Canada Pension Plan (CPP) vs. U.S. Social Security

Investing News

The Canada Pension Plan and the U.S. Social Security system are publicly provided, mandatory old-age pension systems. They both provide retirement, disability, and survivor benefits. But the amount you pay in and the benefits you receive differ between the two.

Key Takeaways

  • Both the Canadian Pension Plan (CPP), and Social Security in the U.S., are government-sponsored retirement income programs.
  • CPP tax rates and income thresholds are generally lower than those of Social Security. Benefits also tend to be lower.
  • Taxed Canadian wages go into a trust fund managed by the CPP Investment Board, which invests the funds in stocks, bonds, and other assets.
  • Taxed U.S. Social Security wages go into the Old-Age and Survivors Insurance Trust Fund and the Disability Insurance Trust Fund. The funds are invested entirely in U.S. Treasury securities.
  • Social Security faces the risk of its reserve funds being depleted by 2033, which would make it unable to pay full benefits to retirees. The CPP doesn’t have this problem.

What Is the Canada Pension Plan?

The Canada Pension Plan (CPP) is one of three levels of the Canadian retirement income system. It was established in 1966 to provide retirement, survivor, and disability benefits. Almost everyone who works in Canada, outside of Quebec, contributes to the CPP. A separate Quebec Pension Plan (QPP) provides similar benefits to its residents.

In general, you must contribute to the CPP (or the QPP if you work in Quebec) if:

  • You’re over age 18
  • As of 2021, you must earn more than 3,500 Canadian dollars a year

If you have an employer, you pay half of the required contribution, and your employer pays the rest. If you’re self-employed, you pay the whole contribution. You make contributions based on your earnings. For 2021, the contribution rate is 10.9% (up from 10.5% in 2020) of the amount you earn between CA$3,500 and CA$61,600 (the maximum for 2020 was CA$58,700).

With this cap in place, the 2021 maximum contribution for employers and employees is CA$3,166.45. If you’re self-employed, it’s CA$6,332.90.

The contributions go into a fund managed by the CPP Investment Board, which invests the assets “to maximize returns without undue risk of loss.”

Canada Pension Plan Benefits

Similar to the U.S. Social Security system, the Canada Pension Plan provides several types of benefits:

  • Retirement pension. You can start full CPP retirement benefits at age 65. You can get a permanently reduced amount as early as age 60, or as late as age 70 with a permanent increase.
  • Post-retirement benefit. If you’re under age 70 and you keep working while you receive your CPP retirement pension, you can continue to contribute to the CPP. These contributions go toward post-retirement benefits that increase your retirement income.
  • Disability benefits. You can get disability benefits if you’re under age 65 and can’t work due to a disability.
  • Survivor’s pension. Your surviving spouse or common-law partner can collect benefits based on your record.
  • Children’s benefits. If you die or become severely disabled, your dependent children can receive benefits.

Your CPP benefits are based on how much you’ve contributed and how long you’ve been making contributions when you become eligible to collect benefits. For 2021, the maximum monthly retirement benefit is CA$1,203.75. The average amount for new beneficiaries as of June 2021 was CA$619.68.

What Is Social Security?

Social Security is a federal benefits program in the U.S. that was founded in 1935. In 2021, employees and employers each pay 6.2% in taxes on the first $142,800 of income (up from $137,700 in 2020). If you’re self-employed, you pay the full 12.4%. For 2020, the maximum contribution for employers and employees each is $8,853.60. If you’re self-employed, it’s $17,707.20 (12.4% of $142,800).

Most people must pay into Social Security, regardless of age. However, exemptions may be available to certain groups of taxpayers, including:

  • Qualifying religious groups
  • Nonresident aliens
  • Students who work for the same school they attend
  • Foreign government employees

Social Security taxes go into the Old Age and Survivors Insurance (OASI) Trust Fund and the Disability Insurance (DI) Trust Fund. Although legally distinct, they’re collectively known as “the Social Security Trust Funds”—or plain-old “Social Security” in common parlance.

All Social Security payroll taxes are put into the trust funds, and all of Social Security’s benefits and administrative costs are paid out of them. The trust funds are invested entirely in U.S. Treasury securities.

Social Security Benefits

Like the CPP, the Social Security system provides several types of benefits:

  • Retirement benefits. Full Social Security retirement benefits start between age 65 and 67, depending on when you were born. You can get a permanently reduced amount as early as age 62, or an increased amount if you wait until age 70 to collect.
  • Disability benefits. You can get disability benefits if you can’t work due to a disability. Your family members may also be eligible for benefits.
  • Survivor benefits. Your surviving spouse and minor children may be eligible to collect benefits based on your record.

To qualify for Social Security benefits, you must have 40 “work credits,” which comes out to about 10 years of work. Your benefits are based on your highest-earning 35 years of work. For 2021, the maximum monthly retirement benefit is:

  • $3,895 if you wait until age 70 to file
  • $3,113 if you file at full retirement age
  • $2,324 if you file at age 62

How Long Will Social Security Last?

Budget shortfalls have often threatened the solvency of Social Security. According to the 2021 Annual Report of the Board of Trustees of the Federal Old-Age and Survivors Insurance and Federal Disability Insurance Trust Funds, “The Old-Age and Survivors Insurance (OASI) Trust Fund, which pays retirement and survivors benefits, will be able to pay scheduled benefits on a timely basis until 2033…. At that time, the fund’s reserves will become depleted and continuing tax income will be sufficient to pay 76% of scheduled benefits.”

“The Disability Insurance (DI) Trust Fund, which pays disability benefits, will be able to pay scheduled benefits until 2057…. At that time, the fund’s reserves will become depleted and continuing tax income will be sufficient to pay 91% of scheduled benefits,” the trustees’ report to Congress further noted.

As of 2021, Social Security’s total annual cost exceeds its total income. But the trust funds’ reserves will supplement the program’s income so that Social Security can keep paying full benefits until 2033 (to retirees) and 2057 (to the disabled). In theory, this gives policymakers time to develop a financing plan for shoring up Social Security.

The Canada Pension Plan does not currently face a similar issue.

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