Canada Pension Plan - History

History

The Liberal government of Prime Minister Lester B. Pearson in 1966 first established the Canadian Pension Plan. Contribution rates were first set at 1.8% of an employee's gross income per year with a maximum contribution limit. By the mid-1990s though this low contribution rate increase was not sufficient to keep up with Canada’s aging population. As a result the total CPP contribution rates for both employee and employer together were raised to an annual rate of 9.9 per cent by 2003.

At its inception, the prescribed CPP contribution rate was 1.8% of an employee's gross income up to an annual maximum. Over time, the contribution rate was increased slowly. However, by the 1990s, it was concluded that the "pay-as-you-go" structure would lead to excessively high contribution rates within 20 years or so, due to Canada's changing demographics, increased life expectancy of Canadians, a changing economy, benefit improvements and increased usage of disability benefits (all as referenced in the Chief Actuary's study of April 2007, noted above). The same study reports that the reserve fund was expected to run out by 2015. This impending pension crisis sparked an extensive review by the federal and provincial governments in 1996. As a part of the major review process, the federal government actively conducted consultations with the Canadian public to solicit suggestions, recommendations, and proposals on how the CPP could be restructured to achieve sustainability once again. As a direct result of this public consultation process and internal review of the CPP, the following key changes were proposed and jointly approved by the Federal and provincial governments in 1997:

• Increase total CPP annual contribution rates (employer/employee combined) from 6% of pensionable earnings in 1997 to 9.9% by 2003.
• Continuously seek out ways to reduce CPP administration and operating costs.
• Move towards a hybrid structure to take advantage of investment earnings on accumulated assets. Instead of a "pay-as-you-go" structure, the CPP is expected to be 20% funded by 2014, such funding ratio to constantly increase thereafter towards 30% by 2075 (that is, the CPP Reserve Fund will equal 30% of the "liabilities" - or accrued pension obligations).
• Create the CPP Investment Board (CPPIB).
• Review the CPP and CPPIB every 3 years.