1998 Changes to the Canada Pension Plan (CPP)

In January 1998, Parliament enacted Bill C-2 which amended the Canada Pension Plan.

Securing the future of Canada's retirement income system is a key priority for the Government of Canada and Canadians alike. When the Canada Pension Plan was introduced in 1966, the face of Canada's population was entirely different than it is today. A quickly growing seniors' population, a generation soon to retire, and a rapidly shifting economy has meant that changes to the Canada Pension Plan were essential to maintaining an affordable, sustainable, and fair system for everyone.

To guarantee that the Canada Pension Plan will be there for Canadians in the future, the Government of Canada has put in place a strong and balanced package of changes to strengthen the Plan's financing, improve the investment practices, and moderate growth in costs. Although the Government of Canada administers the Canada Pension Plan, changes to the Plan cannot be made without the agreement of 2/3 of the provinces with 2/3 of the population. This ensures that the Canada Pension Plan is there for Canadians today and tomorrow - not just for workers when they retire, but also for Canadian workers and their families should they become disabled or die. These changes maintain the Canada Pension Plan Fund, to keep future contribution rates down, and to strengthen Canada's retirement income system.

Following are answers to frequently asked questions about the changes and what they mean to Canada Pension Plan contributors and beneficiaries.

What did not change?
As a current beneficiary, did the amount of my cheque change?
What are highlights of the changes?
Can my application be considered under the old rules?
Why are these changes necessary? Why must the CPP contribution rates go up so much
Can I opt out of the Plan?
If I work for different employers during the year, can I still contribute to the Canada Pension Plan?
How do the changes improve the Plan?
Will the Canada Pension Plan be there for me when I retire?
How do the changes affect:

What did not change?

If you were age 65 or older on December 31, 1997, you were not affected by the changes for future Canada Pension Plan retirement pensions.
Canada Pension Plan retirement pensions, disability benefits, survivor benefits and combined benefits actually being paid as of December 31, 1997, were not affected.
Age of retirement for early, normal or late pension benefits remained unchanged.
All benefits under the Canada Pension Plan except the death benefit remain fully indexed to inflation.

As a current beneficiary, did the amount of my cheque change?

No. Benefits already being paid when the legislation was passed were not reduced. However, if you were a beneficiary and you apply for or have your benefit converted to another Canada Pension Plan benefit after December 31, 1997, the new benefit is subject to the legislative changes.

What are the highlights of the changes to the Canada Pension Plan?

Funding and financing

The changes will result in a much larger reserve fund. The fund will grow from its 1998 value, which was enough to provide about two years of benefits, to enough to provide about five years of benefits.
Contribution rates - shared equally between employer and employee - will rise over six years from the 1998 5.85% of contributory earnings to 9.9%, and then remain steady.
The year's basic exemption - the first $3,500 of earnings in any year on which no contributions are paid - was maintained and frozen.

New Investment Policy (effective April 1, 1998)

A new investment policy will secure the best possible return for contributors. Higher investment returns on the fund will help keep contribution rates down.
The reserve fund will be invested prudently in a diversified portfolio of securities for higher returns. This will help pay for benefits for future generations. The fund will be managed by a new Canada Pension Plan Investment Board , acting at arm's length from government.

Benefits and their Administration

The formula for calculating Canada Pension Plan retirement pensions includes an adjustment of previous earnings to make them comparable to earnings at the time of retirement. Previously, the adjustment was based on maximum pensionable earnings for the last three years. Under the changes, the adjustment is now based on maximum pensionable earnings for the last five years from 1999 onwards. The formula otherwise remains unchanged.
Administration of disability benefits has been tightened.
- To be eligible for disability benefits, workers must have made contributions in four of the last six years instead of two of the last three years or five of the last 10 years.
- Retirement pensions for disability beneficiaries are now based on maximum pensionable earnings at the time the disability occurs and then indexed to prices until age 65, as with other Canada Pension Plan benefits.
- The rules for combining survivor and disability benefits, and survivor and retirement pensions, have been changed.
- The death benefit now equals six months of retirement benefits, up to a maximum of $2,500, and is frozen at that level.

Stewardship and Accountability

Accountability to Canadians will be strengthened.
Canadians will receive regular reports on their Canada Pension Plan contributions.
Federal-provincial reviews will be required every three years rather than every five.

Can my application be considered under the old rules?

Most of the changes took effect January 1, 1998. Some changes, however, will depend on the date of the key event. For example, whether the old or new rules apply to a death benefit depends on when the contributor dies, not when the application is received. Whether the old or new rules apply to a retirement pension will depend on when the applicant reaches age 65, or whether the benefit was being paid as of December 31, 1997.

For a disability benefit, it will depend on when the person is deemed to have become disabled under Canada Pension Plan legislation.

Why are these changes necessary? Why must Canada Pension Plan contribution rates go up so much?

The Government of Canada and the provinces, as joint stewards of the Canada Pension Plan, believe that all reasonable steps should be taken to ensure that the Canada Pension Plan is sustainable, affordable and fair to all generations now and in the future.

The Chief Actuary of the Canada Pension Plan indicated that if no changes were made to the Canada Pension Plan and the way it was financed, our children and grandchildren would be required to pay more than 14.2% of contributory earnings (shared equally between employer and employee) in the year 2030 for the same pensions we are paying 7.8% for today.

Can I opt out of the plan?

You cannot opt out. Canada Pension Plan is more than just a retirement plan. It also provides some protection in the event of disability and death. In order to protect all Canadian workers and their families, compulsory coverage is necessary. Pooling the costs of benefits across the entire workforce provides workers and self-employed persons and their families with some affordable coverage that would not otherwise be available.

The combined rate for employees and employers under the changes will rise to a maximum of 9.9% in 2003.

Remember also that you do not pay any contributions on the first $3,500 of earnings nor on earnings above $38,300 (in 2001).

If I work for different employers during the year, can I still contribute to the Canada Pension Plan?

Yes. The Canada Pension Plan is fully portable no matter how often you change jobs or where you work in Canada. Every employer is required to collect Canada Pension Plan contributions from each employee, and your contribution record is updated annually. The Canada Pension Plan administration keeps an account of all your contributions to the plan, regardless of how many employers you work for during your career, or where in Canada you work. Note that your contribution ceiling, or yearly maximum pensionable earnings ($38,300 in 2001), remains the same no matter how many employers you have during the year.

How do the changes make the Canada Pension Plan more sustainable, affordable and fair to Canadians?

The new contribution rate schedule and investment policy puts the Canada Pension Plan on a sound financial footing.
The 9.9% contribution rate (paid half by the employer, half by the worker) ensures that the Canada Pension Plan remains affordable for Canadians now and in the future. Canadians will not have to pay the 14.2% contribution rate projected in the 1995 actuarial report.
The current generation of older workers will contribute a fairer share towards their pensions. This will lessen the burden on the next generation of workers.
A steady-state contribution rate of 9.9% means that the burden of paying for pensions will be fair to current and future generations.
A balance between combined contribution rate increases and benefit changes will ensure that the changes are fair across generations, and fair to both men and women.

Will the Canada Pension Plan be there for me when I retire?

The changes strengthen the financing of the plan and reduce its costs, thus securing its future. Canadians can be confident that Canada Pension Plan benefits will be available when they retire.
The Canada Pension Plan contribution rates will increase in steps to reach a combined employer-employee rate of 9.9% by 2003, instead of rising to the 14.2% by 2030 as projected by the Chief Actuary. The 9.9% level, called the steady-state rate, is projected to be enough to sustain the fund with no further rate increases.
The new investment policy will ensure the Canada Pension Plan Fund is prudently invested to achieve higher returns, in the best interest of contributors. This will help pay for benefits for future generations.
Other balanced and moderate changes will slow the rate of growth in the cost of providing benefits to Canada's aging population.
More frequent monitoring of the Canada Pension Plan and new governance provisions will alert Canadians to any problems, so their governments can address them.

Children's Benefits

How do the changes affect Canada Pension Plan children's benefits?

Under the1998 changes, there is no impact on children's benefits, either for current beneficiaries or future beneficiaries.

Combined Benefits

How do the changes affect the way Canada Pension Plan benefits are combined?

The method for calculating combined benefits changed. Under the changes, the combined survivor/retirement benefits are lower for many new beneficiaries. As well, the changes mean lower combined survivor/disability benefits for all new beneficiaries.

Death Benefit

Have the changes affected the Canada Pension Plan death benefit?

The death benefit changed from the former amount of six times the monthly retirement pension of the deceased contributor to a maximum of $3,580 (in 1997), to six times the contributor's monthly retirement pension up to a maximum of $2,500 and is frozen at that level. This change applies to deaths after December 31, 1997.

Disability Benefits

How did the changes affect disability benefits?

Eligibility for disability benefits, in addition to meeting medical requirements, now requires contributions in four of the last six years on earnings that are at least 10% of the year's maximum pensionable earnings ($38,300 in 2001). As well, for those receiving disability benefits at age 65, instead of calculating the retirement pension based on the year's maximum pensionable earnings at the time of retirement, the calculation is now based on the year's maximum pensionable earnings at the time of disablement and indexed to age 65.

Benefits will continue to be fully indexed to prices and can be augmented at age 65 by the Old Age Security/Guaranteed Income Supplement.

The former contributory requirements applied to anyone who was considered to be disabled before the end of 1997. The new contributory requirements of four out of the last six years for a disability benefit apply to persons who are determined to have become disabled in 1998 or later.

Are persons with disabilities being targeted by these cuts?

No. These measures are part of a balanced package of changes to ensure that Canada Pension Plan is affordable and sustainable for future generations. The Canada Pension Plan will continue to provide disability benefits that are fully price indexed. The measures will enable the Canada Pension Plan to continue to provide disability benefits in a fair, consistent and responsible manner while controlling costs. In fact, the long-term impact of the benefit changes will be shared among retirees, survivors or estates, and persons with disabilities.

Will Canada Pension Plan disability beneficiaries receive less money at age 65 when their disability benefit converts to a retirement pension?

After December 31, 1997, for those receiving a disability benefit at the time of conversion to a retirement pension at age 65, retirement pension calculations will be based on the year's maximum pensionable earnings at the time of disablement rather than at the time of retirement. This could result in a lower Canada Pension Plan retirement pension than under the previous provisions. However, recipients will also be eligible for Old Age Security, which will augment their incomes.

Improved Administration of Disability Benefits

What improvements were made to the administration of disability benefits?

The adjudication, appeals and reassessment processes have been strengthened to ensure benefits are paid only to those who continue to be disabled. New guidelines issued in 1995 stress the use of medical factors and rule out the use of socio-economic factors in assessing disability. The new guidelines have also helped adjudicators make very difficult and complex decisions. Improved client communications stress the rights and responsibilities of those receiving benefits to inform the Canada Pension Plan administration when their medical condition changes. Incentives to return to work have also been introduced, and a vocational rehabilitation program has become a regular part of Canada Pension Plan disability operations.

Retirement Pensions

How did the changes affect retirement pensions?

First, some key aspects of the retirement pension are not affected:

Canada Pension Plan retirement pensions being paid as of December 31, 1997 are not affected.
Future retirement pensions of those age 65 or over as of December 31, 1997 are also not affected by the changes, regardless of whether or not they are receiving a benefit.
The retirement age for early, normal or late pension benefits remains unchanged.
Retirement benefits remain fully indexed to inflation.

Only one aspect of the Canada Pension Plan retirement pension changed. The plan now uses a five-year average for adjusting previous earnings to make them comparable with current wages, instead of the previous three-year average. The calculation formula is otherwise unchanged. The amount of the pension still depends on how much, and for how long, a person has contributed to the plan and at what age he/she chooses to start receiving it.

For example: If the five year average were used in 1997, the average monthly pension of $383.49 in June 1997 would have been reduced to $377.13, only $6.36 less per month. The maximum pension of $736.81 per month would be reduced by $12.23.

This change did not apply to retirement pensions being paid as of December 31, 1997.

How is a Canada Pension Plan retirement pension calculated?

A retirement pension is calculated using a complex formula that takes into account how much and for how long you contributed to the plan between age 18 and age 70 or the start of a retirement benefit.

The formula protects your benefit by making some adjustments before calculating your pension.

Some years of low earnings may be excluded from the calculation - for example, periods when you stopped working while raising children under age 7, or periods when you received disability benefits.
As well, 15% of the lowest earning periods during your contributory period are excluded, which could increase the amount of your pension.

As a rough rule, your Canada Pension Plan retirement pension will equal about 25% of your average monthly pensionable earnings over your working life, after upward adjustment to reflect current wage levels.

If a contributor retires at age 55 and applies for an early retirement pension at age 60, which five years of earnings are used to determine the pension amount?

The method many private pensions use to calculate a benefit is quite different from how the Canada Pension Plan calculates benefits. For a private pension, the pension benefit is often based on the number of years worked and an average of your best or last five years of earnings. For the Canada Pension Plan, it is not the contributions in the last five years that determine your benefit but all contributions and related pensionable earnings during your working life (referred to as your contributory period). Your contributory period starts at age 18 or in 1966, whichever comes later, and ends when you start collecting a Canada Pension Plan retirement pension or reach the age of 70. The amount of the pension will depend on how much, and for how long you have contributed to the plan and the age you choose to receive it.

Survivor Benefits

Do the changes affect survivor benefits?

Survivor benefits being paid in 1998 were not changed. However, should the survivor beneficiary qualify for a second benefit at some time in the future, the maximum combined amount payable through the two benefits would be calculated using new combined benefits rules, which may result in a lower overall combined benefit.

Future survivor benefits are affected by the change to the retirement benefit calculation, since survivor benefits are based on a calculation of the deceased spouse or common-law partner's retirement benefit.

Do you need additional information?

If you need more information about the Canada Pension Plan, please call free of charge 1 800 277-9914. If you have a hearing or speech impairment and you use a TDD/ TTY device please call 1 800 255-4786.

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