximum of 12 months of missed benefits
benefit is indexed annually
benefit does not cease on remarriage
benefits stop upon death of survivor
Pension to Dependent Children
flat rate pension paid to each dependent child of deceased/disabled contributor
stops when child attains age 18 or when child dies, whichever come 1st
benefit can continue to be paid for dependent child age 18 to 25 but attending school full time
child can receive two x benefits for 2 parents deceased/disabled and were eligible contributors
Lump Sum Death Benefits