In late September, the federal government tabled Bill C-2 to amend the Canada Pension Plan Act. The bill proposes a wide range of changes to the CPP.

Overview

Bill C-2 is the result of the latest federal/provincial statutory review of the CPP which began in 1995. The bill incorporates changes proposed by the provinces which affect fuller funding, a new investment policy and amendments to benefit calculations and administration of the CPP.

The amended provisions establish and address the fiduciary obligations of the CPP Investment Board, deal with conflict of interest and the appointment of directors. The government intends to institute this new regime by Dec. 1997 to allow new benefits, investment measures and increased contribution rates to become effective Jan. 1, 1998.

Statutory Requirement & Review

The amendments proposed in Bill C-2 are supported by the federal government and all provinces, except Saskatchewan and British Columbia. The Province of Quebec has a similar plan, the Quebec Pension Plan (QPP). Provincial support for the proposed modifications fulfils the statutory requirement that CPP changes have the agreement of at least two-thirds of the provinces containing two-thirds of Canada's population.

Current pensioners will not be affected by the proposals. Full indexation of all benefits except the death benefit remains unchanged, as do eligible retirement ages.

Fuller Funding

Foreseeing a financial drain when the "baby boomer" generation retires, the government proposes to build substantial fund reserves by increasing contribution rates over the next six years, from 5.85 per cent to 9.9 per cent of annual contributory earnings. This represents a $450 per year increase for Canadians at or above the yearly maximum pensionable earnings, currently $35,800. This funding arrangement replaces the "pay as you go" approach to reduce intergenerational transfers.

The year's basic exemption -- the first $3,500 of earnings on which no contributions are paid -- will be maintained, but frozen at that present level. Contribution rates will continue to be shared equally by employers and employees. Thus the year's basic exemption will not be indexed for inflation. This results in an increase in the portion of earnings not exempted.

During the consultative committee hearings in May 1996, CAUT recommended that CPP contribution rates be increased immediately by 0.3 to 0.4 percentage points per year to a maximum of about 10 per cent in ten years. The government's proposed schedule of rate increases is much more dramatic -- taking six years rather than ten to reach its target.

CAUT also recommended raising the pensionable earnings ceiling to between 1.5 and 2 times the Average Industrial Wage. Bill C-2 does not raise the pensionable earnings ceiling to either of those levels, but does continue for now to index the current yearly maximum pensionable earnings in future years.

Benefit Changes

There are six proposed changes to the calculation and administration of future CPP benefits.

Retirement pensions will be based on the average of the last five years yearly maximum pensionable earnings, rather than the last three. An individual's pattern of compensation in the years prior to retirement is the key factor in determining the effect of this change on retirement income.

There will be an attempt to be more consistent in dealing with appeals for disability benefits.

Eligibility for disability benefits will be tightened. CPP contributions will be required in four of the last six years to be eligible.

Retirement pensions for disabled beneficiaries will be based on maximum pensionable earnings at the time of disability, then price-indexed to age 65.

Changes will limit the extent to which survivor and disability benefits, and survivor and retirement benefits, may be combined.

The death benefit will be reduced from $3,580 to $2,500. The lack of indexing means a further reduction in the real value of this benefit in the future.

CAUT had recommended that benefits be maintained and indexed to inflation. Bill C-2 generally respects those recommendations. However, the proposed premium schedule contains increases far in excess of the limits recommended by CAUT. The government also did not accept our advice to implement a clawback on the death benefit for large estates.

Investment Policies

As joint stewards of the CPP, the federal and provincial ministers have agreed to invest CPP monies in diversified portfolios of securities. An investment board will manage the CPP fund and be accountable to government and the public. The foreign property limit for pension funds will apply to the CPP. The board's policies will be reviewed in 1999.

CPP Reports

CAUT recommended that there be a concentrated effort at educating the public on how the CPP works, how it is funded, and how it affects Canadians' retirement. Canadians will now receive regular statements about their CPP pension. The CPP Investment Board will provide quarterly financial statements and annual reports. The board will hold public meetings at least biennially in each participating province to report on the performance of the CPP investment fund.

Seniors Benefit

Changes to the Old Age Security and Guaranteed Income Supplement legislation will follow the government's CPP initiatives. The new Seniors Benefit, at present, is to take effect in 2001, but there continues to be much discussion with the Ministry of Finance by seniors and other interested groups, including CAUT.

Future Amendments

A number of other issues related to sustaining the CPP need to be addressed. Many of these concerns were raised late in the 1995 review. Such matters include partial pensions, survivor benefits, credit-splitting, CPP coverage and the stacking of pensions and employment insurance benefits. These issues will be examined over the next two years, but there is no change envisioned for the steady-state contribution rate of 9.9 per cent of pensionable earnings achieved by 2003.

Bill C-2 addresses some items not yet treated by CAUT. For example, the legislation includes clauses about liabilities and debts owed to the Crown or third parties by the contributor. These provisions pertain to the continuance of disability or survivor pensions and child benefits under the CPP. There are other proposed amendments which relate to the use of social insurance numbers that have privacy ramifications for Canadians, and the definition and application of "spousal agreements" have important consequences concerning benefits for spouses.

CAUT is concentrating its lobbying efforts on the immediate legislative amendments to the CPP. A contact network of interested members from local associations has been established. A task force is working on the CAUT lobby as Bill C-2 proceeds through the various stages in the House of Commons and Senate.

Gary Tompkins teaches economics at the University of Regina and is a member of the CAUT Collective Bargaining & Economic Benefits Committee.

Bob Moore is CAUT professional officer for economic benefits.