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The Canada Pension Plan (CPP), introduced in 1966, was designed to provide pension income to retired and disabled workers, surviving spouses of deceased contributors and orphans. For the first time in Canada the plan provided a public, earnings-related retirement income, together with ancillary benefits, survivor benefits and disability benefits. Central to the survivor benefits are a Surviving Spouse’s Pension, Orphan’s Benefits, and a Death Benefit. Virtually all workers in Canada, whether employees or self-employed, were required to contribute to the plan. Benefits have been indexed annually to offset the effect of inflation. Since 1989, the survivor benefit has stabilized at about 17% of total CPP payments, with the bulk of these paid to women over the age of 65. B. The Scope of This Report This study is part of a larger effort which encompasses the review of retirement benefits and disability benefits under the CPP being conducted by Human Resources Development Canada (HRDC). This phase of the CPP evaluation is aimed at determining whether there is a continuing rationale for providing survivor benefits and for other features of the CPP, such as the dropout provisions and credit splitting. At present, the general dropout provision allows 15% of years with lowest earnings to be dropped out in calculating CPP benefits. The child rearing dropout permits parents to drop additional years for raising children up to 7 years of age. Credit splitting refers to the division of CPP pension credits between members of divorced or separated couples. This report integrates qualitative and quantitative findings from a wide range of sources, including surveys of surviving spouses and of the general public, as well as from simulations using the CPP Actuarial Model, other micro-simulation models, analysis of administrative data, and opinion from experts in the field. The report describes the historical development of CPP survivor benefits and other features of interest. Then the current program coverage and continuing rationale are examined. The report examines the extent to which objectives have been achieved and addresses the key issue of the significance of survivor benefits in relation to all other sources of income, including personal income and, where applicable, that of all members of the household. Impacts and effects of the survivor benefits and ancillary features are examined, along with an analysis of the economic effects of CPP contributions on employers and employees. The last chapter identifies issues that deserve further consideration. C. The Rationale for Survivor Benefits Remains Despite Social Changes Ninety percent of survivors are women; orphans benefits are paid mainly for children who have lost their fathers. Also, the general dropout provision is beneficial to those with erratic earnings, traditionally more characteristic of women. Credit splitting was intended to benefit women. The mid-1960s model of the typical family pattern—a male breadwinner and a non-working wife taking care of the children—has changed, but the need for earnings replacement has not diminished. Some of the key changes that have occurred together with their impact on the rationale for various components of the CPP are summarized below:
We found strong support among experts, the public, and our own analysis of data for the rationale of continuing federally provided, post-retirement survivor benefits in their present form and—by extension—to pre-retirement survivors over 55. However, there was some disagreement among experts on survivor benefits for pre-retirement survivors. The formula for pre-retirement survivor benefits includes a flat-rate component which is not related to the deceased contributor’s earnings record. There is therefore an element of "income support" as well as income replacement. Interviewees as well as the expert panel found the rationale for this benefit design is less clear than in the case of the post-retirement benefits, where only the earnings-related component is present. Insofar as orphan’s benefits and the death benefit are concerned, the expert panel and key informants were less supportive of the rationale than in the case of spousal survivor benefits. However, there was little support for the elimination of these benefits, partly because of the relatively small savings that would result. The continued rationale for the general dropout was supported, even enhanced in view of labour market instability. In spite of changed labour force participation of working mothers, evidence for continued need for the specific child rearing dropout provision was offered. Strong support was shown from experts for the rationale for continuation of credit splitting on marriage breakdown. On the other hand, assignment of pension benefits in the absence of marriage breakdown was questioned. D. The Profile of Beneficiaries has Changed The number of recipients of CPP survivor’s pensions has increased rapidly over the last three decades, from less than 100,000 in the early 1970s to 735,345 in January 1996. In that month, 89% of the beneficiaries were women, and of the women almost three-quarters were over the age of 65. The age of new beneficiaries has steadily increased. There has also been a dramatic increase in female beneficiaries over 75—a 24 percentage point increase from 1984 to 1995. A 1996 survey of beneficiaries showed that less than 10% of female survivors were remarried; 75% lived alone. In addition, only 18% of all female survivors had been employed (full-time or part-time) in 1995. The total dollars expended for Surviving Spouse’s Benefits in the month of January 1996 was $180.7 million, with an average benefit of $244.01. The maximum benefit in 1996 is $436.25 if the spouse is 65 or over. Younger female beneficiaries—those of pre-retirement age—represented only 28% of the number of beneficiaries, but represents 32% of the dollar value of the benefits to female survivors. E. Survivor Benefits are Very Significant for Only a Minority of Women Survivors For 80% of female survivors, the survivor benefit represents less than 20% of household income. However, multiple lines of evidence indicate that for low income women—those with $10,000 in income or less—survivor benefits represent a very significant proportion of total gross household income. Especially among lowest income women, the proportion of income represented by CPP survivor benefits has increased over time. Survey data showed that female survivors who perceive their current income to be less than adequate are disproportionately numerous among women of pre-retirement age and those with little or no education. F. Experts and the Public Differ Somewhat on Eligibility Rules for Survivor Benefits
The general public tends to be both restrictive and generous with respect to eligibility for benefits. Canadians think that survivors who remarry should not receive a benefit, but they would open up eligibility for younger pre-retirement survivors in addition to the disabled and those with children. Current beneficiaries tended to support the status quo with respect to whether survivor benefits should vary with the age of the surviving spouse and whether benefits should be related to the survivor’s income. They also support the current rules with respect to Orphan’s Benefits. Experts and key informants think the current rules are, by and large, appropriate. Even on the more controversial pre-retirement eligibility rules, there is general acceptance of the income support aspects—largely because the principle of income support for families overrides their dislike for a departure from the income replacement principle. If the $3 billion of expenditure on Survivor Benefits were cut from the CPP/QPP, the net effect would mean a compensating increase of $1 billion in other income support programs. The manner in which the lower costs net out is complex, given that OAS, GIS and tax credits are all affected by the presence of a CPP survivor benefit as part of income. G. Retention of Other Survivor Benefits, Dropout Provisions and Credit Splitting is Generally Well Supported
Experts and our key informants supported retaining the death benefit, orphans benefits as well as the general and child rearing dropout provisions and credit splitting. Regarding the death benefit, male and female beneficiaries differed in their perceptions of adequacy—more males than females found the death benefit to be "less than adequate." The opinions of female survivors were consistent with the views of key informants and the expert panel—namely, that the death benefit makes a reasonable contribution following the death of a spouse and, therefore, should not be dropped. Many survivors find the current name insensitive and would like to see it changed. The Surviving Child’s Benefit seems more appropriate. Regarding the Orphan’s Benefit the public supported the status quo, but there was fairly strong support for extending Orphan’s Benefit to at least 22 years of age, even if the child was not in school. On the general dropout provision, the public favoured extending it to cover other forms of family-related care-giving beyond the current rules, but there was no agreement on lengthening or shortening the number of years of general dropout permitted. The experts and the public differ on the mandatory aspect of credit splitting: the public is more disposed to negotiation in the case of divorce and separation; the experts favour mandatory provisions. Simulation results using the CPP Actuarial Model showed that the removal of mandatory credit splitting on divorce would actually increase CPP costs because of the way credit splitting currently interacts with dropout provisions. Credit splitting should transfer credits from men to women and from those with a less interrupted earnings record to those with a more interrupted one. Women also live longer than men, such that equal benefits transferred to women would be more costly. However, the effect is outweighed by its interaction with the splitting of the child rearing dropout—which results in lower total costs to the CPP. This reduces the percentage of maximum CPP pension available to husbands after credit splitting. The result is some savings to the Plan. H. Survivor Benefits Do Not Have a Major Impact on Labour Force Behaviour Women’s labour market behaviour is little affected by the death of a spouse and the receipt of a benefit. Most of the current beneficiaries were not in the labour force at the time of the death of a spouse and, for most, the situation did not change afterwards. Trend analysis showed that the number of weeks worked by women revealed a downward trend both before and after the start of benefits. This is reflected in annual average earnings. We also found that employed survivors differed, but not significantly, from those with no employment income with respect to the proportion of income provided by survivor benefits. The issue has been raised as to whether employed survivors should receive lower benefits. We found little justification in the data for considering changes to the benefit structure to accommodate differences in income related to employment. In future, it is not likely that significantly more widows will be employed at the time of the death of their spouse/partner. In part this is because the longevity of males is greater now than in the past and also because of a trend to earlier retirement. This makes it more likely that neither partner will be working at the time of the death of a spouse, and there is little reason to think that many will seek/find employment afterwards. I. CPP Payroll Taxes currently Account for a Fifth of Employer Payroll Taxes In comparing tax incentives that affect the labour market, a complete perspective requires information on other taxes borne by employers. Currently the CPP does not dominate the cost impacts on employers, since payroll taxes for CPP account for one-fifth of all employer payroll taxes. The employer cost impact has increased in the last decade, but historically the CPP payroll tax has been smaller than that of our major trading partners. On the other hand, the contribution of employers will rise significantly. According to draft legislation to amend the Canada Pension Plan tabled on February 14, 1997, contribution rates will rise over the next six years to 9.9% of contributory earnings and then remain steady. These contributions are split equally between employer and employees, so employer contributions will be slightly below 5% of contributory earnings. The self-employed pay the full amount. J. No Major Unintended Impacts of CPP Were Found, But some Anomalies Exist Evidence on the impacts of the program features we examined offered no major concerns for unintended consequences, although there were some anomalies:
K. Comparison of CPP Costs to Private Insurance Not Conclusive It is difficult to compare actuarial and administrative costs for survivor benefits with comparable benefits provided by the private sector, because of differences in the population covered and the variety of plans available. However, it seems likely that the costs of providing CPP benefits are slightly higher due to its coverage of a broader population. CPP has comparable administrative costs to those of large pension plans and group life plans and significantly lower administrative costs than individual insurance. L. Several Program Changes Warrant Serious Consideration Many suggestions for changes, both major and minor, were elicited from key informants, including major stakeholders, the expert panel, as well as CPP program officers. Input on alternatives was also provided by surveys of survivors and of the general public. Ideas were also provided by reviewing how Canada compares with selected other countries. We concluded that the basic structures examined should be retained. However, based on the input received, we have identified a substantial list of changes that are worth pursuing. The most important are listed below, along with a brief statement of the rationale for each change.
Several possible changes were seen as not worth pursuing, most notably alternatives relating to pre-retirement survivor benefits that would include eliminating the age and family status distinctions; establishing a separate program; and eliminating the flat rate component. Nor do the findings support instituting a dynamic dropout based on future expected labour market conditions or linking the dropout to specific causes, e.g., further education, unemployment. The alternatives identified as worth pursuing create benefits from "modernizing" provisions of the CPP to respond to the changed context. They appear not to create countervailing negative effects, especially increased cost and administrative complexity.
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