The Honourable Gordon J. O'Connor, PC, MP
Minister of National Defence
House of Commons
Adjustment of Canadian Forces Superannuation - Age 65
The purpose of my letter is to respond to your email to Chief Warrant Officer Tom Walton, a constituent of the Hon. Chuck Strahl, of Chilliwack - Fraser Canyon, dated 26 May 2006. The correspondence is in reference to the policy whereby the amount of a person's pension under the Canadian Forces Superannuation Act (CFSA) is reduced by a factor based upon his Canada Pension Plan (CPP) at age 65.
At the outset let me indicate that I have no disagreement with the process whereby that amount of reduction is determined under the policy introduced in 1966 and enunciated in your email. The issue to be examined is not whether that process is in any way being improperly applied but rather the fashion in which the decision was taken at the time of inception of the CPP to impose a financial handicap upon members of the Canadian Forces over the long term
There was a totally paternalistic approach to Service personnel in the development of that policy. That was compounded by a wholly inadequate briefing in 1966 where the approach was primarily to assure us that there would be no increase in the deductions from our military pay. We were advised that cost of the this new CPP would be derived from a portion of our already existing contributions to the Canadian Forces Superannuation Act ( CFSA). The plan was depicted as a very positive undertaking which would benefit us in our post age 65 years. Specifically the matter of an eventual "reduction" was not explained nor even mentioned. It is not possible at this time to determine if this failure to explain the negative aspects was deliberate or simply because those responsible for the briefing had no concept of the long-term financial consequences of this method of funding our contribution to the CPP.
There were options to either stack or integrate the CFSA Pension and the CPP. If the pensions had been stacked we would have had to pay both our total CFSA contribution and the new CPP levy whereas the integrated version saw no additional levy being imposed upon us to fund CPP. Essentially the impression left at the conclusion of the briefing was that our employer's decision to integrate as opposed to stack would result in this "NEW" pension causing no increase in pension deductions. If you were paying 7% you continued to pay 7%.
You state that the decision to integrate these was motivated largely by the sense that members' retirement contributions were already substantial. Thus I assume that the belief was that the average soldier, sailor or airman could not afford a further requisition on his / her pay. This presumption was drawn without any discussion or consultation with service personnel as to what additional amount could be borne or any opportunity to rebut it. . I find it ironic that the officials who displayed such great concern for our financial load in respect to the CFSA/CPP issue did not exhibit the same concern when a decision was taken to impose upon Service Personnel the payment of employment insurance premiums.
This lack of concern is particularly disturbing when one considers that we would be precluded from drawing benefits from that plan when we severed our connection with the CF, regardless of the reason for such parting. .
Throughout the years 1965 to 1986 my contributions were based on the CPP maximum pensionable earnings table. An estimated $9461.90 should have been transferred to CPP on my behalf. Had I have been given the option of stacking the two pensions I would have had to pay that amount over and above my existing CFSA contribution. This payment of this amount would have been spread over 21 years with the maximum contribution in any one-year being $419.40 (1986). (Hardly an onerous demand given the long-term financial benefit which would have accrued and given my financial position at the time).
I do agree that not all would have seen the extra contribution as financially feasible thus the matter of whether one should stack or integrate should have been an individual option arrived after a total explanation of the pros and cons of this major financial plan. The only reasonable and fair approach should have been to set out the downstream effects of both integrating the contributions or stacking them as mentioned above and then allowing members, after a full appreciation of the factors, to elect whether:
- they wished to participate in the integrated method of payment and knowingly accept the eventual reduction on their CFSA benefit; or
- they wished to have their CPP and CFSA contributions stacked, thus fully paying for both plans resulting in no reduction in either pension.
We were however, through either deliberate or negligent inaction denied the right to exercise an option or even have an understanding of the adverse outcome that would befall us at age 65. The matter of opting into or declining to participate in undertakings of significant personal concern is not foreign to the Canadian Forces. We were given that opportunity, after detailed briefings, at the initiation of the following plans:
- Government Services Medical Insurance Plan (GSMIP) and
- Serviceman's Income Security Insurance Plan (SISIP)
I am sure you will agree that both of these endeavours were of great significance to the long-term financial stability and well being of members of the Canadian Forces and their families. Thus the question remains as to why such personal options could not have been offered when the CPP was introduced.
The unilateral decision to integrate the CFSA/CPP contributions and benefits has imposed an injustice upon members of the Canadian Forces. The Government of Canada has been known to correct matters where such instances of unfairness have been demonstrated. Bill C221 attempts to mitigate that unfairness and injustice. It does not seek to provide any retroactive adjustments that were imposed as a result of the unilateral integration policy but rather to restore justice to pensioned post age 65 pensioners of the Canadian Forces from this point forward.
I have taken the liberty of inserting in the body of this mail a copy of a paper I prepared containing some personal thoughts and experiences in regard to the policy. I have pasted it in this manner rather than attaching it to ensure that it is not seen as a transmission security hazard.
Minister, in conclusion think that you would agree that " Respect" is an important factor in the core values of a military ethos. The unilateral decision in 1966 to implement this insidious policy affecting the long-term retirement financial stability of military pensioners clearly lacked that quality of respect for those pensioners. It is worthy of correcting this oversight.
May I commend a further review of this matter in the expectation that you would support Bill C 221.
Thank you for your consideration.
James (Jim) Lumsden
23 Cedar Grove Court
Hon Chuck Strahl MP Chilliwack - Fraser Canyon
Hon John Baird MP Ottawa West - Nepean
Peter Stoffer MP Sackville - Eastern Shore
This is the paper referred to in the body of the letter above which I prepared containing some personal thoughts and experiences in regard to the policy.
REDUCTION OF CANADIAN FORCES SUPERANNUATION BENEFITS AT AGE 65
James Lumsden, Lcol (Retired)
The Canada Pension Plan (CPP) was enacted in 1965 and came into force on January 1, 1966. Its intention was to provide another source for an "Income Security" program supplementing Old Age Security (OAS) and the Guaranteed Income Supplement (GIS). With very few exceptions, every person in Canada over the age of 18 who earned a salary was required to pay into the Plan. The employee and employer each paid half of the required contributions. Self-employed persons were required to pay both portions. Contributions ceased if a person was in receipt of a CPP disability or retirement pension. Contributions ceased at age 70 even if the person has not stopped working.
It is vitally important at this point to realize that the CPP has universal application to all Canadian salary or wage earners and the CPP Fund is the property of all those shareholders. This provides a distinct difference between it and single group or affiliation pension plans such as CFSA and PSSA.
The rate of contribution was based upon what was referred to as " pensionable earnings". In 1965 they were the amount of salary earned between $600 and $5600 or $5000. The rate of contribution was 1.8% of pensionable earnings (assuming having an employer). Thus the actual dollar contribution in 1965 was $79.20. Over the years " pensionable earnings" and the rate have increased substantially ($37000 and 4.95%). The maximum contribution in 2004 was $1831.50.
At the time of introduction many envisioned this levy as simply another arm reaching into our pocket. To allay this belief briefings were held wherein we were advised that there would be no increase in the deductions from our military pay. The cost of the CPP would be derived from a portion of our already existing contributions to the Canadian Forces Superannuation Act ( CFSA) At the briefing I attended it was depicted as a very positive undertaking which would benefit us in our post age 65 years. Specifically the matter of eventual "reduction" was not explained or even mentioned. It is not possible at this time to determine if this failure to explain the negative aspects was deliberate or simply because those responsible for the briefing had no concept of the long-term financial consequences of this method of funding our contribution to the CPP.
There were "Buzz Words" such as "stacking" and "integrating" used in the briefing. If the pensions had been stacked we would have had to pay both our total CFSA contribution and the new CPP levy whereas the integrated version saw no additional levy being imposed upon us to fund CPP. Essentially we were left with the impression that our employer's decision to integrate as opposed to stack would result in this "NEW" pension causing no increase in pension deductions. If you were paying 7% you continued to pay 7% creating an impression that CPP was a gift. It turned out to be a "COSTLY GIFT".
At this point it is probably legitimate to suggest that we (persons contributing to CFSA) have a degree of liability for failing to exercise reasonable prudence in better examining this proposal. We failed to remember such old adages as "There ain't no free lunch" and " If it sounds too good to be true it probably isn't". Not withstanding this lapse on our part there is a far greater onus on those who were assigned to brief on such a significant program with financial implications. The objectives demanded by that onus or responsibility on the part of the "Employer" were not met.
It is my opinion that the minimum standard that should have been met in the briefings is that the downstream effect on the persons entitled to a CFSA benefit at age 65, of the integrating plan, should have been set out in detail using examples of persons at various ages and stages of their careers. This would at least have alerted persons to the loss they could anticipate.
The most reasonable and fair approach should however have been to set out the downstream effects of integrating the contributions as mentioned above and then allowing members to elect whether:
- they wished to participate in the integrated method of payment and knowingly accept the eventual reduction on their CFSA benefit; or
- they wished to have their CPP and CFSA contributions stacked resulting in no reduction.
I would have opted for the stacking option and I believe most others would have chosen that course. We were however, through either deliberate or negligent inaction denied the right to exercise an option or even have an understanding of the fate that would befall us at age 65.
EFFECT OF THE INTEGRATED PLAN
The decision of the Department of National Defence to unilaterally impose the integrated plan has resulted in serious financial loss for many members. As each individual loss will vary I will use my personal case to illustrate such loss.
I served in the Canadian Forces from 1951 to 1978 and in the Public Service of Canada from 1978 to 1995. I thus contributed to Canada Pension Plan as a member of the CF by deduction from my CFSA contribution from 1965 to 1978 and as a Public Servant by deduction from my PSSA contribution from 1979 to 1986. As I had completed 35 years service in 1986, the maximum permitted for pension calculation purposes, I ceased having to make contributions to the PSSA. I was however now required to make a direct contribution to the CPP and this continued until my retirement in 1995.
Throughout the years 1965 to 1986 the amount due CPP through my CFSA / PSSA was based on the maximum pensionable earnings prescribed for the CPP. During that period an estimated $9461.90 should have been transferred from my CFSA / PSSA to CPP on my behalf. It is worthy to note here that should I have been given the option of stacking the two pensions I would have had to pay the total of $9461.90 over and above my CFSSA / PSSA contribution. The payment of this amount would have been spread over 21 years with the maximum contribution in any one-year being $419.40 (in 1986). (Hardly an onerous demand given the long-term benefit which would have accrued).
In the years beyond which CFSA / PSSA contributions were required my total direct contributions to CPP were an estimated $5739.30. I reached the age of 65 in 1997. The negative effects "Came to Pass". At that time I was advised that both my CFSA and PSSA benefits were going to be reduced because of the integrated contribution scheme. I do not have the records of the actual amount of that reduction but my recollection is that it was in the range of $3800 to $3900 per year. I recall that the reduction came close to offsetting the amount of my Old Age Security pension which became payable at the age of 65.
I am now 73 thus I have been sustaining that annual loss for eight years. I estimate the loss to be at least $30000. That figure does not take into consideration the loss of indexing increases which would have accumulated on the annual reduction to my pensions. My net loss to date is estimated at $20,500 (total loss less the cost of the CPP premium [$9461.90] if we had been permitted to option of stacking the pensions) That loss will continue to increase at a minimum of $3800 a year until I die and then will continue at half of that rate until my spouse dies.
This loss is one that I and most other persons who were in the employ of the Government of Canada can ill afford. That we have been subjected to this through some deliberate or negligent oversight makes it all the more vexatious and galling.
It should be noted that the effect of this plan to integrate rather than stack has been and continues to be the imposition of a reduction in the amount of CFSA / PSSA or other government agency Superannuation plan benefits that we were entitled. It is important to recognize that it has no effect whatsoever on our entitlement to CPP. The individual's full entitlement to CPP has been respected.
I became aware of this nefarious plan a few years after it was implemented. A more specific reference was made at the time of my release processing in 1978-79. At that time I was advised that my CFSA would be reduced by some $810 when I reached 65. I accepted this as tolerable and said no more at the time.
When I was advised at age 65 that there would be a reduction which was at the least triple that amount I queried the matter. To my surprise there was another formula at play that took cognizance of my accumulated pension-indexing factor. I did not understand the process of growing the reduction amount then nor can I fully explain it now.
There has been reference in this paper to a lack of information, whether through deliberate action or negligence, being provided to the members of the Canadian Forces at the time of the introduction of the decision to integrate the premiums for CFSSA and CPP in 1964. I have been unable to determine whether there is any greater effort being made to forewarn CF members of their impending financial loss today. A CF booklet containing a section on "Moving on Financial Considerations" at Section 7.6 there is reference to CPP on matters such as its purpose, how to apply for it and applying for it between age 60 and 65 (with an explanation of the ½% per month reduction factor for early application. There is no reference that I can locate which sets out or refers to the effect of CPP entitlement on CFSA at age 65,
In contrast to this the Public Service has a booklet entitled "Annuitant's Benefits - September 2003". At Section 6: Integration of Benefits with the Canada and Quebec Pension Plans (CPP/QPP) the principle that PSSA pension benefits are reduced automatically by a standard formula once the pensioner reaches age 65is very clearly set out, The formula used to develop the reduction is contained in that Section 6. While this open advice of the reduction does not mitigate the effects of the financial loss it allows individual to more accurately know and plan for the financial emoluments they may expect on retirement.
One has to wonder why the difference in making persons affected by this policy aware of it!! The fact that the concept of integrating CFSA / PSSA and other government pension plans with CPP is recognized thus this is not a suggestion that basic concept is aimed at the CF.
Notwithstanding that universal application there are however some extraordinary conditions, which are applicable to those who fall within the pension /annuity provisions of the Canadian Forces Superannuation Act. This is based upon the concept that the military has a role and lifestyle distinct from the general community. This difference flows from the its distinctive mandate. The Canadian Forces are responsible for maintaining the security and defending the sovereignty of Canada, if necessary by means of force. .
Canadian Forces members and their families must face, challenges that others in Government service do not generally have to contend with including:
- hazards to health and safety, such as stress injuries,
- possible exposure to toxic materials and physically demanding activities;
- uncertainty, such as long-term separations from family on short notice;
- multiple postings and all the inherent challenges of re-establishing family life in a new location; and
- needs of family members, such as health, housing, education and employment within an ever changing and transient environment.
These unique factors and challenges were recognized by the Standing Committee on National Defence and Veterans Affairs, in its 1998 Quality of Life study. The time members have to spend away from home, whether on deployment, training or other activities - has a long-term impact on Forces' members and their families which go beyond severe family stress. They also impose a financial penalty on members and their spouses. It is extremely difficult under these circumstances for military spouses to pursue careers wherein advancement in self-realization / actualization and financial benefits can be anticipated at the same level that the non-military family sees as normal. Beyond that the individual member ability or opportunity is prejudiced as he or she is deprived of the opportunity of additional employment that creates extra funds for their family. Similarly the lack of stability limits the ability and availability of members to participate in formal lifetime learning opportunities. That inability may limit the range of opportunities for post release careers.
Thus in many instances the financial status of military families at retirement or age 65 is prejudiced when compared to others not had to contend with a lifetime facing the unique factors and challenges. The integrated plan of dealing with pension funding exacerbates that problem and must be addressed to alleviate its effects.
Funding to restore pensions to their original level must be found within the CFSA Account. As of April 2000 new contributions from both the Canadian Forces members and the Government are deposited into the Canadian Forces Pension Fund (CFPF) which was created by the 1999 reform legislation. The balance of the new Pension Fund is fully invested in the financial markets by an independent Public Sector Pension Investment Board. The results of money market investments of the contributions are expected to exceed the Fund earnings that would be generated by credits calculated on the basis of the interest rate payable on Government bonds.
As pensions based upon the CPP are being fully met in accordance with individual entitlement I do not believe that CPP has a responsibility in this matter. The shareholders of CPP number in the millions i.e. every wage and salary earner in Canada. They bear a heavy and ever increasing financial burden in their annual contributions i.e. max contribution in 2004 was $1831.50. The only connection is that CPP is being used as a benchmark for the CFSA reduction.
It is clear that members of the Canadian Forces have been unfairly dealt with by the unilateral decision to integrate their CFSA and CPP contributions rather than stacking the two pension plans or at the very least allowing member to chose between integrating or stacking. The resultant financial loss works hardship on these members based upon actions that were well beyond their knowledge or ability to influence.
It is recommended that:
1. the amount deducted from existing affected annuitants / pensioners CFSA at age 65 be restored immediately ;
2. the practice of integrating contributions be ceased for present serving members;
3. stacking of pension contributions be implemented at an individual's option.