Morneau - Government Pension Programs

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Morneau - Government Pension Programs
2014-04-12 11:09:08
Pension & Benefits
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  1. 3 tiers in Canada's retirement income system
    • government-administered pension programs (aim = 40% of income)
    • employer-sponsored plans
    • individual retirement savings (aim = 25% of income)
  2. CPP/QPP projections
    • CPP contribution rate of 9.9% is sufficient to provide benefits past 2075
    • QPP contribution rate of 9.9% is planned to run out by 2061, then rate should be 12.6%
  3. Layers of government-administered programs
    • OAS benefit provides a flat monthly pension for Canadians 65 and older
    • clawback gradually eliminates pension for (2008) income from $65,000 to $105,000
    • GIS is an income-tested benefit that provides additional monies over and above OAS
    • reduced by $1 for every $2 of any other income other than OAS
    • (Survivor’s) Allowance provides income-tested additional amount for 60-64 (living or surviving) spouses or common-law partners of OAS pensioners who receive GIS
    • CPP/QPP are compulsory earnings-related plans for all employees and self-employed
    • also provides disability, death and survivor benefit
  4. Amendments to CPP and QPP
    • 1998: plan to increase contribution rage from 6.0% to 9.9%; freezing of YBE and maximum death benefit (lowered and frozen)
    • 1998: Canada Pension Plan Investment Board, that invests CPP funds in financial markets, broadly following the same investment rules as other pension plans
    • 2000: extend partner benefits to same-sex partners
    • full funding provision: changes in benefits are to be paid for in full so that their costs are not passed on to future generations
  5. OAS - Qualifications requirements
    • 40 years of residence in Canada after age 18 (proportionate for those with 10 to 40) OR
    • 10 years of continuous residence in Canada immediately prior to the date of application
    • can make up each missing year (from previous criteria) by 3 years of Canadian residence between ages 18 and 55, and at least last year as resident
    • reciprocal agreements between Canada and other countries
    • unless pensioner had 20 years residence in Canada after the age of 18, pension is payable 6 months after the pensioner leaves Canada and may be resumed when he returns
  6. OAS - Financing and Taxation
    • financed on a pay-as-you-go basis from Government of Canada general tax revenues
    • OAS pension is included in the income of taxpayer, so regular income tax is paid
    • clawback based on 15% surtax of net income in excess of $65K, 100% above $105K
    • non-residents are subject to clawback based on world-wide income
  7. GIS - Benefits, Financing and Taxation
    • benefits are income tested and reduced by $1 for each full $2 of other income above OAS
    • benefit payments from GIS are not taxable income to the recipient
  8. Allowance and Survivor’s Allowance - Purpose and Benefits
    • applies to (deceased) pensioners’ partner
    • applicant can receive Allowance if he or she is between the ages of 60 and 64
    • also must qualify under an income test as well as residency test (at least 10 years)
    • reduced by $3 for every $4 of couple’s income from sources other than OAS until reduction equals OAS pension; then reduction is $1 for every $4
  9. CPP/QPP Financing
    • supported by contributions from employers and employees (no government subsidy)
    • benefits are based on earnings between YBE and YMPE
    • self-employed participate both portions (employer and employee)
  10. CPP/QPP Qualification requirements
    • normal retirement age is 65; min is 60
    • must have earned less than maximum pension payment in the month before pension begins; once it started that person can work as much as desired without affecting pension and will not have further CPP deduction on earnings
    • QPP is increased/reduced by 0.5% for each month later/earlier than age 65 (60 to 70)
  11. CPP/QPP Survivor Benefits
    • Survivor’s Pension: 35 years or older partner if has dependent children or is disabled; spouse from civil union is entitled to pension regardless of age but amount varies based on children and disability
    • Orphan’s Benefit: each dependent child of a deceased contributor 
    • Death Benefit: lump-sum equal to 6 times amount of monthly retirement pension, max $2,500 for CPP, and $2,500 for QPP
  12. CPP/QPP drop-out months
    • periods while receiving CPP disability benefits
    • periods while caring for children under the age of 7
    • up to 15% of months of lower earnings, provided 120 months are left
    • months included in a period of indemnity (QPP)
    • periods after age 65 while contributing to CPP
    • may substitute a month of earnings after age 65
  13. CPP/QPP benefits calculations
    • adjust each year’s covered earnings by the ratio of the 5-year average YMPE prior to the pensions’s start to that year’s YMPE 
    • divide by number of non-drop-out months to get adjusted monthly pensionable earnings
    • pension is simply 25% of this amount
    • Pension Index is tied to CPI, unless CPI decreases (Pension Index remains unchanged)
    • disability benefits are paid 75% of retirement pension plus a flat rate pension
  14. CPP/QPP taxation
    • benefits are taxable income to the beneficiary
    • contributions by employers are fully tax deductible
    • employees receive a tax credit (16% of contributions)
  15. Factors that caused the $570B deficit
    • maturation of the plan (benefits and contributions started at the same time)
    • higher than expected disability payments
    • aging population
    • slower than expected economic growth
  16. Role of CPP Investment board
    • manage funds in the best interests of the contributors and beneficiaries
    • invest its assets with a view to achieve a maximum rate of return, without undue risk
    • funds can now be invested in private assets on top of government bonds