The Canada Pension Plan and the U.S. Social Security system have a lot in common. Both are publicly provided, mandatory old-age pension systems that can provide disability and survivor benefits in addition to retirement assistance. One big difference is not about which benefits citizens receive, but how solvent and sustainable the CPP is compared to the troubled Social Security system.
- Canadian Pension Plan tax rates and income thresholds are generally lower than those of Social Security. Benefits also tend to be much lower.
- Taxed Canadian wages are placed into a trust fund managed by the CPP Investment Board, which invests the funds in stocks, bonds and other assets.
- Taxed U.S. wages go into the Old-Age and Survivors Insurance Trust Fund and the Disability Insurance Trust Fund, jointly managed by a Board of Trustees. The U.S. Secretary of the Treasury is the Managing Trustee.
Canada Pension Plan
CPP and Social Security cannot be a straight comparison of government pension programs, because the CPP has a complementary program that Social Security does not: Old Age Security. The OAS program, Canadian government’s largest pension program, is funded out of the general tax revenues of the Government of Canada. Citizens do not pay into it directly.
In every province except Quebec, which has its own Quebec Pension Plan (QPP), the CPP taxes wages in a manner that is split between the employer and the employee, although the net effect is to reduce employee wages by the combined taxable amount. Taxes on wages begin at age 18 and end at age 65, unless the individual worker has already begun receiving benefits or has died. In general, CPP tax rates and income thresholds are lower than those of Social Security; corresponding benefits also tend to be much lower.
One big difference between Social Security and the Canadian Pension Plan is the solvency and sustainability of the CPP, compared with Social Security.
Those taxed Canadian wages are placed into a trust fund managed by the CPP Investment Board, which in turn invests the funds in stocks, bonds, and other assets. As of late 2018, these assets included private and public equity holdings, as well as real estate.
When an individual reaches retirement age, their benefits are determined based on the number of years they contributed the required minimum amounts. To qualify for the maximum benefit they must not only have contributed to CPP for 40 years, but also have contributed the sufficient amount in each of those years.
Social Security is a federal program in effect in every state, with no exceptions. Like the CPP, taxes are split between employee and employer. Again, this distinction has little net effect on real income. Social Security casts a wider net than the CPP and encompasses both the Medicare and Medicaid programs.
All income earners pay Social Security taxes regardless of the earner’s age. Retirees can claim benefits beginning with a reduced level at age 62. Benefits are determined by taking the 35 highest-earning years in an individual’s work history and workers have to have earned at least 40 credits over 10 years to be eligible. Like the CPP, those with higher incomes see higher benefit levels in retirement.
Those taxes go into the Old Age and Survivors Insurance (OASI) Trust Fund and the Disability Insurance (DI) Trust Fund. Both funds are managed by a single Board of Trustees, with the U.S. Secretary of the Treasury as the Managing Trustee. These trust funds represent the most significant difference when comparing the two systems. Unlike the CPP trust fund, the Social Security trust funds lend out 100% of their assets to the U.S. government. Excess funds can be used by the U.S. government for other purposes.
Budget shortfalls have often threatened the solvency of Social Security. According to the 2019 Annual Report of the Board of Trustees of the Federal Old-Age and Survivors Insurance and Federal Disability Insurance (OASDI) Trust Funds, “OASDI cost is projected to exceed total income starting in 2020, and the dollar level of the hypothetical combined trust fund reserves declines until reserves become depleted in 2035.”
The OASI Trust Fund reserves, which pay for retiree pensions, is expected to become depleted in 2034; the Disability Trust Fund will last until 2052, according to the report. At depletion, the current estimate is that 77% of retiree benefits and 91% of disability benefits would be covered, unless steps are taken to remedy the situation.This is not an issue that faces the Canada Pension Plan.