The Canada Pension Plan (CPP) was established in 1966 to provide all working Canadians with retirement income and financial assistance to their families in the event of death or disability. The annual contribution rate was set at 3.6 per cent of earnings. The CPP is administered on behalf of all participating provinces by the federal government.

The CPP was designed as a "pay-as-you-go" rather than a "fully funded" pension plan. This meant that each generation paid the pensions of the previous generation.

The CPP worked well for 30 years. For most of that time, substantially more money flowed in than was paid out.

By the mid-nineties, however, despite an increase in the contribution rate to six per cent of earnings in 1996, projections indicated that changing demographics and increasing life expectancy of Canadians meant that more money was being paid out in benefits than was being collected. As a result, the CPP was headed for serious trouble.

In the sixteenth actuarial report on the CPP, the Chief Actuary predicted that the Canada Pension Plan’s reserve fund, the equivalent of two years of benefits, would be depleted by 2015. He estimated that future generations would have to pay 14.2 per cent of contributory earnings to pay the pensions of retired Canadians.

The ratio of CPP contributors to beneficiaries has decreased from 6.5:1 to 5:1 in 2002. By 2030, there will be only three CPP contributors to support every pensioner.

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Review of the CPP

The impending pension crisis sparked an extensive review by the federal and provincial governments in 1996. Public hearings were held across Canada along with a series of meetings with federal and provincial finance ministers, who are ultimately responsible for the CPP.

On February 9, 1996, the federal, provincial and territorial governments released a joint information paper on the CPP entitled An Information Paper for Consultations on the Canada Pension Plan. This paper formed the basis for consultation with the Canadian public.

On March 28, 1996, David Walker, then Member of Parliament for Winnipeg-North Centre, was appointed chief federal representative for the public consultations. One Member of Parliament, and at least one elected representative from the respective provincial or territorial governments, joined Mr. Walker for each public meeting.

Public consultation began on April 15, 1996. More than 270 Canadians made formal presentations during 33 sessions held in 18 cities. In addition, the CPP Secretariat received 140 written submissions and 6,000 inquiries or comments were logged to the 1-800 information line.

Quebec, which has its own plan, the Quebec Pension Plan, conducted its own public consultations within the province in parallel with the consultations on the CPP.

Plan Improvements

As a result of the review and input received during the consultation process, several changes were implemented to put the CPP on firmer financial footing and build greater assets for the future.

• Contribution rates were increased in stages from six per cent in 1997 to 9.9 per cent of maximum pensionable earnings by 2003
• Improvements were made to the CPP administration to lower operating costs
• The CPP fund near-term  fund target was increased from two to five years of benefits
• A new funding level goal was established. The Plan is expected to be 20 per cent funded (that is, CPP assets will equal 20 per cent of the liabilities - or pension obligations) by 2017
• Pension plan statements were scheduled to be issued annually to all contributors and beneficiaries
• The CPP Investment Board, an independent investment organization separate from the CPP, was established to invest excess CPP funds in a diversified portfolio of securities, and
• The federal and provincial finance ministers agreed to review the CPP and the CPP Investment Board every three years instead of every five years.

These changes, outlined in a paper titled Securing the Canada Pension Plan: Agreement on Proposed Changes to the Canada Pension Plan, were approved by Parliament in December 1997 and received the formal approval of the participating provinces soon after.

Changes to the schedule of contribution rates were made effective January 1, 1998 and the CPP Investment Board began operations in April 1998.

The changes made to the CPP and the creation of the CPP Investment Board will ensure that the Plan is affordable and sustainable for generations to come.