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Home , Canada, Canada Pension Plan

Canada Plan of 1965

by DANIEL 5. GERIG and ROBERT J. MYERS*

A LANDMARK in the development of PREVIOUS LEGISLATION ’s social security system was reached in Canada has had Federal legislation dealing with 1965, when the new old-age assistance since 1927. Similar legislation was enacted.’ The law establishes, for the first providing assistance for blind persons was adopted time, a contributory system of earnings-related in 1937 and revised in 1951, and assistance to per- old-age, disability, and survivor insurance ben- manent.ly and totally disabled persons was first efits in Canada. It was assented to on April 3, provided in 1955. These assistance programs are 1965, and was proclaimed on 5. The collec- similar in many ways to those in the United tion of contributions under the new program will States. They are, in effect, Federal- commence in 1966, and retirement ben- Provincial programs, under which the efits will first become payable in January 1967. Government makes grants to the cover- The effect of the new legislation is, in general, ing a part of the cost of the Provincial programs. to superimpose a system of contributory wage- These programs were established and are admin- related retirement on top of the existing istered by each separately. system of universal flat-rate old-age pensions, At present the Federal Government pays 50 which is retained and, in fact, expanded. The new percent of the payments up to $75 a month to retirement pensions will be equal to about 25 per- persons with limited means aged 65-69. It also cent of earnings at the end of an initial transi- shares in the cost of payments of up to the same tional period of 10 . In addition, contrib- amount under the programs for permanently and utory disability and survivor pensions are intro- totally disabled persons and blind persons who duced ; such pensions have previously been pass a means test. In addition, the individual provided in Canada only to needy persons on an Provinces often make supplementary payments assistance basis. All t,he new insurance benefits under their general assistance programs, the costs will be financed from contributions paid by in- of which are shared by the Federal Government sured persons and employers. under the Assistance Act of 1956. The new Canadian social insurance program is All of these assistance expenditures are financed similar in significant respects to the Federal old- from general revenues of the Federal and Pro- age, survivors, and disability insurance (OASDI) vincial governments. program of the .* There are, how- The Provinces, for a number of decades, have ever, a number of important and interesting dif- ferences between the two systems. Some of the also been providing assrstance pensions to needy widowed . ‘The Federal Government does similarities and differences are pointed out in not participate in the cost of these pensions, but t.he of the discussion below. proposals to do so have been made under the Canada Assistance Plan now being developed. *Mr. Gerig is in the OtIlce of Research and Statistics, The new assistance plan, which would consolidate and Mr. Myers is the Chief Actuary of the Social &cur. ity Administration. and improve existing programs, has already been 1 Chapter 51 of 13-14 Elizabeth II. the subject of formal Federal-Provincial dis- 2 See Wilbur J. Cohen and Robert M. Ball, “Social cussions. Security Amendments of 1965: Summary and Legislative History,” Social Security Bulletin, 1965; see The Old Age Security Act, passed in 1951, also Robert J. Myers and Francisco Bayo, “ established a national system of universal flat-rate Insurance, Supplementary Medical Instirance, and Old- old-age pensions, administered entirely by the Age, Survivors, and Disability Insurance : Financing Basis Under the 1965 Amendments,” So&Z SecurCty Federal Government. Before the 1965 legislation, Bulletin, 1965. this program provided for payment of a flat

BULLETIN, 1965 t pension to every person who reached age 70 and 1951, both of which became effective in January who satisfied certain minimum requirements re- 1952, followed closely the ’s recommen- garding length of residence in Canada. The dations. amount of the old-age pension was originally The Federal Government in 1958 engaged Dr. fixed at $40 a month. By successive amendments, R. M. Clark “to conduct an inquiry into facts re- this amount was raised to $46 in 1957, $55 in lating to old-age security systems in effect in November 1957, $65 in 1962, and $75 Canada and the United States.” His report-Eco- in October 1963. nom,ic Security for the Aged in the United States The flat-rate pension is paid at the specified and Ga~da-contained no recommendations. It age whether or not the recipient has retired. The was presented to the Government early in 1959. amount of the pension does not vary with pre- In July 1963 the Government submitted a res- vious earnings or with the income or means of the olution in the House of Commons and issued a recipient. If both a man and his wife have reached supporting statement indicating its intention of age 70, t,he combined pension for the couple enacting a contributory pension plan. The plan amounts t,o $150 a month. originally provided only for retirement pensions The program of universal old-age pensions is and pensions for aged survivors, in recognition of financed out of a special old-age security fund doubts that had been expressed about the consti- set up in the general consolidated revenue fund of tutional competence of the Federal Government, the Federal Government. The old-age fund re- under the British America Act, to provide ceives its income from the earmarked yields of disability benefits and benefits for survivors three taxes-a $-percent tax on taxable income under age 65. The plan thus limited was incor- up to $3,000 a for all individuals; a 3-percent porated in a bill (C-75) that was given first tax on all corporate income subject to the cor- reading in 1964. porate ; and a 3-percent tax on manu- The Province of meanwhile had facturers’ sales. adopted a law in April 1963 requiring every pri- The universal flat-pension program provided vate employer in the Province who employed 15 for by the Old Age Security Act will continue or m&e workers to maintain for them a pension in force concurrently with the social insurance plan with certain vesting provisions. (Under program enacted in 1965. The basic of the amendments adopted in 1964, maintenance of flat pension remains essentially unchanged, but such a plan is no longer mandatory.) The Prov- certain modifications have been made in the ince was also studying the possibility of establish- age at which it is payable, in its adjustment to ing a public pension plan for Ontario. price changes, and in its residence requirements. The Province of began developing a pension plan in 1963, and in April 1964 it announced the details of its own pension in- surance program. Ot,her Provinces also evidenced LEGISLATIVE PENSION PLAN considerable interest in pensions-a subject of The Canadian Government had been studying concern to them not only for itself but because the possibility of introducing a contributory pen- of its implications for savings and capital sion insurunce program for a number of years. accumulation. In 1950 a Joint Committee of the and the The various developments at both the Federal House of Commons on old-age security was and Provincial levels made necessary extensive formed to review the existing old-age pension consultation, therefore, between the Federal Gov- program, which operated with a means test and ernment and the Provincial governments on t,he was subject to widespread criticism. After hear- subject of pension planning. Four formal Fed- ing testimony on a contributory and earnings-re- eral-provincial conferences were held during 1963 lated insurance program, the Committee unani- and 1964 at which the subject was discussed, in- mously recommended a. universal flat-rate pension cluding the propos& made by t,he Federal Gov- beginning at age ‘70, as well as a Federal-Pro- ernment. In 1964, agreement was reached vincial old-age assistance program for persons with the Provinces for amendment of section aged 65-69 with limited means. The Old Age Se- 94-A of the British Act to em- curity Act and the Old Age Assistance Act of power both the Canadian Parliament and the

4 SOCIAL SECURITY Provincial to enact legislation con- ment, including employment outside the country cerning survivor and disability pensions as well as and employment within the country by certain old-age pensions. The Canadian ConsOitution now foreign employers, will be determined by regula- authorizes the Federal Parliament to legislate t,ion. Civilian government employees will be cov- concerning all three types of pensions, but it also ered under the program, although coverage o-f provides that Federal legislation shall not affect Provincial Government employees is subject to the operation of any present or future Provincial agreement with each Province. legislation dealing with pensions. A major feature of the coverage provisions On the basis of the Federal-Provincial nego- is t,hat all persons whose earnings rates are below tiations and agreements, the Department of a specified “basic exemption” in any year are National Health and Welfare of the Federal Gov- not covered during that year. In other words, ernment in issued a White Paper- they are not required to pay any contributions The Canada Pension Plan. This document out- during that year, and no earnings are credited lined and explained the pension insurance pro- for benefit purposes. gram that t,he Government was advancing. For contribution purposes the basic rate of The substance of the White Paper proposals exemption for any year is ordinarily equal to was incorporated in a bill (C-136)) which was 12 percent of “maximum pensionable earnings” int,roduced in the House of Commons for first (the earnings base) for that year. For coverage reading on November 9, 1964. After second read- purposes, however, the basic exemption for self- ing on November 18, the bill was referred to a employed persons is one and one-third times this Joint Committee of the Senate and the House amount. Accordingly, all employees who receive of Commons. The Committee recommended less than 12 percent of maximum pensionable certain substantive changes, as well as a number earnings in any year and all self-employed per- of technical changes. The Government approved sons who earn less t,han 16 peTcent will be ex- and took a&ion on of these recommenda- cluded from coverage in that year.3 Since t,ions. The revised Canada Pension Plan bill was maximum pensionable earnings will be $5,000 a subsequently passed by the House of Commons year in 1966 and 1967, employees earning $600 on March 29 and by the Senate on April 2. It a year or less, and self-employed persons earning received Royal Assent on April 3, 1965. less than $800, will be excluded from coverage in those years. In the United States the maximum taxable earnings base for OASDI is $6,600 a year, and COVERAGE there is a $400 minimum limit for self-employed persons. There is no minimum limit, however, The coverage of t,hc new contributory pension for employees in industry, commerce, and certain program will extend, in general, to almost all other types of employment,, although there are employees and self-employed persons in Canada. minimum wage requirements for some types of Among the few groups specifically excluded are employment (such as $50 a quarter for employees agricultural, forestry, and similar employees in domestic and employees of nonprofit whose wages from one employer are less than organizations and $150 per year in certain cir- $250 a year or who are employed by an employer cumstances for agricultural workers). for less than 25 working days in a year; em- During 1968-75, t,he $5,000 base for the ployees in casual employment, not for the purpose Canadian program will vary automatically with of the employer’s business ; aliens employed as annual changes in a “pension index” based on the exchange ; employees of spouses ; unpaid Canadian consumer price index. From 1976 on, children employed by a parent; members of re- the base will vary with changes in an “earnings ligious orders taking n vow of ; members index” based on national average wages and of the armed forces; employees of foreign gov- ernments and international organizations, except 3 These exclusion limits will be applied only in even by agreement wit,h the employer; and employees multiples of $100. The limits will remain unchanged in practice until a $100 increase is warranted. Therefore, in certain other employments. Coverage of they will not be exactly 12 percent and 16 percent employees in certain marginal types of employ- of the earnings ceiling.

BULLETIN, NOVEMBER 1965 5 salaries as computed from income-tax returns. been completed between the Canadian Govern- Thus, the basic exemption used in determining the ment and the . point below which workers are excluded from It is estimated t,hat in 1966 about 6.4 million coverage will vary after 1967 in the same manner. persons, or 92 percent of Canada’s labor force, The I7.S. program has no automatic adjustment w-ill be covered either by the Federal pension feature for its maximum taxable earnings base, insurance program or by that of the Province of alt.hongh such a procedure does apply for the Quebec. The OASDI program in the United “average current earnings” used in the provision States covers about the same proportion of its that prevents excessive overlapping of disability labor force, although it.s exclusions are not all benefits wit,h workmen’s compensation benefits.4 the same. Under the Canadian lam, any Province signifying it,s intention of establishing a com- prehensive pension plan of its own that will pro- CONTRIBUTIONS vide benefit,s comparable to those under the The new pension program, in contrast to the national program may “-out” all em- ployment within its jurisdiction from the national existing universal pension program, will be program. This action may be taken either within financed exclusively from social insurance con- 30 days after enactment of the national law or tributions paid by insured persons and employers. later, on 2 years? notice. In the latter case, t,he ,4 contribut,ion by the Government from general Provincial program will be required to take over revenue is expressly prohibited by the law, just the accrued liabilit,y of the national program as under t.he U. S. system. Like the pensions to with respect to the inhabitants of the Province. be provided, the contributions will vary with At the same time, it, will receive from the national earnings. program a lump-sum payment related to the total. Contributions will not be payable with respect contributions paid in the past by such persons. to anyone, even though he would otherwise be The Province of Quebec signified its intention covered, who is under age 18. They also will not of establishing its own Provincial plan, and its be payable for workers who have begun to receive enacted the Quebec Pen- a retirement pension and who will therefore be sion Plan on June 23, 1965. This plan is virtually aged 65-70. In no case will contributions be identical with the Canada Pension Plan. As a payable after the worker reaches age 70. All othet covered workers between the minimum and maxi- result of the Quebec action, all employees (except mum age limits indicated except disability pen- Federal workers5) gainfully occupied in the Province of Quebec and all self-employed persons sioners will contribute. This is one of the differ- residing there at, the end of the year will be ences from the U. S. system, where there are no age limitations for contributors. covered under the Quebec program and not under Contribut,ions will be payable only with respect the Federal program. to that part of the earnings of an employee or a Special arrangements between the Federal pro- self-employed person that falls between the gram and any Provincial program will have to be “basic exemption” specified in the law and the made for the coverage of persons moving from maximum pensionable earnings base. The basic one Province to another or from one employment exemption will be equal to 12 percent, of the maxi- to another, in to provide continuity of mum pensionable earnings fixed for the year in coverage without duplication of contributions. question. The proportion of the maximum pen- Discussions of these arrangements have already sionable earnings is the same as that applied in the minimum coverage requirement for employees, 4 For an illustration of how such a procedure could but, for the self-employed the proport,ion of the be applied to the maximum taxable earnings base under maximum pensionable earnings required for the I!. S. system, see Robert J. Myers, “A Method of coverage is 16 percent. Thus, cont,ributions in Automatically Adjusting the Maximum Earnings Base Under OASDI,” Journal of Risk and Zneurance, Septem- 1966 and 1967 for both employees and self- ber 1964. employed persons will not be payable on the first 5 Federal employees in Quebec will be covered by the $600 of earnings a year (12 percent of the maxi- Quebec plan under an agreement whereby Quebec acts as agent for the Federal Government. mum taxable earnings of $5,000). ..4 worker whose

6 SOCIAL SECURITY earnings are $1,500 a year, for example, will pay (1963-75) will be derived by mult,iplying $5,000 contributions only on $900. An employee with by the ratio of the pension index for the year to annual earnings of $750 will pay on $150, but a the pension index for 1967 (with the result, if self-employed person earning $750 will pay noth- it is not already a multiple of $100, rounded down ing, since his earnings are less than the minimum to the lower multiple of $100). If, for earnings requirement ($800) for coverage. (If his example, the pension index for 1970 is 4.6 percent earnings were $800, however, he would pay larger than that for 1967, then the maximum contributions on $200.) These provisions are un- earnings base in 1970 will be $5,200 (1.046 times like those of the U. S. program, under which- $5,000 equals $5,230). once the minimum earnings requirement, if any, Starting in 1976, maximum pensionable earn- has been met-all earnings up to the maximum ings will vary annually with an “earnings index” earnings base are subject to contributions. rather than with the pension index. The earnings At the other end of the scale, no contribut,ions index for any given year will be the ratio of (a) will be payable uuder the Canadian program with the average of all wages and salaries reported respect to that part of any individual’s earnings under the Canadian income tax in the g-year in any year that are in excess of the maximum period ending at the beginning of the previous pensionable earnings figure. This maximum is set calendar year to (b) the corresponding average by law at $5,000 a year in 1966 and 1967. There- for the S-year period 1966-73. The maximum after, as noted above, it will vary automatically earnings base for years after 1975 will be the with economic changes. The exempt amount, of earnings base in 1975, mult)iplied by the earnings $600 a year is prorated for employees over the index for the particular year, with rounding as in pay periods of the year, and contributions are the application of the pension index. paid on excess wages until they have been paid The rates of contribution payable on the earn- on $4,400 of wages from a particular employer. ings subject to contribution will be 1.8 percent If, for example, in 1966 an employee is earning of covered wages each for employees and em- $500 a month, he will contribute on $450 each ployers. Self-employed persons will pay the com- month for the first 9 months of the year, in the bined employee-employer rate of 3.6 percent of 10th month he will contribute on $350, and in the earnings. The law does not provide a schedule of last 2 months he mill contribut’e nothing. contribution-rate step-ups for the future, and it is If the worker has more than one employer believed that the present rates will be adequate during a year, contributions are payable on for several decades. A schedule of step-ups had earnings up to $4,400 from each employer, but he been proposed in the earlier bill (C-75)) but it receives a refund of contributions paid on the was omitted from the bill finally enacted in order combined amounts over $4,400. This procedure to harmonize the contribution provisions of the parallels that, of the U. S. system. Canada and Quebec Pension Plans. During a transitional period from 1968 to 1975 Contribution rates under the Canada Pension the maximum earnings base will vary in relation Plan cannot readily be compared with those of to changes in a “pension index.” The pension the U. S. program. In the first place, the pro- index for 1967 will be equal to the average of visions in the United States call for future the Canadian consumer price indexes for the step-ups in contributions, with the combined 12 months ending June 30, 1966. For each sub- employee-employer rate (excluding the separate sequent year it will in general be the average of contributions for hospital insurance) 7.7 per- the consumer price indexes for the 12 months cent in 1966, 7.8 percent in 1967-68, 8.8 percent in ending on the preceding June 30. There are, how- 1969-72, and 9.7 percent in 1973 and thereafter. ever, two exceptions. First, if the average of the Second, contributions under the Canada Pen- consumer price index is less than 1 percent higher sion Plan do not cover the cost of the $75-a-month than the pension index for the preceding year flat-rate pensions provided under the Old Age the pension index will remain unchanged. Second, Security 14ct, which are financed from ear- the pension index for a given year may not be marked general taxes. Thus, Canadian taxpayers more than 2 percent higher than that for the with a total income of $250 a mont,h from all preceding year. sources pay a separate old-age security tax (if the The maximum earnings base for these years standard deduction is used and no allowance is

BULLRIN, NOVEMRER 1965 7 made for ) equal to approxi- visions, but OASDI benefits are not taxable as mately 2.5 percent of income if single, 1.2 percent income. if married but with no children, and 0.4 percent The contributions will be paid into a special if married and with two children. Taxpayers with “pension plan account,” from which, in turn, all a total income of $416.67 a month pay approxi- benefits as well as costs of administration Cl1 be mately 2.4 percent, 2.3 percent,, and 1.8 percent, paid. Balances accumulated in this account that respectively, under similar circumstances. Car- are in excess of the amounts needed to meet cur- porations pay an old-age security tax of 3 percent expenditures will be invested in obliga,tions of their taxable income, in addition to their em- of the Provincial governments in approximate ployer contributions under the Canada Pension proportion to the percentage of total contribu- Plan. There is also a 3-percent tax on manu- tions collected in each Province. If a Province facturers’ sales under the old-age securit,y pro- does not wish to borrow its share of total avail- gram, the incidence of which is indeterminable. able funds in any period, the amount will be The principle in the Canada Pension Plan of investecl in obligations of the Canadian Govern- equal employer and employee rates and that of no ment. The IJnited States, in contrast, permits Government, contribution parallel the provisions investment only in obligations of the Federal of the IJ. S. law. The two systems use different, Government or in those with both principal and procedures, however, for the self-employed. interest guaranteed by the Federal Government. Before the 1965 amendments, self-employed per- (In actual practice, the latter type of investment, sons in the United States paid approximately ‘i5 has never been acquired.) percent of the combined employer-employee rate ; The estimated income and outgo of the pension under present law, t,his proportion will ultimately plan account in future years, as well as antici- be somewhat. less for the OASDI program and pated balances in the account at different periods, only 50 percent for hospital insurance. are discussed later in this article. As a result of the basic exemption, the smaller t.he income the lower the effective contribution rate under the Canadian system. Table 1 shows RETIREMENT PENSIONS the contributions payable under the new program at, various earnings levels. The principal benefit provided under the new Canadian social insurance program will be a All contribut,ions will be deductible from “retirement pension” payable in old age. The income subject to the Canadian income tax, as are contributions to private pension plans. Pensions, other pension-disability and survivor benefits- are referred to as supplementary benefits. The however, will be taxable like other income. These retirement pension will be payable concurrently provisions are the reverse of those in the Vnited with the universal flat pension provided under States, where OASDI contributions of employees the old-age security program. Thus, virtually all and self-employed persons are not deductible persons who will qualify for a retirement pension under the Federal individua.1 income-tax pro- will actually receive two old-age pensions at the TABLE 1 .-Contributions of employees and self-employed same time. under the Canada Pension Plan, by monthly earnings- Employee contribution 1 Annual bfxf~\“bt’ -----. __-- I contri- Montblv earnines Qualifying Conditions Iearn& I AS percent butElY- by of monthly employed earnings One condition that a claimant must satisfy to __--_ qualify for a retirement pension is attainment $60.00 _..______.__ -.- ____- $50 0.30 (2) 100.00 __.__..______-.- 50 ?E .90 of a specified age. The minimum age at which 150.00 ._._.____ _ .._____.._ 50 1.80 1.20 “2: f2 200.00 . ..______._. __ __. 2.70 1.35 64.80 the new pensions will be payable during 1967- 250.00 ___.______.______G 3.60 1.44 86.40 300.06 ______. _. ______- 50 4.50 1.50 108.00 the first year during which they will be paid- 35O.nO ..____.__..______. 50 5.40 1.54 129.60 400.00 . ..______- ____ .50 6.30 151.20 will be age 68. This minimum will decline to age 50 ::Ei 156.40 416.675-...--...---..-..- 6.60 67 in 1968, age 66 in 1969, and age 65 in 1970. The 1 The employer contribotion is the same as that of the employee. long-run minimum pensionable age of 65 f Not covered. 3 Maximum possible amount of creditable eaminss. (beginuing in 1970) is the same as under the

8 SOCIAL SECURITY IT. S. program although in the United States the IJ. S. program has no such provision. TJnder early retirement ilt ilp 65%64 with ilCtll~~lGdl;y the Canadian monthly test, regardless of the reduced benefits is also allowed. The 1966 result, that the annual test might produce, a re- Canadian legislation similarly lowers the age at tirement benefit is payable for any month in which the universal flat pension is payable. That which earnings f ram wages and self-employment pension, formerly payable at age 70, under the do not exceed $75 ($125 of \vages and no sub- new law will be payable at age 69 in 1966 and at stantial self-employment in the United States). the same ages thereafter as the retirement pension The exempt amounts and limits under the under the Canada Pension Plan. Canadian earnings test 1411 vary with changes No minimum qualifying period of coverage or in the pension index during 1968-75, and there- contributions will be required for eligibility after with changes in the earnings index. The for a retirement pension (unlike the provisions monthly exempt amount will first be determined of the IJ. S. program). Thus, workers aged 68 and rounded to the nearest $5. The annual exempt and older in 1967 will be able to claim a pension amount will then be 12 times the adjusted in t,hat, year, even though they have contributed monthly amount, and the “$1 for $2” band will only during 1966. These payment~s are possible be eight times that, figure. because ret,irement pension amounts in the early years of the Canadian program will vary directly with years of coverage. The pensions in t,he Rate of Pension first, few years, however, will be small-only The ret,irement pension paid to an insured 2.5 percent of average earnings in 1967. worker under the new Canadian program is equal Another condit,ion for receipt of a ret,irement) to 25 percent of his average monthly earnings. pension will be retirement from regular employ- Because of the method of computing such earn- ment for a claimant under age 70. After he ings, however, the maximum effectjive pension reaches age 70, a retirement, requirement is no rate will be only 2.5 percent of earnings in longer imposed. The earnings test, imposed under January 1967. It will rise gradually during the t,he U. S. program applies only to workers under next 10 years and reach 25 percent only in 1976. age 72. No supplementary benefits will be payable for a The Canadian earnings test will be applied on spouse or children. (A spouse aged 65 or over, both an annual and a monthly basis. The annual however, will receive a flat pension in her own basis has an initial exempt amount, a band in right under the Old Age Security Act and may which $1 of benefits is wit~hheld for each $2 of receive an earnings-related pension on her own earnings, and a $1-for-$1 &hholding thereafter. account.) The IT. S. program, after amendments This procedure parallels that of the TJ. S. pro- in the 1950% that extended coverage to the point gram, except, that the amounts in the test are where it was virtually complete, began paying different and also that the Canaclian amounts are full benefits almost immediately. It also pro- automatically adjusted in the same way as the vides for eligible spouses and children supple- contribution earnings base.” mentary pensions that, are a proportion of the Under the annual test, t,he exempt amount is basic benefit. init,ially $900 ($1,500 under the U. S. system) ; A major feature of the new Canadian program the “$1 for $2” band applies to the next $600 will be the automatic revaluation of a worker’s ($1,200 under the IJ. S. system) ; and the “$1 for actual earnings before his average monthly earn- $1” basis applies to earnings over $1,500 ($2,700 ings are computed. The revaluing of the actual under the U. S. system). The exempt amount is earnings recorded for each earlier year mill be prorated in the year of initial retirement,, and based on changes in the pension index, if he only earnings after “retirement” (that is, the retires during 1967-75, and changes in the pen- month the benefit is claimed) are considered ; sion index during 1967-75 and in the earnings G For a full description of the earnings test for OASDI index thereafter if he retires after 1975. To make benefits in the United States before the 1965 amendments, this revaluation, the actual credited earnings see Robert J. Myers, “Earnings Test Under Old-Age, Sur- vivors, and Disability Insurance : Basis, Background, and of a worker for each given year will be multi- Experience,” Social Secwity Bzilletin, May 1964. plied by the ratio of (a) the average of the

BULLRTIN, NOVEMBER 1965 9 maximum earnings base for the 3 years ending TABLE %-Combined monthly retirement and old-age security pensions payable to qualified aged beneficiaries with his retirement to (b) the earnings base for under the Canadian pension program in 1976, at various eurn- the given year. ings levels To illustrate, suppose that an individual has Single beneficiary 1 Married couple 1 $4,000 of credited earnings in 1966 and that Averagemonthly he retires in 1980, at which time the earnings earnings Combined Percent of Combined Percent of pension earnings pension earnings base is $7,000 (having increased from $6,600 in _-__-____ - ---- ______1978 and $6,800 in 1979). The worker’s adjusted 0 ---...... _._.____ . ..__ I $75.00 (9 W:$ (9 $50.00 . . ..______._-._ -__. 87.50 175 recorded earnings for 1966 would be $5,440- 100.00 . ..______.__..___ 100.W 100 175.00 :;i 150.00 ._...... ______.._ 112.50 187.50 125 $4,000 times the ratio of $6,800 (the average 200.00 . ..____ -- . .._._____ 125.00 2 200.00 100 250.00 .._.. __.______. ___ 137.50 212.50 85 of the assumed earnings bases cluring 1978-80) 300.00 .______-..- __.____._ 150.00 ii 225.w 350.00 . . ..______._.._____. 162.50 46 237.50 ii to t,he $5,000 earnings base of 1966. This pro- 400.00 ...... ______.. -___ 175.00 416.67 ._.______._.._____. 179.17 :i 250.00254.17 E cedure will have the effect of adjusting newly awarded pensions to economic changes that have 1 Applies also to a married beneficiary whose spouse is ineligible for any pension. occurred since a worker was first covered. * Assumes that only 1 spouse is elipihle for retirement pension, hut that both spouses are aged 65 or over nnd eligible for flat-rate old-age security During the first 10 years of the program, the pensions of $75. 8 Not applicable. average monthly earnings of a claimant reaching pensionable age will be computed by dividing by 120 (the number of months in the lo-year transi- cumulative credited earnings (as adjusted) by tional period) the cumulative total of his the total number of months that have elapsed adjusted credited earnings (earnings below the after 1965 and before at,tainment of age 65, but $5,000 annual ceiling, as adjusted, and counting with a 15-percent dropout provision. Under this years with no coverage as zeros). A worker provision, 15 percent of the years with lowest covered in all years from the start of the program earnings before age 65 will be omitted from the will thus be able to qualify for a pension equal ca,lculation of average earnings, if total earnings to 2.5 percent of his average adjusted earnings in are not, thereby averaged over a total of less 1967, 5 percent in 1968, 71/2 percent, in 1969, and than 120 months. An individual who retires in so on up to 25 percent of earnings in 1976 and 1986, for example, would have 20 elapsed years thereafter. Table 2 shows the amount of the after 1965 and so could have a dropout of 3 years. retirement pension that will be payable in differ- His average earnings would then be computed ent years of the transition period to workers at from the total of his highest 17 years of covered various average earnings levels (assuming no earnings divided by 204 months. Ultimately, change in the $5,000 maximum earnings base). after the year 2011, the dropout, can be as much The calculation of pensions will be somewhat as 7 years (15 percent of the 47 years from age different for retirements after 1975, because per- 18 to age 65). sons mill then be able to have at least the 10 In addition, a person who continues to work years of earnings to be applied against the 120- after he reaches age 65 can substitute 1 year of month minimum divisor. Average monthly earn- higher earnings after age 65 for an earlier year ings at t,hat time will be determined by dividing of low earnings. The year substituted cannot be (1) after the worker has reached age 70 or TABLE 2.-Monthly retirement pensions under the Canada (2) a year after he has initially retired. Pension Plan, 1967-76, at various earnings levels, for persons The method of calculating average earnings employed in all years from 1966 until retirement under the Canadian program is similar in many Pension Actual average monthly earnings while working ways to that, under the U. S. program. Both USC commencing ------__ __---_--____~ average lifetime covered earnings after a speci- ‘* January $100.00 $150.00 $2W.O0 $250.00 &3M.M) $350.00 $400.00 $416.67 ------_-- __ ~--___-____ fied starting date and up to a minimum retire- 1967.. ______- “,:Z 3.75 5.00 6.25 7.50 8.75 10.00 10.42 ment age, but with a dropout of certain years 1868 .__. -.- ___. 7.50 10.00 12.50 15.00 17.50 20.00 20.83 1969 ______7.50 11.25 15.00 18.75 22.50 26.25 30.00 31.25 of low earnings (5 years in the United States 1970 _.______._ 10.00 15.W 20.00 25.00 30.00 35.00 40.00 41.67 1971__.______12.50 18.75 25.00 31.25 37.50 43.75 50.00 52.08 and O-7 years in Canada). Both programs, also, 1972...- _.____. 15.00 22.50 30.00 37.50 45.00 52.50 60.00 62.50 1973 ______.___ 17.50 26.25 35.00 43.75 52.50 61.25 7O.M) 72.92 permit substitution of years with high earnings 1974 __._._.__-- 27.00 30.00 40.00 50.00 60.00 7n.M) 80.00 63.33 1975. .______22.50 33.75 45.00 56.25 67.50 78.75 90.00 93.75 after the minimum (65 in Canada 1976 ______25.00 37.50 50.00 62.50 75.00 87.50 100.00 104.17 and 65 for men and 62 for w-omen in the United

10 SOCIAL SECURITY 3ntes), except that the U. S. program has no index has risen above its earlier peak. It is im- ~equiremrnt tha,t the post-65 years must, be before portant to note t,hat pensions in force will be retirement and before age 70. adjusted by t.he pension index in all future Table 3 shows t,he combined earnings-related years, and not by the earnings index that is retirement pensions and the uniform $75a-month applicable to the earnings base (and thus the old-age security pensions that will be avail- adjustment, of past earnings records for those able in Canada to aged pensioners in 1976 (at who have not yet retired) for years after 1975. ihe end of the transitional period), assuming t,hat 110 changes have occurred by that time in y&e or wage levels that would to their auto- DISABILITY PENSIONS m>~tX~adjustment. The table also shows the com- bined pensions as a proportion of average earn- Earnings-related disability pensions will be ings. payable beginning in under the new Table 4 compares the combined retirement and Canadian program to insured persons who are flat, pensions that will be payable in 1976 under disabled and satisfy the minimum qualifying the Canadian system with old-age benefits under period of contribution spec.ified. A worker will the OASDI program in the U. S. as amended in be considered disabled if he suffers from a severe 1965 (again disregarding any changes that, might and prolonged physical or mental disability. A occur in Canadian pensions because of their auto- disability is regarded as severe if it renders a mntic-adjustment provisions). The table indicates worker incapable of pursuing regularly any that the combined Canadian pension will be substantially gainful occupation. A disability is larger than old-age benefits under the U. S. considered prolonged if it is determined that it program in all instances but one-when the wife will actually be of long-continued and indefinite of a man aged 65 or over is herself aged 62-64. duration or is likely to result in death. This is In addition to the adjustment of credited wages the same clefinit,ion used in the United States under the Canadian system, the amounts of all before the 1965 amendments. That legislation, earnings-related retirement pensions in force, as however, eliminated the L‘prolonged” require- well as all universal flat pensions in force, will ment and substit.uted an expected duration of at be automatically adjusted annually in the future least 12 months. for increases in the pension index, which will The contribution period required to qualify for occur if prices go up. Pensions will not be reduced a disability pension is 5 calendar years out of the in those years when prices decline, since then last 10 years. A “contribution year” for both dis- the pension index is held constant. In such cir- ability and survivor pensions is a calendar year cumstances, however, pension increases in sub- for which any contribution was made. After 1981, sequent years would be slowed down, since the total contribution years must also equal at least pension index will not change until the price one-third of the years elapsing after 1965 (or t,he

TABLE 4.-Total monthly pensions of aged beneficiaries under Canadian and United States programs, 1976, at various earnings levels -I - Payable to married couple, 1 ayable to single beneficiary, both aged 65 or over at time of Payable to married couple, husband aged 65 or over and aged 65 or over husband’s retirement 1 wife aged 62 at time of his retirement 3 ___------_____- _-___ T -7 Average monthly Cnned$ g grcent earning: Canada as Canada as Canada, Canada, Canada U.S. Canada U.S. while wife when wife U.S. -___- !ggy i;;z4d is aged . . !%E” 65 or eve* While wife When wife h&d is aged 65 or over ---.------$100. _ __. ______. 363.20 158 $94.80 185 200. _. _ _. _ _ __. . - - - “Ei 89.90 139 “%Z 134.90 148 %:E %Ez xi 101115 201162 300. _. _ _ _ _ _. _ -. -. 150.00 112.40 133 225:oo 168.00 133 150.00 225:00 154:OO 97 146 400 ._._ .____ 175.00 135.90 129 25O.M) 203.m 123 175.00 25O.Oil :iE ; 134 417’...... --T-...- 179.17 139.00 129 254.17 208.50 122 179.17 254.17 133 5502.. ______... 179.17 1611.00 107 254.17 252.00 101 179.17 254.17 231.00 78 110

1 Maximum possible amount of earnings creditable under Canadian effective in 1966. system. 3 Assuming wife not eligible for benefit bssed on her own earnings record. 2 Maximum possible amount of earnings creditable under U.S. system,

BULLETIN, NOVEMBER 1965 11 worker’s attainment of age 18, if later) ; in no TABLE 6.-Combined pensions 1 payable to widows aged 65 and over under the Canada Pension Plan and Old Age Security event, however, are more than 10 years required. Act, at various earnings levels These conditions are generally similar to those Average Average monthly earnings of widow z for receipt of disability benefits under the monthly ____ _~_____--~--- -___ earnings U. S. system. of husband None %54l.O0 $100.00 $200.00 $300.00 $416.67 Disability pensions will become payable after _--- -__ 92.19 104.69 129.69 154.69 179.17 $50.00.. .._. 82.50 I 1 a waiting period of 3 full calendar month- 100.00 .._._. 90.00 97.50 109.38 134.38 159.38 179.17 that is, for the fourth month following that in 150.00.. _. 97.50 105.00 I 114.06 139.06 164.06 179.17 200.00.. 105.00 112.50 12o.00 I 143.75 168.75 170.17 which disablement occurs. Under the U. S. sys- 250.00. ..__. 112.56 120.00 127.50 148.44 173.44 ;;x: ;; tem, the corresponding waiting period is 350.00..3oo.Ol. _. . . _. 127.50120.00 127.50135.00 135.00142.50 153.13157.81 178.13179.17 / 179.:; 400.00...... 135.00 142.50 ;‘g:$ I 165.00 I 179.17 i 1% 17 7 months. If a worker is disabled in January, for 416.67. _ ._.. 137.50 145.00 - I 167.50 179.17 j 1%. 17 example, under the Canadian system the first 1 Represents old-age security pension of $75 ~2~s. if widow is not eligible monthly benefit payment would be made if he for her own retirement pension, widow’s pension (60 percent of husband’s retirement pension) or, if she is eligible for own retirement pmsion. the most survived until May 1; under the IT. S. program favorable combination of fractions of her own and her husbands’ retirement pensions. the corresponding date would be . 2 Assumes that widow attains age 65 after 1975. Figures below the line result from application of the “60 percent of both pensions” alternative. The Canadian disability pensions will be The maximum widow’s pension is $179.17 a month (25 percent of maximum made up of (1) a flat amount of $25 a month monthly earnings plus $75 flat pension). and (2) an earnings-related amount equal to 75 percent of what the worker’s retirement pension periods while he was receiving a disability pen- would have been if calculated as though he has sion. At age 65, he also receives the $75 old-age reached age 65 on the date the disability pension pension, and his basic pension income is thus in- starts (without regard to the lower pension rates creased. Under the U. S. system, old-age benefits in the first 9 years). The earnings-related amount and disabilit,y benefits are equal. will thus, in effect, be equivalent to 18.75 percent Disability pensioners will also receive an ad- of average earnings. All disability pensions out- ditional benefit with respect to each child in standing will be subject to automatic adjustment their care under age 18 (age 25 if a ) at each year for price increases, as reflected in the the time of disablement. The child’s pensions will pension index. be payable to a disabled female worker only if The disability pensions that will be payable she was the main support of the child. When to workers at different earnings levels are shown the disability pensioner attains nge 65 and has in table 5. At almost. all earnings levels the his pension converted to a retirement pension, the disability pension exceeds the wage-related re- child’s pensions cease. These provisions are gen- tirement pension alone, but it is substantially erally similar to those of the U. S. system, except, less than the sum of the retirement pension and that child’s benefits lmder OASDI are paid to the flat, old-age pension payable under the Old children acquired after the worker% disablement, Age Security Act. When a disability pensioner do not terminate when the disability pensioner reaches age 65, his disability pension is con- attains age 65, and continue for children in verted to a retirement pension, which in this school only up to age 22. case is not reduced because of the noncontributory The benefit for each of t,he first four eligible children of disability pensioners under the Canadian program wil be a uniform $25 a month, TABLE 5.-Monthly disability pensions under the Canada and for each additional child it will be $12.50. Pension Plan, at various earnings levels These amounts will be adjusted automatically Disability pension for changes in the pension index. Average monthly earnings It is apparent that large low-income families Percent of earnings may be able to receive as much as or more in __---__ ---- disability and child’s pensions than the worker’s $50.00~.~. ___-__ _ -____-__.-______--__ 69 100.0%. ______-_. %i former earnings. This situation could occur for 150.00 __-______-__-- _ _---__.- _ ___-__-. _ _--- _- 53.13 ii: 200.00 ______- ______-______--_- 62.50 a worker with average monthly earnings of $150 250.00.~~~. __.______.___ _ ._____ i‘i 300.00 ______-____-______---_- z!z if he has at least four children ; it could occur 350.00 .______.______-__ 90:63 iii 400.00 ______.___ __-___- ______.______100.00 even at a monthly earnings level of $200 if 416.67 __-______-_ ____-___-____-___-______103.13 Ei there are seven children.

12 2OClAL SECURITY The TJnited Stat,es pays supplementary benefits will then receive the larger of (a) 60 percent, of with respect, to disability beneficiaries not only her own retirement. pension, plus the ordinary for eligible children but also for the wife, or widow’s pension of 60 percent of her husband’s for the wife alone if she is aged 62 or over.’ retirement pension, or (b) 100 percent. of her own These supplementary benefits are related t,o the retirement, pension, plus 37.5 percent, of her hus- disability benefit and t.hus are themselves earn- band% retirement pension. She will also receive ings relatecl. The total family benefit in the the $75 old-age security pension. Under the U. S. United States cannot exceed 80 percent of average provisions a widow receives, in essence, only a earnings (except when such earnings are less proportion of her husband’s benefits or a benefit than about $145 a month) up to about $370 a based on her own earnings, whichever is larger. month. The percentage is somewhat lower for A pension is also payable to a widower who higher average earnings (662/ percent for t.he has reached age 65 and was disabled and depend- maximum average earnings of $550 a mont.h). ent upon his wife at her death. The provisions are essentially the same as those for aged widows. Table 6 gives the amount of the total pension, before adjustment for price changes, that will be SURVIVOR PENSIONS payable to widows aged 65 and over. The figures The new Canadian legislation also provides for represent the combined total of the $75 old-age payment of earnings-related pensions to several security pension, the widow’s pension based on different categories of survivors. Their rights her husband’s earnings, and the widow’s retire- to such pensions are based on t,he contributions ment pension, if any, based on her own earnings. previously made by the deceased breadwinner. Only the larger of the pension amounts for which The qualifying period required for eligibility a widow can qualify when she is entitled to a is contributions by the deceased worker during at pension based on her own earnings is shown. The least one-third of the years after 1965 (or the figures below the descending line are those year he attains age 18, if later) and up to the year derived from use of alternative (a) described of his death or attainment of age 65 (or retire- above, and t,hose above the line are the ones that ment, if later). A minimum of 3 years of con- result from use of alternative (b). It is evident tribut,ions is required, but in no case more than that the total pensions of aged widows in Canada 10 years. As a result of these qualifying condi- will be larger, in general, than widow’s benefits tions, the first month for which survivor pensions in the Unit.ed States, which will range from will be payable is February 1968. The provisions $44.00 to $138.60 a month, with $6,600 as are generally similar to those under the U. S. the earnings base. In the United States, however, program, except t,hat they are based on years aged widow’s benefits are payable at age 62 or, of contribution rather than on quarters of subject to a lifetime actuarial reduction, as early coverage. as age 60. A widow who has reached age 65 at her hus- Pensions for widows under age 65 are on a band’s death, or who later reaches that, age, will different basis than those for older widows. be entitled under the Canadian program to a The full ‘%vidow’s pension” for qualifying “widow’s pension.” This pension will be equal to widows under age 65 consists of a uniform 60 percent of what her husband’s retirement pen- amount of $25 a nionth (adjusted for changes in sion would have been. She will simultaneously re- the pension index) plus 37.5 percent of the re- ceive a flat-rate old-age security pension of $75 a tirement pension of the deceased worker. This month in her own right (in 1968 at age 67, in full pension is payable to the following survivors: 1969 at age 66, but thereafter at age 65). (1) Widow with dependent child under age 18 Many widows aged 65 or over will also build (under age 25 if continuing in school, or of any up eligibility for a wage-related retirement pen- age if disabled before attaining age 18 or, if sion based on their own earnings. The widow later, before the father’s death) (2) Widow aged 45 or over at widowhood, or when there is no longer an eligible child 7 In Canada, a wife aged 65 or over of a disability pensioner will receive an old-age security pension of $75 (3) Widow of any age if disabled, or if she a month in her own right. later becomes disabled

BULLRTIN, NOVEMBER 1965 13 (4) Dependent widower of any age if dis- U. S. system pays child survivor benefits with abled. respect, t,o women who had a recent work record A nondisabled widow who is under age 45 even though they were not the child’s main sup- at t,he time she is widowed or when her last c.hild port,, and the Canadian program does not. ceases to be eligible will receive & full pen- Comparison of benefit, amounts for “child sur- sion that is reduced, until she reaches age 65, vivor” families under the two national programs by 10 percent for each year she is under age 45 is difficult because of the different, methods of at t.he time of widowhood or, if later, when the computation involved. The U. S. program pays last eligible child attains age 18 or ceases to be no additional benefit, for children in excess of disabled (even if he was eligible later because three (usually only for a maximum of two), of school attendance). No pension will be pay- when the is also being paid a benefit.. The able, accordingly, to widows under age 35 at Canadian program, in cont,rast, places no limit on widowhood if they have no dependent children the total number of children for whom additional and are not disabled. orphans’ benefits are paid. For survivor families The eligible children receive flat-rate pen- consisting of two children and widow, the U. S. sions, subject, to adjustment for price changes, program tends to provide larger benefits, ranging in t,he same manner as do children of disability from $94.80 a month for an average monthly pensioners. These pensions amount to $25 a month wage of $100 to a maximum of $368.00 with for each of the first four children and to $12.50 $6,600 as the earnings base; in Canada the cor- for each additional child beyond four. They are responding range for the same three survivors is also payable to full orphans, as well as to surviv- $84.38-$114.06. Even for a widow with 10 chil- ing children of women workers who were their dren, the maximum Canadian pension is only main support. $239.06 a month. The U. S. benefits tend also to Table 7 gives the total amount of the pension, be larger when children are the sole beneficiaries, including orphans’ pensions, that will be payable since the Canadian system then pays only flat to widows with young children in their care, at amounts not related to earnings. various earnings levels. The widow’s pension amount changes dras- There are many similarities in the “young tically under the Canadian system when she survivor” benefit provisions of the Canadian and attains age 65 and becomes eligible for a flat-rate U. S. systems, but there are also a number of old-age security pension, and possibly also for significant differences. Canada pays benefits to the an earnings-related pension on her own work following categories of survivors, but t,he United record. She will receive a substantial increase States does not: childless widows who are aged in all circumstances, since her total pension at 35-59 ; disabled widows and widowers of any age 65 and after will at least equal the sum of age; widows with children disabled after t,hey the $75 universal pension and 60 percent of her reach age 18 but before the father’s death; chil- husband’s ret,irement pension-in contrast to her dren in school at ages 22-24 ; and widowed pension before age 65 of $25 a month plus mobhers of children aged 18-24 in school. The 371/2 percent of her husband’s retirement pension. A typical case might be that of a widow whose TABLE T.-Monthly pensions for widow under age 65, under husband had average earnings of $350 a month the Canada Pension Plan, at various earnings levels and for various numbers of orphans in family and who herself has had average earnings of $100 a month. The pension payable to her before I Monthly penelon to widow under age 65 with- age 65 would be $57.81 a month ; her total pen- Five Ten sion at age 65 would rise to $142.50 ($127.50 if children children she had had no earnings of her own). amoo. _ - --- $20.69 $54.69 ‘p; s;g.g $142.10 A lump-sum death benefit is also payable under 146.88 100.00..150.00. _ _------E*E g:; SQ:O5 IGl3 151.56 the Canada Pension Plan to the surviving spouse 200.00~~..-~ 4a:75 . 158.25 260.00~ _ _. -- tz: :Ei lBo.04 or orphans (or otherwise to the estate). The aoo.00. _ _ __ - ;:g $:S i03.ia 165.83 a5o.00._---- 107.81 :G 170.31 qualifying conditions are the same as those for 4aMm. _ - _-- 62:50 I37:50 112.50 162:m 175.00 416.e.7.-.~.. 64.06 89.06 114.08 164.08 176.56 survivor pensions. The death benefit is equal to six times the monthly retirement pension the 1 hsnmes full pension Is peyehle to widow (see text for categories involved). deceased individual had been receiving or that

14 SOCIAL SKUWW would have been payable to him if he had retired been issued in the past to more than 6 million on the date of his death and had then been aged persons in Canada, in connection wit,11 its un- 65. Since the benefit, however, may ‘not exceed employment insurance program. This numbering 10 percent of the earnings base in that year, the system will be extended for use under the new initial maximum is $500. program. Earnings records will be kept in such AI.l1 persons with average monthly earnings of a way as to make possible the identification of two-thirds or more of the maximum lump-sum t,he Provinces in which all contribut,ions for a death benefit will therefore be affected by t,he worker have been paid. Data-processing equip- “10 percent of earnings base” maximum. To put ment, will be used in the calculation of benefits, it another way, the maximum lump-sum pay- as well as in the recordkeeping process. ment applies to all persons with average monthly The administration of the national program earnings of 80 percent or more of the maximum will be closely coordinated with the administra- taxable base. Though the lump-sum death pay- tion of the program of any Province that decides ment provisions are fairly similar in both pro- to contract out of the national system. This co- grams, the Canadian amounts are about twice as ordination will be necessary to assure that large as those in the United States-6 months’ workers who have contributed under two or more basic benefit in contrast. to 3 months’ benefit, and programs at different times will have the same a $500 maximum as opposed to a $225 maximum. rights and benefits as if they had contributed under only one program throughout their work- ing life. Coordination has already been worked ADMINISTRATION out between the Federal administrative au- thorities and the Province of Quebec. The control and direction of the administration The law authorizes the Minister of National of the new earnings-related pension program, Health and Welfare to enter into agreements other than coverage functions and the collection with the governments of other countries that of contributions, are emrusted to the Depart- have old-age, disability, or survivor programs, in ment of National Health and Welfare, which will order to make reciprocal arrangements relating actually administer the program. The Depart- to the administ.ration of the two programs. The ment of National Revenue will be responsible for arrangements may deal with any necessary ex- controlling and directing t,he administration of change of information, the payment of benefhs coverage and contributions. under one system to recipients residing in the Employers will be required to withhold em- other country, and the extension of benefits under ployee contributions from each wage payment the law of either country to persons employed in made to their workers. They are to transmit these or resident in the other country. Adaptations of contributions monthly, with their own contribu- the Canadian law for the persons affected, as well tions, to the Department of National Revenue. as necessary financial interchanges required to Contributions by self-employed persons will be implement the agreements, may be made by paid directly to t’he same Department, with their regulation. The Federal Government is also au- regular income-tax returns. The Department of thorized to enter into reciprocal arrangements National Revenue will regularly transmit to the with the governments of foreign countries on Department of National Health and Welfare behalf of Provincial pension plans, if the reports on the pensionable earnings of each per- Province concerned requests it to do so. son covered. These procedures closely parallel those in the United States. The Department of National Healt,h and Wel- CHANGES IN UNIVERSAL PENSIONS fare will be responsible for maintaining the earnings record of each insured worker and also The Act of April 3, 1965, also amended several for awarding and paying pensions to him as they provisions of the Old Age Security Act providing become due. Each worker covered under the pro- for universal flat-rate pensions. For one thing, gram will be assigned a , the age at which these flat-rate pensions are which will be used in the electronic maintenance payable will be progressively lowered over a of wage records. Social insurance numbers have 5-year period from 70 to 65. Specifically, this

BULLETIN, NOVEMBER 1965 15 pension will become payable at age 69 in 1966, years of operation. Thereafter, it will have a age 68 in 1967, age 67 in 1968, age 66 in 1969, and relatively small effect for a few years, but after age 65 in 1970 and thereafter. 1990 it will raise costs by about 0.1 percent of In the second place, t,hough the basic rate of covered earnings. The liberalization of orphans’ the universal pension of $75 a month remains benefits represents a negligible increase in cost unchanged, starting in 1966 this amount will be when measured against covered earnings. The adjusted annually for increases in the pension addition of benefits for the dependent children of index, reflecting increases in the consumer price disability pensioners mill also have only a small index. These increases will be made, however, cost, effect in the early years of operation, but only when there has been an increase of 1 percent. after about 10 years it mill represent an added or more in the pension index during the preced- cost of about 0.1 percent of earnings. These addi- ing period, and they may not, exceed 2 percent in tional cost, aspect,s should be kept in mind in any year. considering the following discussion, which A thircl amendment, permits persons who have is based primarily on the cost, estimates shown resided in Canada for 40 years or more since they in the actuarial report. reached age 18 to qualify for a universal flat The actuarial cost estimates were prepared on pension, irrespective of any other residence re- several alternative bases concerning future quirements prescribed in the act. This amend- changes in price and earnings levels. Prices are ment is designed to make the flat pension avail- assumed to increase during the first 10 years at able to many persons who leave Canada before an average annual rate of 11/s percent and there- they reach age 65 but who have spent the greater after by either 11/z percent or 2 percent. The gen- part of their working life there. In other words, eral earnings level is assumed to increase alterna- the ordinary requirement of recent residence is tively by 3 percent and 4 percent a year. The waived for persons who have had a long period following discussion is based primarily on the of residence in the country. -estimates that assume a 4-percent annual increase in earnings and on the intermediate assumption concerning changes in the price level-an annual change of 11,~ percent until 1975 and 13/h percent FUTURE INCOME AND OUTGO OF thereafter. PENSION PROGRAMS Because of the qualifying periods and the deferred nature of the pension formula during An extensive actuarial cost report, on the the first 10 years of operation, the estimated Canada Pension Plan was prepared as it was outgo for benefit payments and administrative being considered in late 1964.* The provisions expenses in the early years of the program will be finally adopted, however, differed in a few relatively low. It will be less than 0.5 percent of significant respects from those dealt with in the covered earnings for all years before 1970 and report. First, the proport,ion of the years with will rise to only about Sl,! percent in 1975 (in- lowest earnings that can be dropped out of the cluding an allowance for the subsequently added computation of average earnings (but, with no liberalizations). Thereafter, the cost is estimated less than 10 years being used in the average) to rise steadily and by 1980 to reach about 31/2 was increased from 10 percent to 15 percent. percent of earnings. At this point, contribution Second, more liberal benefits for orphans were income would approximately equal benefit outgo. provided, since half-rate benefits are now pay- Interest earnings on the accumulated funds able for orphans in excess of four in a family. would provide sufficient financing for several Third, benefits for children of disability bene- additional years, but then an increase in the ficiaries, at the same rates as those for orphans, contribution rate is expected to be necessary. were added. Some indication of the contribution The more liberal dropout provision, of course, rates needed may be obtained by considering the will have no effect on costs during the first 10 cost of the benefits and administrative expenses in relation to covered earnings in the distant 8 , Department of Sational Health and Welfare, Tire Canada Pension Plan, A&z&aria1 future. This cost, is expected to approach 5 per- Report, November 6, 1964. cent of covered earnings by 1990, to average

16 SOCIAL SECURITY slightly less than 5 percent for the next 30 years, rather substantial fund in the pension plan ac- and to exceecl 5 percent thereafter, tending count. In fact, the fund in 1975 will amount, to toward 51/l, percent (when allowance is made for about, 13 times the estimated benefit outgo and increased costs resulting from the liberalizations 28 percent of covered earnings in that year. (To incorporated after the actuarial estimates had put, these figures in perspective, if the old-age been prepared). If the estimates based on a 3- and survivors insurance and disability insurance percent average annual increase in earnings are trust funds under the U. S. programs had considered, the long-range costs (for 25 or more represented this proportion of covered earnings years in the future) are increased by about a in 1963, they would have amounted to $63 billion, further 0.6 percent of earnings. in contrast to the actual figure of $21 billion.) Income from the combined 3.6..percent con- The contribution rates under the Canada Pension t,ribution rate is estimated to total about $440 Plan will have to be raised some time after 1985, million for the first year of operation (on an according to the above estimates, if the fund is accrual basis) and then to gradually increase as not to be used up and if no other financing is the population grows and as the earnings level is provided. By 1990 the combined employer- assumed to rise-reaching about $660 million in employee contribution rate may have to be about 1975. The annual outgo for benefits and adminis- 5 percent, and ultimately it, may have to be from trative expenses is estimated to be relatively 5112 percent to 6 percent,. small in the first few years and to reach only $100 The Canada Pension Plan specifically provides million in 1970 and $390 million in 1975. As a that any statutory amendments by Parliament of result, the fund accumulated in the pension plan contribution rates or methods of calculating con- account will grow rapidly and, with interest tributions, management or operation of the pen- accumulations at an assumed amlual rate of 5 per- sion fund, general level and classes of benefits, cent through 1975 and 4 percent thereafter, will and benefit formulas shall not go into force until amount to about $5 billion at the end of 1975. at least two-thirds of the Provinces (excluding After 1975 the fund will grow more slowly, those that have cont.racted out), containing at reaching a peak of $8 billion in 1985 and then least two-thirds of the population in the Pro- declining until it is exhausted shortly after the vinces that have not contracted out, have con- year 2000. These figures would be somewhat, sented to the changes. lower if earnings were assumed to increase 3 per- It should be emphasized again that the con- cent a year rather than 4 percent. They will be tribution rates, income and outgo data, and fund lower in any case because of the liberalized benefit accumulations referred to above relate only to the provisions that were introducecl after the contributory earnings-related insurance pensions actuarial report was prepared. provided under the Canada Pension Plan. They In summary, analysis of the actuarial cost, do not include the taxes and expenditures con- estimates indicates that the initial 3.6-percent nected with the financing of the monthly flat-rate contribution rate will probably be adequat,e to pensions of $75 a month payable to all aged support the outgo for benefit payments and ad- residents under the old-age security program. minist,rative expenses of the earnings-related Large financial magnitudes are also involved benefit, program until at least 1985, and at the under the latter program, which is essentially, same time will result in the accumulation of a ho\vever, on a pay-as--go basis.

BULLETIN, NOVEMBER 1965 17