After provincial finance ministers expressed a slew of concerns over the Canadian pension system at the recent federal-provincial-territorial Finance Ministers’ meeting in Meech Lake, Quebec, Ottawa has proposed several changes to the Canada Pension Plan.

The proposed changes are intended to modernize the plan to better reflect the different paths people take to retirement, in addition to improving the financial sustainability of the plan, according to the Federal Department of Finance. They are part of a regular review of the Canada Pension Plan that the finance ministers undertake every three years.

“A modern public pension plan should treat workers fairly regardless of the age at which they take their retirement pension or how they choose to retire,” the finance ministers concluded after the meeting. “It should also recognize the need for some flexibility during contributors’ working years.”

The changes would “modestly” expand pension coverage; provide greater flexibility for older workers to combine pension and work income; and improve fairness in the plan’s flexible retirement provisions, the government said.

One proposal, which seeks to improve the plan’s flexibility, would remove the Work Cessation Test, which requires individuals who apply to take their CPP benefit early to either stop work or reduce their earnings. By removing the test, individuals could take their benefit as early as age 60 without any work interruption or reduction in earnings, according to the proposal. This change could help individuals to use income from their CPP pension to phase into retirement or supplement their earnings.

Another change to improve flexibility would increase the general low earnings drop-out from its current level of 15% to 16% in 2012 and to 17% in 2014.

The drop-out is a provision allowing for a percentage of the years during an individual’s career to be excluded from the calculation of the average career earnings. The provision ensures that average earnings are not affected by a certain number of years of unusually low earnings that occur during periods of unemployment, full-time post secondary attendance, or for other reasons.

This change would improve the basic retirement pension for virtually all CPP contributors, since individuals would be able to exclude up to eight years of low earnings, up from the current limit of seven years.

Such a change is particularly relevant in the current economic environment, the government noted. “The current economic downturn is a reminder that work interruptions occur for a variety of reasons, including involuntary job losses, and that time out of the labour force can lower the amount of one’s CPP pension,” the Department of Finance said.

In order to improve pension coverage, the government proposed another change that would require working beneficiaries under 65, and their employers, to continue to make CPP contributions that will increase their retirement benefits. This differs from rules under the current system, where those who receive a CPP pension and return to work do not pay CPP contributions.

The change would allow working beneficiaries to continue to build their CPP pension, and could be particularly helpful for individuals without a CPP pension close to the maximum amount, according to the government. For working beneficiaries aged 65 or over, the continued participation would be voluntary, but employers of those opting to participate would be required to also contribute.

Lastly, a proposed change would gradually restore the pension adjustments to their actuarially fair levels. This change would improve equity in the CPP’s flexible retirement provisions by ensuring that benefits received by early and late retirees reflect contributions made to the plan and the average duration of benefits. The current adjustment levels have been left unchanged since 1987 despite significant shifts in the economic and demographic factors that affect their “actuarially fair” levels, according to the government.

For individuals who take their pensions early and therefore receive a lower benefit, the rate of reduction would be gradually increased to 0.6% per month for each month that the pension is taken before age 65, up from its current rate of 0.5%. For individuals who delay their pension, the rate of increase would gradually rise to 0.7% per month for each month that the pension is taken after an individual’s 65th birthday, up to age 70, from its current level of 0.5%.

Under the proposed package of changes, the government would maintain the current CPP contribution rate of 9.9%.

@page_break@The changes are expected to improve the financial sustainability of the plan, but Finance Minister Jim Flaherty noted that even in its current state, the Canada Pension Plan remains on solid financial footing.

“The CPP is well positioned to weather the current market turbulence,” commented Flaherty. “Canadians can count on an affordable CPP today and for the future.”

The Department of Finance is seeking public feedback on the proposals by July 31st. Pending approval by Parliament and the provincial governments, the changes would begin to come into effect in 2011 in a gradual phase-in process.

IE