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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)
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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%
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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
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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
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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
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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
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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
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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
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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)
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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)
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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
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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
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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
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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)
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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
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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
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