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Actuarial Science 1021A/B Study Guide - Canada Pension Plan, Lump Sum, Cpp Investment Board


Department
Actuarial Science
Course Code
AS 1021A/B
Professor
Steve Kopp

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(III) Government Plans
Canada Pension Plan (CPP) / Quebec Pension Plan (QPP)
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)
Exceptions:
o exchange teachers
o casual/migratory workers
o certain religious groups
o Employee’s of provincial government
CPP benefits are supported by contributions from ers and ees; there is NO gov’t
subsidy no general gov’t tax revenue used
benefits are earnings related (based on earnings prior to retirement) and indexed
annually (unlike OAS and GIS)
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
The other % must come from:
oIndividual savings
oRPP/Group RRSP
Contributions
Contributions are paid on earnings between the:
YBE – year’s basic exemption = $3500 (frozen at this level since 1996)
YMPE – year’s maximum pensionable earnings
= YMPE t-1 (1+i)
where YMPE = AIW (average industrial wage)
i = rate of increase in industrial wages in a year
2012: YMPE = $51,100
2013: YMPE = $50,100
2014: YMPE = $52,500
From 1966 to 1986, the contribution rate was:
1.8% for ees
1.8% for ers

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3.6% for self-employed
Example: in 1986
YBE = 2500
YMPE = 25,800
Suppose you earned $23,685 in 1986. Then your CPP contribution for 1986 would have
been (0.018)[25,685-2500]=$381.33
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, after which it will remain 9.9%
(this was the solution that was adopted!)
oThis option was chosen because it was more equitable and people today
are more willing to pay a higher % of the CPP burden to lessen the burden
on the workers of tomorrow.
CPP contribution rates:
2000 – 7.80
2001 – 8.60
2002 – 9.40
2003 and beyond – 9.90%

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CPP/QPP
Contributions are required from workers who are age 18 to the earliest of:
death
start of CPP retirement pension (can start as early as age 60)
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
oif the ee has total CPP contributions that exceed the maximum in any year,
the ee can get a refund of the excess at tax time
oHowever, the er does not get a refund; only ee does.
To calculate an ee’s CPP contribution in any year:
Total CPP contribution =
(0.099/2) x min[(YMPE YBE), (actual income YBE)]
Examples
(a) Your income for 2014 is $42,500
(0.099/2)[42,500-3500]=$1930.50
(b) Your income for 2014 is $57,600
(0.099/2)(52,500-3500)=$2425.50
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