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A. Introduction This chapter reviews the rationale for survivor benefits and other features of the CPP. The social, demographic and economic conditions in Canada have evolved dramatically since the mid 1960’s, when the basic provisions being studied were implemented. Conditions have even changed since the 1970’s and 1980’s when new features to the CPP (e.g. flexible retirement, child rearing dropout, credit splitting on marriage breakdown) were implemented. The chapter is organized as follows:
B. Original Rationale for Survivor Benefits and Other Ancillary Benefits in General 1. Survivor Benefits The stated reason for the introduction of the CPP as a whole was to provide a measure of protection to all Canadian workers and their families against the loss of earnings due to the death, disability or retirement of the worker. The CPP survivor benefits were developed to address the potential financial difficulty faced by the surviving spouse and dependent children in the event of the death of the main income provider in the family. The primary role of the CPP is earnings replacement, as indicated by the Minister of National Health and Welfare at the time of the CPP’s introduction. The Minister summarized the issue as follows: "What people need, if either retirement or the death or disablement of the head of the family removes their regular income, is related in part to the level of earnings to which they have been accustomed." Income replacement provided by the CPP was tied to earnings, not solely to the contributions made to the program. There are both elements of "income distribution" and "insurance" that weaken the strict relationship between contributions made by the contributor and benefits received by a beneficiary. For example, contributors pay contributions only on earnings in excess of the Year’s Basic Exemption (YBE),1 while benefits are based on the entire earnings rate, up to the Year’s Maximum Pensionable Earnings (YMPE). The table below illustrates this effect for two sample salaries:
The insurance element in the case of disability and survivor benefits is reflected in the flat rate component. This is independent of the contributor’s earnings record and is payable once the contributor has met the eligibility criteria for the benefit. Therefore, low income contributors, disabled persons, and survivors in many cases receive a much larger benefit, as a proportion of contributions paid, than other beneficiaries. The provision of CPP survivor benefits may also act as a substitute for life insurance for the family’s main income earner. For young families who have relatively higher demand for life insurance, survivor benefits may be viewed as having a life insurance component as well as income support provisions. Substitution of CPP for life insurance would be most prevalent in lower income families. Prior to the introduction of the CPP in 1966, private pension plans were becoming an increasingly important part of the negotiated compensation packages provided in the private sector. Private plans were growing in importance, particularly in Ontario, and would have become more prevalent in the absence of the CPP according to the Report of the Ontario Task Force on Inflation Protection for Employment Pension Plans (1988). By 1960, 34% of Canadian workers participated in private pension plans; coverage increased to 38% of workers by 1965. More recent data from Statistics Canada on private pension plans indicate that 44.6% of paid workers were covered by private pension plans in 1993. Of the total labour force, only 35.4% were covered by private plans.2 Statistics Canada’s Ageing and Independence survey, 1991, shows that men were far more likely than women to have a job-related pension. Data from the Survey of Surviving Spouses conducted for this evaluation shows that 45% of the female survivors reported having some income from private pension plans, although the amount (proportion of total household income) was not established. Private registered retirement savings plans (RRSPs) do provide for surviving spouses in that the RRSP can be transferred to the surviving spouse when the owner of the RRSP dies. RRSPs are not used by the majority of the Canadian population. The 1993 Canadian Institute of Actuaries report cites a survey that found 35% of Canadians contribute to RRSPs and Statistics Canada reports that only 26% of all taxfilers contributed to an RRSP in 1993. 3Revenue Canada data for 1992 show that, at all age groups, a smaller percentage of women than men contributed to RRSPs. Data on withdrawals from RRSPs indicate that many Canadians use RRSP funds before they retire, thus weakening the effectiveness of RRSPs as a retirement income protection instrument. With respect to income from RRSPs, our survey of CPP beneficiaries indicated that in 1995, 25% of the female survivors had some income from an RRSP. Workers’ Compensation programs were an earlier form of social security that offered coverage for survivors and children. These programs have existed in all provinces since 1950, well before the Canada Pension Plan. However, Workers’ Compensation provides benefits for survivors only in cases of work-related causes of death. 2. Surviving Spouse’s Pensions "In the social context in which CPP was introduced, a man was considered to be the family breadwinner, and was expected to provide financial security for his wife and children. Married women, for the most part, were expected to be homemakers, without earnings of their own. For this reason, survivors’ benefits were designed to help widows and orphans. However, widows under age 45 were presumed capable of finding gainful employment, unless they were disabled or had dependent children in their care."4 In the case of widows age 65 or over, the survivor pension was 60% of the husband’s pension. In addition, she would have received $75 per month in 1966 from OAS. This plan design was consistent with major public sector employee-spousal pension plans at the time. Widows under age 65 would receive 37.5% of their husband’s entitlement, plus $25, provided they were over the age of 45 and with dependent children. Younger widows without dependent children or not disabled would receive a pro-rated amount (no benefit if they were under age 35). This design is not consistent with that for other pension plans—the rationale seems to be that the Surviving Spouse’s Pension for survivors under the age of 65 is partially "earnings replacement" and partially "income support". In fact, the flat rate component clearly simulates a proportion of the OAS that survivors over the age of 65 would have received. Subsequent changes to the CPP all recognized that the notion of all married women as homemakers was obsolete and removed the distinction between male and female survivors. However, the age, presence of a disability, and family status criteria remain. 3. Orphan’s Benefits The Orphan’s Benefit was a flat $25 per month and was seen as insurance in the event of the death of the father. Originally only one benefit per child was payable, even if both parents were CPP contributors. This was amended in 1987, indicating a subtle change from "insurance" to "entitlement". A limit of two benefits per child was substituted. It is likely that this benefit was introduced based on provisions in existing social security programs in other countries and other pension plans in Canada. For example, the Public Service Superannuation Act (PSSA) provides children’s benefits to deceased contributors to age 21, or age 25 if they are in full time education. This design was also consistent with the view of family benefits and the need to provide for children on the death of the breadwinner, prevalent at the time. 4. Death Benefit Health and Welfare Canada’s 1992 review of the CPP offers a rare glimpse into the rationale for the Death Benefit component. "A benefit payable on the death of a contributor was considered desirable for reasons of fairness and practicality. Even if there were no survivors, it would be only fair to provide some return of the contributions that had been made to the Plan which might be used to cover funeral expenses. If a pension were already in pay, the application for a death benefit would be the notification that it should be terminated."5 This quote indicates that the rationale was two-fold:
Reference is also made to "funeral expenses", but this does not seem to be its main rationale. 5. Dropout Provisions Since its inception in 1966, the CPP has permitted contributors to exclude (or "drop out") the years of lowest earnings from their contributory period. Since inception, this general dropout provision has allowed 15% of years with lowest earnings to be dropped out in calculating C/QPP benefits. Given the maximum contributory period will ultimately be 47 years for those retiring at age 65 or more (65-18), the general dropout provision could mean that full benefits would be paid if 40 years are worked. The child rearing dropout provision was added to the CPP in 1978 (although implementation was delayed until 1983 due to provincial opposition). This provision permits parents to drop out additional years for raising children up to seven years old. The number of years dropped out for child rearing is not limited to 15%; it is determined only by the number years out of the workforce, or in which earnings are below the contributor’s average while caring for children under seven. The rationale for the child rearing dropout provision was to avoid penalizing contributors (mostly women) who left the workforce, or who had years of low earnings while caring for children under the age of seven. It is not clear whether there was a more specific objective of ensuring that such contributors’ benefits would approximate those of contributors who had not left the workforce. In this case, this specific objective is not being met in a number of cases, as will be explained later. The Canadian Institute of Actuaries comments that the general dropout provision makes sense for many contributors who often do not start working until their early twenties, or who miss some period of employment, or who must retire early. They also recognize that the child rearing dropout is valuable in that it addresses concerns about lack of coverage for homemakers. Dropout provisions effectively raise pension (and therefore survivor) benefits. Pensionable earnings are calculated based on average lifetime earnings. Omitting low earnings years raises the average on which CPP pensions are calculated. The dropout provisions are to permit contributors to disregard certain periods of low or zero earnings, thereby preserving the value of the pension earned outside these periods. Flexible retirement in the CPP has effectively shortened the potential contributory period. For example, a full pension (although reduced by the early retirement reduction) is available after 35.7 years for a person who retires at age 60. This and other changes (child rearing dropout and credit splitting) have had some unexpected impacts on the dropout provision. These are further discussed in Chapter 5. 6. Credit Splitting Credit splitting refers to the division of CPP pension credits 6between members of divorced or separated couples. Credit splitting is done by adding together all pension credits of both spouses for each year they cohabited, and dividing the credits equally between them. Credit splitting is mandatory for most divorcing couples. It applies to legally married and common-law couples that have lived together for one year or more. The split credits are not actually paid to either spouse but are credited to the individual’s Record of Earnings which determines retirement, survivor, disability or children’s benefits. Credit splitting was first introduced in 1978 to address the increased frequency of marriage breakdowns. Credit splitting recognizes the reality that pensions are marital property that should be divided equally on marriage breakdown. 7. Assignment of Benefits The rationale for the assignment of a pension in pay would appear to be based on an argument of equity — non-separated spouses should not have fewer options than separated spouses. In any case, this provision seems mainly to have the effect of allowing income splitting for income tax purposes. However, it does provide a spouse who had little or no attachment to the workforce a pension in his or her own name, as is currently the case with OAS and GIS and in the proposed income-tested Seniors Benefit. C. Changes in Social, Demographic and Economic Conditions It should be recognized that most of the benefits being studied in the evaluation are primarily of interest to women: 90% of survivors are women; orphan’s benefits are mostly paid to children who have lost their fathers; and credit splitting is mainly intended to benefit women. The general dropout provision is of greater benefit to those with erratic earnings, as compared to those with a more level earnings record. Women tend to have more erratic earnings than men, generally speaking. In the mid-1960’s the typical Canadian family pattern consisted of a male breadwinner and a non-working wife taking care of children. The death of the breadwinner would not only put an immediate financial strain on the family unit, but would also compromise the retirement savings of the couple. Exhibit III-1 identifies some of the key changes that have occurred, in recent years, together with impacts such changes might have on the rationale for various components. In the next section, we examine the rationale for the program given the social changes that have occurred.
EXHIBIT III-1 Key Changes in Canadian Family Patterns Affecting Program Rationale
D. Analysis of Evidence for Continued Rationale 1. Surviving Spouse’s Benefits
2. Orphan's Benefits Orphan’s Benefits are payable as a flat rate to children of a deceased contributor. The rationale is clearly to provide support for children of deceased contributors. They are payable unconditionally to age 18, and as late as age 25, contingent on the child being in full-time education. Far fewer respondents expressed opinions about the rationale for orphan’s benefits, as compared to surviving spouse’s benefits. On the other hand, those who did saw them in the context of "family benefits", which are particularly needful in case of death where the contributor has a young family. As noted above, the level of survivor benefits was originally established with the entire range of social benefits in mind. Childrens’ benefits have undergone the most radical change to date, from a "universal" benefit to a benefit aimed at lower income families and no benefits at all for higher income families. In the light of the changes, panelists felt that the rationale for an orphan’s benefits in the original form should be reviewed. The rationale for contingent payment after age 18, based on continuation of education, was questioned by some. Although the rationale is clear (to support students of a deceased contributor), uniformity of age of cessation was cited as a reason for eliminating this provision. However, the counter argument would stress the value of investment in human capital. While there was not much discussion of these benefits, it was generally felt that they are not costly; so there was not a strong consensus to eliminate them either. 3. Death Benefits The original rationale, namely, to provide a basic, minimum payment and to encourage the reporting of a death, has not changed. However, very little discussion of this benefit was engendered, either with the expert panel or the interviewees. Evidence from the international study was mixed—with some countries having a lesser benefit than Canada, while others have substantially greater benefits. In summary, a number of respondents questioned the need for this benefit in today’s society. Those who think of it solely as a subsidy of funeral expenses think that few, besides the totally indigent, would not have enough money available for a simple funeral. Nonetheless, as with orphan’s benefits, the death benefit was not considered a significant cost within the total CPP either and few recommended its elimination. 4. General Dropout Provisions The general dropout of 15% of the years of lowest earnings during the contributory period has been a feature from the inception of the CPP. While its intention was to eliminate the negative impact on the CPP pension of years of absence from, or weak attachment to, the workforce due to illness, unemployment, and continued education, these specific grounds were not incorporated into the Plan. The dropout was designed on a "general" basis. The specific dropout was for months while on CPP disability pension. (The corollary of this is that virtually the only contributors receiving a 100% CPP retirement pension are those who have experienced considerable time on CPP disability. In other words, it is extremely difficult to qualify for a 100% pension even with the general dropout.) Changes to the CPP since inception, principally flexible retirement ages, and introduction of the child rearing dropout and credit splitting have produced some unexpected impacts on the general dropout. More discussion of these issues, together with examples, are found in Chapter 5. Some of the stakeholder interviewees seemed to be aware of these issues, although others minimized their importance. Among those who responded, there was questioning of the basic rationale for the dropout provision—of its place in a contributory social insurance plan. Others, however, supported the original rationale. The expert panel was very supportive of the initial rationale, and indeed felt it was even more required in the current and evolving economic conditions of a less secure employment, more non-standard work and difficulty experienced by young people in entering the workforce in the first place. There was no support for linking the dropout to specific causes of absence, other than child rearing dropout, as at present. Also the panel did not seem to be concerned by the anomalies mentioned above. However, it was suggested that the 15% figure be reviewed in the light of changing economic and social conditions (see Chapter 7 for more discussion on this point). In relation to comparator countries, a dropout expressed as a proportion of a fixed contributory period would appear to resemble the systems indicated in our international review more closely. As the report on the international review points out, direct comparison with the CPP dropout system is quite difficult. The U.K. probably has the closest design, with a fixed 20 year contributory period. The U.S. would also be categorized in a similar manner, although the benefit design in terms of earnings levels and years of contribution is considerably more complex than in the CPP. 5. Child Rearing Dropout Provision The provision of a child rearing dropout was not part of the original CPP design. It came into effect in 1983 retroactive to 1978 as a response to higher participation of women in the workforce and the need to protect contributors who left the workforce to raise young children against a negative impact on their CPP pension due to low or zero-earning years. It should be noted that there is no limit to the number of years that can be dropped out for this purpose, as compared to the limit on the general dropout provision. There was much support for the continuation of this provision, as it is a means to encourage women to remain in the workforce in the longer run, while taking time out to raise a family. Others highlighted some concerns with this provision, for example:
In spite of these shortcomings, support for the continued rationale was particularly strong among the expert panel, somewhat more mixed among the key informants. 6. Credit Splitting Credit splitting on marriage breakdown was introduced in 1978, 12 years after the inception of the CPP. This provision recognized the evolving social reality of higher divorce rates and lesser probability of life-time unions, as compared to earlier epochs. Subsequent amendments to this provision had the effect of giving recognition to common-law unions, and separation as well as divorce or annulment. Other amendments effectively made this provision mandatory instead of voluntary, at least in principle. On separation, credit splitting is only by application to the CPP. Provinces may decide whether this provision can be applied on a voluntary basis, allowing couples to trade-off CPP entitlements in the same way as other marital assets. Currently, only Saskatchewan and British Columbia have taken advantage of this provision. The situation in Québec would be similar to that in these two provinces, although the Civil Code differs somewhat from the common law in effect in the other nine provinces. There was strong support for the rationale for this provision, given the continued high rates of marriage breakdown and general acceptance of sharing of marital property. There is also strong support for a mandatory approach. It should be noted that a significant proportion of the interviewees were not aware that it was already mandatory, and recommended that the provision be "changed" to make it mandatory. This reflects the reality that, to date, awareness of the provision is low and effective enforcement/communication mechanisms have not been found. It is interesting to note a split in opinion regarding the mandatory nature of the credit split between experts and key informants on the one hand and the general public (as indicated in the various surveys) on the other. The general public appears to support "choice" in general and opposes mandatory provisions which limit choice. The experts, on the other hand, recognize that parties (especially women) may be poorly informed about the value of their entitlement and might be inclined to trade it away too easily. The experts feel that limitation of choice was warranted in this case due to the asymmetric knowledge and bargaining power of the two sides of marriage breakdown. The international study showed that no other country has implemented a credit splitting approach. However, some countries do pro-rate survivor benefits, while others are considering credit splitting provisions. 7. Assignment of Benefits Even in the absence of a marriage breakdown, spouses in receipt of a CPP pension can assign each other half of their pension. There was not much discussion of this particular provision. Where it was discussed it gave rise to mixed feelings. On the one hand, it was seen as purely an income splitting device to reduce income taxes. The rationale for this was questionable, especially as "special deals" for seniors seem to be coming to an end. On the other hand, it is viewed as giving a spouse who may not have his or her own income a right to a pension in his or her own name. This is similar to the current OAS and GIS provisions as well as the proposed Seniors Benefits. E. Summary In spite of changing conditions there is strong evidence for a need for surviving spouse’s benefits. There is strong evidence for the rationale of post-retirement survivor benefits in its present form. There is consensus for continuation of pre-retirement survivor benefits in their current form, but it is weaker than the consensus in regard to post-retirement benefits. Flat-rate benefits and age/family status criteria are questioned by some experts. Current beneficiaries tended to support the status quo when surveyed with respect to whether benefits should vary with the age of the surviving spouse and whether benefits should be related to the survivor’s income. Insofar as orphan’s benefits and the death benefit are concerned, far less discussion was elicited from the expert panel and key informants. Current beneficiaries support the current rules. By and large, experts were less supportive of the rationale than in the case of spousal survivor benefits. Conversely, there was little support for the elimination of these benefits, partly because of the insignificant savings that this would bring about. Adequacy of the benefit was validated in a qualitative sense, in relation to original, implicit replacement target, but interaction with other evolving social programs was questioned. Finally, strong support was shown for continued provision of survivor benefits from the federal source (i.e. CPP). The continued rationale for the general dropout provision was supported, even enhanced in view of labour market instability, and 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 among experts for the rationale for continuation of credit splitting on marriage breakdown. Assignment of pensions in the absence of marriage breakdown was questioned.
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