Getting people to post- pone retirement and continue working seems to be a key objective of policy-makers these days. If the average age of retirement could be increased, so the argument goes, big pension payouts for baby-boomer retirements could be postponed and the potential shortage of workers when the boomers retire could also be delayed.

That’s why we may see changes to the Canada Pension Plan in the near future that will encourage Canadians to extend their working lives.

Federal and provincial finance ministers, who describe themselves as “joint stewards” of the CPP, have put off making changes, however. When they completed their triennial review of the CPP at the end of June, the ministers decided to take the issue under advisement, saying they would “in the next review, examine whether changes need to be made to the CPP to reflect the growing number of older Canadians who wish to remain in the labour force.”

Quebec has already thrown some light on the changes that might be expected with its proposals to improve benefits for people who put off claiming their pensions and to reduce benefits for people who want to take early retirement. The details were outlined in a discussion paper released by the provincial government in October 2003 entitled Adapting the Pension Plan to Quebec’s New Realities.

However, Quebec’s “new realities” are not entirely the same as those facing the rest of Canada, says Pierre Plamondon, chief actuary of the Quebec Pension Plan. Quebec’s population is aging more quickly and — at the time the discussion paper was released — the rate of return on QPP investments had not been as good as those of the CPP. As a result, Quebec had planned to phase in the proposed changes over a relatively short five-year period.

But, Plamondon says, favourable actuarial reports for 2003-05 have eased the pressure on the QPP. He says the province will wait until the next report, expected at the end of 2007, before deciding what, if any, changes are needed. If QPP investment returns continue to be favourable, Quebec could phase in changes over a longer period, he says. Nevertheless, he emphasizes encouraging people to work longer is “the way to go” to reduce costs and demographic pressures.

Changes to the CPP require the consent of two-thirds of the provinces — including Quebec — having two-thirds of the population. The next review is not until 2008, so changes are not likely before then.

Although Quebec administers its own pension plan for residents of that province, provisions of the QPP are generally in line with those of the CPP. The two plans are integrated, so someone who has contributed to both the QPP and CPP in a working lifetime will get a pension from one or the other based on all contributions made to both plans.

Among other things, Quebec’s paper proposed to cut QPP benefits for people who want to retire early and introduce a new calculation of retirement benefits that would grant higher benefits the longer the person stays employed.

Under current rules for both the CPP and QPP, retirement benefits may be claimed at any time between the ages of 60 and 70. But pensions started before age 65 are permanently reduced by 0.5% for each month between age 65 and the age at which the pension commences. Pensions that start after age 65 are increased by 0.5% for each month between age 65 and when the pension starts — up to age 70. Those claiming benefits early are required to demonstrate they have substantially stopped working.

Quebec’s proposal for QPP pensions would have allowed workers to start pensions at age 60 even if they continue to work and receive a salary. And the actuarial reduction for those claiming benefits before age 65 would be increased to 0.7% from 0.5% for each month prior to age 65 the pension started. The 0.5%-a-month increase for those claiming a pension between ages 65 and 70 would remain.

The paper also proposed a new way to calculate the pension benefits. Under the current system, a pension is based on 25% of the worker’s average annual lifetime earnings up to an annual limit, calculated from age 18 to the age at which the pension starts — with an allowance for low-earning periods up to about seven years to be excluded from the calculation. In effect, the number of working years considered for a pension varies between 36 and 44, depending on the age when the pension starts.

@page_break@Quebec has proposed to abolish these exclusions and base the pension on 25% of an individual’s total pensionable earnings, divided by 40. (Pensionable earnings are the earnings on which the pension is based and are subject to a year’s maximum pensionable earnings [YMPE] adjusted each year and set at $42,100 for 2006.) The proposal means those who worked more than 40 years would have higher pensions.

Robert L. Brown, a professor in the department of statistics and actuarial science at the University of Waterloo, says these are all attractive proposals and shouldn’t depend on the actuarial health of the CPP and QPP. What is needed, he says, is phased retirement allowing a person to draw part of a pension but still work part-time.

However, pension and tax legislation says a person can’t simultaneously collect a paycheque and a pension from the same employer.

Brown notes the average age of retirement in Canada is now about 62: “I don’t buy the idea that retiring late means having to work beyond age 65. I’d like to see people keeping active until age 65.”

Benefits should be hiked for those who work longer, Brown says. Instead of raising CPP or QPP benefits by 0.5% a month for each month after 65, he says, the actuarial adjustment should be an increase of about 0.8% a month for those who postpone claiming pensions. IE