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CPP Notes

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Western University
Actuarial Science
Actuarial Science 1021A/B

(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!) CPP/QPP 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 To calculate an ee’s CPP contribution in any year: Total CCP contribution = (0.099/2) x min[ (YMPE −YBE), (actual income − YBE)] Examples (a) Your income for 2013 is $42,500 (b) Your income for 2013 is $55,600 Qualifying/Eligibility 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 •Used to be an 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 BUT NOT ANY MORE (as of 2012) Note: Late and Early Retirement 1. If retire after age 65, pension is increased by 0.70% per month (2013 and beyond) Example If you started receiving CPP benefits in 2013 at age 67 years, 7 months old, what is your maximum monthly CPP benefit? 2. If retire before age 65, your CPP pension is reduced by the following percentages per month of early retirement: 0.54% 2013 0.56% 2014 0.58% 2015 0.60% 2016 Example If you started receiving CPP benefits in 2013 at age 60 years, 10 months old, what is your maximum monthly CPP benefit? (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 • 1 payment begins in 4 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 1/3 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: • 16% 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 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 subtrac
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