FEWO Committee Report

The CPP and QPP make up the second pillar of our retirement income system in Canada. These plans are mandatory contributory pensions for workers, funded in equal parts by the employer and employee. The CPP provides contributors and their families with basic income replacement upon retirement, disability, or death of a wage earner. It covers workers in all sectors of the economy, including those working in non-standard arrangements and the self-employed, both of which are important sectors for women. The CPP provides a retirement pension equivalent to 25% of the contributor's average annual lifetime earnings up to a maximum of $908.75 a month.

The CPP is financed through mandatory contributions from virtually all workers and their employers, including the self-employed. The contribution rate is 9.9% of earnings between $3,500, which is the Year’s Basic Exemption and the Year’s Maximum Pensionable Earnings ($46,300 in 2009). The contribution rate is split equally between employees and employers so that the maximum amount paid by employees and employers per year is $2,118.60 (2009) each. The self-employed pay both the employee and employer share of the contributions.[23]

As we saw in Chapter 2, the first goal of Canada’s retirement income system is to prevent and alleviate low-income among Canadians sixty-five years of age and over. The second goal of Canada’s retirement income system is to help Canadians avoid a significant decline in their standard of living when they retire. This goal is met through a combination of the mandatory contributory pensions for workers (CPP and QPP) and
tax-assisted private savings in RPPs and RRSPs.

The replacement rate provides information on the pension income relative to earnings when working. The net replacement rate compares the after-tax income, whereas the gross replacement rate compares the income levels before tax. The replacement rate is a useful measure of the ability of seniors to maintain their pre-retirement standard of living.

The combination of the CPP and OAS/GIS is intended to provide an income replacement rate of about 40%. A 2009 report by Canadian economist Monica Townson indicates that “OAS provides about 13% of pre-retirement earnings. Retirement benefits from the CPP provide another 25% for a total of 38%.”[24]

A recent OECD report, Reforming Retirement Income Systems: Lessons from Recent Experiences of OECD Countries, pointed out that the mandatory pension in many OECD countries provide a higher gross replacement rate than that in Canada.
The average gross replacement rate in the OECD is 58.7%, compared to about 40% in Canada. As a result, Canadians need to make up a greater share of their retirement income from private sources which comprise the third pillar of the retirement income system, either through RPPs or RRSPs.

A. Level of Benefit

Although the maximum CPP benefit is $908.75 a month, the majority of recipients receive considerably less than that amount. Ms. Monica Townson told the Committee that:

[T]he average monthly retirement pension that's being paid to men who retired in May 2009 was $564 and for women, it was only $391. In other words, women were getting less than 40% of the maximum benefit. That difference, of course, reflects the fact that many women's have spent less time in the paid work force over their lifetimes than men have, but in particular that women have lower earnings than men.[25]

As the table below indicates (Figure 3.1) the Office of the Chief Actuary projects this discrepancy between the CPP benefit received by women and men into the foreseeable future.

Figure 3.1 Projected New Retirement CPP Pensions

	Projected new beneficiaries (thousands)				Average Monthly Pension of new beneficiaries ($)
		Female	Male	F/M ratio	Female	Male	F/M ratio
2007		134.0	135.9	98.6%	369.33	553.89	66.7%
2010		149.6	149.6	100%	409.83	582.27	70.3%
2015		172.2	171.2	100.5%	483.56	648.14	74.6%
2025		201.2	200.8	100.1%	692.94	874.57	79%
2050		217.4	213.5	101.8%	1,829.78	2,171.05	84.3%

Source: data presented in brief by Bob Baldwin, based on data in the 23rd Actuarial Report on the CPP, 2007.

B. CPP and Unpaid Caregiving Work

The CPP currently contains three measures to take into account the unpaid caregiving work, which is disproportionately done by women: the general and child-rearing dropout provisions, the survivor benefit, and CPP credit splitting upon separation or divorce.

The average of earnings for the purposes of calculating the CPP allows all beneficiaries to exclude 15% of months of low or nil earnings over a lifetime from the formula used to determine average earnings. This general dropout provision prevents beneficiaries from being penalized for periods of low income due to unemployment, post-secondary education, or illness. Proposed changes to the CPP, which are currently before Parliament, include increasing the dropout provision to 17%. This proposal received strong support from witnesses.

The CPP also allows for a child rearing dropout provision which allows beneficiaries to exclude those years when they had a child under the age of seven from the calculation. As Monica Townson told this Committee, this provision “ensures that women are not penalized if they take time out of the workforce to have children or remain at home or even to work part-time while their children are young”.[26] This provision is a significant benefit to caregivers of young children.

Some witnesses have suggested that removing the years of low income from the pension calculation is not enough. Witnesses have urged the Committee to recommend that pension contributions be made on behalf of those providing unpaid caregiving work. A brief prepared by 14 Quebec women’s groups calls on the government to follow the lead of several European countries (France, Germany, Sweden, Austria) to make pension contributions on behalf of women and men, who are out of the labour force to take care of young children or of sick, disabled or elderly persons requiring care. Some witnesses have suggested that such a contribution could be equal to 60% of the maximum insurable earnings for those caring for children under the age of seven. Mr. Jean-Pierre Laporte suggested that another solution might be an amendment to the Income Tax Act, noting that the Act

[…] says you cannot have a pension plan unless there is an employment relationship, T4 income. If you have someone working in the home, non-remunerated, they are shut out from the whole registered pension plan world. One quick fix is to scrap this antiquated rule and simply allow women who work in the home to participate in a pension plan[27].

The Committee urges the government to study the range of options to ensure that caregivers are not penalized by the public pension system.

Witnesses have pointed out that Canadians will be increasingly called upon to provide unpaid care to older family members, and that this care should not be penalized by the pension system. Monica Townson provided an example of the potential impact of providing elder care on CPP benefits:

Let's say a woman at the age of 55, has to withdraw from the paid workforce to care for her elderly husband or a family member who has disabilities. When she claims her retirement pension[…] she has five years from age 55 to 60, that will have to be included in her average earnings, at zero, which means it's going to bring down the average and she'll get a lower pension.[28]

In light of the aging population and the resulting demands for providing care to senior family members, the Committee calls for the introduction of measures to ensure that this caregiving does not come at the cost of reduced CPP income for the rest of the caregiver’s life. Thus, the Committee recommends:

Recommendation 4

That the government explore the implementation of a caregiver dropout for Canadians who reduce their labour force attachment to care for sick, disabled or elderly persons requiring care, comparable to the current child rearing dropout.

The CPP also provides a survivor's pension to eligible spouses in the event of a contributor's death. Criteria such as the age of the survivor, whether the survivor is maintaining any dependent children or has a disability are considered in determining eligibility and the amount of the pension benefits. In 2008, 84% of survivors were women. The Committee has heard that, while this provision was initially designed on the assumption that the pensioner was supporting a partner whose labour force attachment was reduced in order to care for children, higher levels of divorce and separation sometimes lead to the survivor’s pension being attributed to someone other than the spouse or partner who provided care to children. In light of the changing family situations, the Committee urges the government to explore options to modernize the survivor pension.

Finally, the CPP allows for credit splitting, which is the division of CPP contributory credits upon divorce or separation of married spouses or breakdown of a common law union. It enables former spouses and partners to equally share CPP credits earned during the period of cohabitation. Through credit splitting, the CPP recognizes the contribution to families and society made by both spouses through paid employment, unpaid work in the home, or both. It ensures that former spouses receive their equal share of the CPP credits earned through their joint efforts. Mr. Dominique La Salle, Acting Senior Assistant Deputy Minister, Income Security and Social Development, Department of Human Resources and Skills Development Canada reported to the Committee that “[i]n 2005, 95% of all credit-splitting applicants were women, the vast majority of whom benefited from the provision.”

C. Proposed Changes to the CPP arising from the Triennial Review

Changes to the CPP were recommended by federal-provincial-territorial Ministers of Finance on May 25, 2009, as part of the regular reviews of the plan that they are required to undertake every three years. These proposed changes are currently before the Senate. The proposed changes aim to provide greater flexibility for older workers to combine pension and work income if they so wish; to allow employees over age 65 and their employers to continue to pay into the CPP so that employees can continue to build their CPP pension; and to introduce actuarial adjustment to the CPP’s flexible retirement provisions, as described below.

The CPP’s flexible retirement provisions allow take-up of the retirement benefit as early as age 60; however, benefits are decreased by 0.5% for each month between retirement and the recipient’s 65^th birthday. Similarly, late retirement is rewarded by 0.5% per month after the recipient’s 65^th birthday. Proposed changes to the CPP, which are currently before Parliament, include a phased increase of this penalty to 0.6% per month, and of the incentive to 0.7%. A brief prepared by 14 Quebec women’s groups acknowledges that the economic security of women would be improved if they worked longer, however it suggests that this goal should be met by increasing the incentives for delaying retirement, not by increasing the penalty for early retirement.

The proposed adjustment to the penalty for early uptake of the CPP is intended to make that adjustment actuarially more sound and to encourage workers to stay in the labour force longer. Witnesses have suggested, however, that for many caregivers the retirement decision is not a deliberate and voluntary one. Dr. Lynn McDonald provided the Committee with an illustration of this:

through the caregiving process, women are forced into early retirement, and it's retirement by stealth because they don't think they're going to retire. So what happens is when the caregiving's over, which could be up to 10 years, they then try to go back into the labour force. Their human capital has deteriorated, they have wasted or used all their savings to live, and they can barely afford to even go out to look for a job. Then they face age discrimination because they're an older worker, and who wants an older worker?[29]

Increasing the penalty for early retirement will result in a lifelong reduction in the pension income of caregivers who are forced into retirement. Once again, the Committee stresses the value of the unpaid caregiving work which is done by Canadians, an invisible contribution of $25 billion per year. The Committee urges the government to find ways to ensure that older workers who take time out of the labour force to care for sick or disabled family members are not penalized by the CPP.