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A. The CPP in 1966

The Canada Pension Plan was introduced in 1966, in parallel with the Quebec Pension Plan (QPP). The Plan provided for the first time a public, earnings-related retirement income, together with ancillary benefits such as disability benefits and survivor benefits. The purpose of the CPP was to make reasonable minimum earnings replacement available to all workers at retirement, if they were disabled, and to their dependants in case of death, up to an earnings ceiling. The Year’s Maximum Pensionable Earnings (YMPE), which is the earnings ceiling, has been approximately equal to the average, annual industrial wage.

CPP survivor benefits were implemented as part of the original CPP in 1966, when most married women usually had little experience working outside the home in the paid labour force. Many employed Canadians did not have access to employer-sponsored pension plans, and many of those who did were subject to quite varying benefits. It was believed that most widows and dependent children would require assistance, as they could not adequately support themselves with employment earnings or income from other sources, such as investment income. Therefore, the federal and provincial governments agreed that survivor benefits under the CPP and QPP should ensure that the female spouse and dependent children of a male contributor would have a measure of earnings protection in the event of the contributor’s death.

CPP survivor benefits, like the entire CPP, have always been financed through compulsory contributions of all employees and employers (including self-employed workers) and from the investment earnings of the CPP Investment Fund. The system was designed to be on a pay-as-you-go basis, with a small reserve fund in the long run. Initially, however, income exceeded outgo, and the excess funds were maintained in the CPP Investment Fund.

The CPP is a defined benefit plan in that CPP survivor benefits paid out, as well as CPP retirement and CPP disability benefits, are based on a formula driven by the level of earnings and length of contributions made by the worker. A ten year transition period was established for retirement benefits to deal with the first generation of recipients for whom the CPP was in place for only part of their working lives.

CPP survivor benefits have always had three main components: Death Benefits, widow’s/widower’s benefits (now called Surviving Spouse’s Pension Benefits), and Orphan’s Benefits.

Death Benefits provide a lump sum benefit equal to the lesser of six months of the deceased’s CPP pension or 10% of the Year’s Maximum Pensionable Earnings. The death benefit is subject to a minimum qualifying period of contributions of three to ten years.

Widows and widowers now receive benefits based on the same criteria. Originally, eligibility for widower’s pensions was restricted to men who were disabled and substantially dependent on their wife for financial support at the time of her death. Widows qualified for a survivor pension if they had dependent/disabled children or were over the age of 35, as long as sufficient contributions had been made by the husband. Surviving spouses over age 65 receive up to 60% of their deceased spouse’s retirement pension. Surviving spouses under 65 receive a flat rate portion plus 37.5% of the contributor’s retirement pension. Prior to 1987, both widows and disabled widowers were not eligible to continue to receive CPP survivor benefits when they remarried.

Orphan’s benefits are now paid on a flat-rate monthly basis for each dependent child of the contributor at the time of death. However, the original CPP allowed only four children to receive the full orphan’s benefit pension ($25.50 in 1966); the fifth and subsequent children could receive only half the benefits of the first four ($12.75 in 1966).

Since it was introduced, the CPP has also included a general dropout provision, whereby the contributor’s lowest earnings years are omitted from the calculation of lifetime earnings. This calculation is the basis of all the earnings-related pensions and, consequently, determines Surviving Spouse’s Pension benefits. Up to 15% of the years in the total contributory period (ages 18 to 65, or to the retirement age, if the contributor retired between age 60 and 65) can be dropped out.

B. Reforms to CPP Survivor Benefits and Other Features - The Main Effects

Since the introduction of the CPP and QPP, several changes have been made to both systems. The key changes are described in this section.

In 1973, the QPP increased survivors benefits substantially, almost tripling them, to make up for reduced purchasing power of the pension benefits resulting from the high inflation of the late 1960s and 1970s. The CPP did not adjust survivor benefits that year, resulting in substantial differences in benefits between the two systems. The CPP did index all benefits to the Consumer Price Index in 1974, but in some cases major discrepancies remained between the QPP and CPP flat rate payments for orphan’s benefits. Orphan’s benefits under the CPP were somewhat higher and fully indexed for inflation. QPP benefits for orphan’s were lower and not indexed for inflation.

In January 1975, CPP survivor benefits changed such that survivors of female contributors received the same benefits as survivors of male contributors, without the need to prove substantial dependence on the female contributor. Eligibility for being deemed a surviving spouse was also made easier.

Credit splitting was introduced in 1978 under the CPP, one year later than in Quebec. CPP pension credits earned by either spouse during the years of cohabitation are split equally between husband and wife upon divorce or annulment of marriage. Each spouse receives half of the couple’s total pension credits, regardless of their individual contribution. This amendment to the CPP affects retirement benefits as well as survivor benefits in that credits transferred from an earlier marriage may be part of the calculation for benefits paid to surviving spouses and children from a subsequent marriage.

Another dropout provision to recognize child rearing was added to CPP in 1978 (although not implemented until 1983 when sufficient provincial approval was received). Spouses who leave the paid labour force to raise children under the age of seven (or who had below average earnings during such periods) can "drop out" those years from the calculation of life-time pensionable earnings, if it is advantageous to do so. This effectively raises the average pensionable earnings, which in turn determine benefit levels. Orphan’s benefits were also adjusted in 1978 to eliminate the restriction on benefits paid for orphaned children who were the fifth or subsequent child in the family.

The period from 1976 through 1986 witnessed a major pension reform debate on all aspects of the CPP, as well as other elements of the pension system. The pension reform process attempted to deal with virtually all aspects of the CPP including funding, equality, Charter of Rights issues, and financial stability. The process of review led to a range of task forces, conferences, reports and federal-provincial agreements, which examined such ideas as substantially increasing benefits paid to survivors over 65, and transition payments for survivors under age 65. Eligibility rules relating to common-law spouses, remarried spouses, same-sex couples, ex-spouses and adult dependants were also examined. Only some of these issues were actually addressed by Bill C-116, which was passed by Parliament in 1986 to come into effect the next year.

As a result of the Bill, survivor benefits were no longer terminated upon re-marriage. Combined benefits (paid to a survivor with CPP retirement or disability pensions) were also made more generous. The earnings-related portions of combined retirement and survivor benefits were stacked, subject to a ceiling of one maximum retirement pension, for recipients over age 65. For those between 60 and 65, the flat rate component of the survivor’s benefit was added to their actuarially-adjusted retirement pension and the earnings-related portion of the survivor’s benefit. For combinations with disability benefits, the higher of the survivor or disability flat rate was paid. The combined survivor and disability payments were allowed to exceed the maximum retirement benefit ceiling.

Another survivor benefit reform introduced in 1986 was that orphan’s benefits would be paid regardless of the status of the surviving child. In particular, the benefit continued to be paid even if the surviving child married, whereas prior to this amendment, marriage of the child would disentitle him or her to further benefits. Changes were also made in regard to entitlement of adopted children on the death of a natural parent.

Reconsideration of survivor benefits policy continued even as the new rules were being given effect. A Parliamentary Task Force on Pension Reform noted that demographic changes—in particular, the increased participation of women in the workplace—suggested the need for a specific study on survivor benefits. A consultation paper, published in 1987, pointed out:

As a direct result of the marked increase in labour force participation of women and in the increase in single-parent families, the ‘traditional’ one-earner (couple) for whom the existing benefit structure was designed dropped from 58% of all non-elderly families in 1967 to 27% in 1985.

The report went on to make proposals for changes to four main elements: implementation provisions; a transitional benefit structure for current surviving spouses; a new benefit structure for future surviving spouses; and increased children’s benefits. The proposals were subject to Parliamentary Committee review, public consultations, federal-provincial consultations and consideration of Finance ministers, but were not implemented.

In 1991 an amending bill to the CPP was passed by Parliament that contained increases of 30% to orphan’s benefits and benefits for children of disabled contributors. However, other changes to the Surviving Spouse’s Pension were not agreed upon and were not included in the 1991 amendment. Reconsideration of survivor benefits has continued since that time, but no further amendments have been made.

Retirement benefit payments under CPP increased sharply between 1973 and 1986, rising from a low of 43% of total net payments to 66% in 1986. This period corresponds to increases in the retirement beneficiary population as the plan matured, to the liberalizing of pension eligibility, and to the improvement of benefits. Since 1986, retirement benefits have consistently accounted for almost two thirds of the total payments. Recently, the share of total payments accounted for by retirement has fluctuated between 65% and 67% from 1991 to 1996.

Survivor benefits combined with orphan’s and death benefits made up 16% of total net CPP payments in 1994. This represents the lowest percentage in the period from 1970 through 1994 attributable to these components of the CPP. As shown in Exhibit II-1, the portion of total payments allocated to survivor benefits (including the Surviving Spouse’s Pension, orphan's and death benefits) has fallen steadily since 1970.

Since 1989, the survivor benefit category of CPP payments has stabilized at between 16% and 17% of total payments. In this category, the Surviving Spouse’s Pension comprised 13.6%, orphan's benefits were 1.3%, and death benefits made up 1.5% of total net payments in 1994. Orphan’s benefits have accounted for a smaller portion of total payments than death benefits since 1986. Prior to 1986, orphan's benefits were always a greater portion of total payments than death benefits. These trends are accounted for by the maturing of the over-65 beneficiary population and the lower birth rate since the baby-boom.

EXHIBIT II-1CPP Benefit Components, Percentage of Payments

Source: Data provided by Planning and Strategic Studies, Human Resources Development Canada, January 1995.