The Canada Pension Plan and the US Social Security System are publicly provided, mandated old-age pension systems. They both offer retirement, disability and survivor benefits. But the amount you pay and the benefits you get differ between the two.
- The Canadian Pension Plan (CPP) and Social Security in the US are both government-sponsored retirement income programs.
- CPP tax rates and income limits are generally lower than those of Social Security. The profit is also less.
- Taxed Canadian salaries go to a trust fund managed by the CPP Investment Board, which invests the money in stocks, bonds and other assets.
- Taxed U.S. Social Security pay goes to the Old Age and Survivor Insurance Trust Fund and the Disability Insurance Trust Fund. The fund is invested entirely in US Treasury securities.
- Social Security risks running out of its reserves by 2033, which will make it unable to pay full benefits to retirees. The CPP does not have this problem.
What is Canada Pension Plan?
The Canada Pension Plan (CPP) is one of three tiers of Canada’s 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 should contribute to the CPP (or QPP if you work in Quebec) if:
- you are over 18 years old
- By 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 remainder. If you are self-employed, you pay the entire contribution. You contribute based on your earnings. For 2021, the contribution rate is 10.9% (up from 10.5% in 2020) if you earn between CA$3,500 and CA$61,600 (the maximum for 2020 was CA$58,700). .
With this limit, the maximum contribution for 2021 for employers and employees is CA$3,166.45. If you are self-employed, it is CA$6,332.90.
Contributions go to a fund managed by the CPP Investment Board, which invests assets “to maximize returns without undue risk of loss.”
Canada Pension Plan Benefits
Similar to the US Social Security system, the Canada Pension Plan offers a variety of benefits:
- retirement pension. You can start full CPP retirement benefits at age 65. You can get a permanent increase at the age of 60 or a permanently reduced amount at the age of 70.
- Benefits after retirement. If you are under 70 and you continue to work while you are receiving your CPP retirement pension, you can continue to contribute to the CPP. These contributions go towards post-retirement benefits that increase your retirement income.
- disability benefits. You can receive disability benefits if you are under 65 and cannot work because of a disability.
- Survivor’s pension. Your surviving spouse or common law partner can collect benefits based on your records.
- Children’s benefits. If you die or become seriously disabled, your dependent children may receive benefits.
Your CPP benefits are based on how much you have contributed and how long you have been contributing when you become eligible for benefits. For 2021, the maximum monthly retirement benefit is CA$1,203.75. The average amount for new beneficiaries as of March 2021 was CA$619.44.
What is social security?
Social Security is a federal benefits program in the US that was established in 1935. In 2021, employees and employers each pay 6.2% in taxes on the first $142,800 (up from $137,700 in 2020) of income. If you’re self-employed, you pay the full 12.4%. For 2020, the maximum contribution for employers and employees is $8,853.60. If you’re self-employed, that’s $17,707.20 (12.4% of $142,800).
Most people will have to pay into Social Security, regardless of age. However, exemptions may be available for certain groups of taxpayers, including:
- eligible religious group
- non-resident aliens
- students who work in the same school they attend
- foreign government servant
Social Security taxes go to the Old Age and Survivor Insurance (OASI) Trust Fund and the Disability Insurance (DI) Trust Fund. Although legally distinct, they are known collectively as the “Social Security Trust Fund”—or “Social Security” in common parlance.
All Social Security payroll taxes are put into the trust fund, and all Social Security benefits and administrative costs are paid out of them. Trust funds are invested entirely in US Treasury securities.
social security benefits
Like the CPP, the Social Security system offers a variety of benefits:
- retirement benefits. Full Social Security retirement benefits begin between ages 65 and 67, depending on when you were born. If you wait until age 70 to make a deposit, you can get a permanently reduced amount or increased amount at age 62.
- disability benefits. If you cannot work because of a disability, you may receive disability benefits. Your family members may also be eligible for benefits.
- survivor benefit. Your surviving spouse and minor children may be eligible for benefits based on your records.
To qualify for Social Security benefits, you must have 40 “work credits,” which translate to approximately 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 constraints have often put Social Security’s solvency at risk. According to Annual Report of the Board of Trustees of the 2021 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 survivor benefits, will be able to pay scheduled benefits in a timely manner until 2033…. At which time, the fund’s reserves will be depleted and the tax is released. The income will be sufficient to pay 76 per cent of the scheduled benefits.”
“The Disability Insurance (DI) Trust Fund, which pays disability benefits, will be able to pay scheduled benefits by 2057 … at which time, the fund’s reserves will be depleted and continued tax income to pay 91% of scheduled benefits.” The trustees’ report to the Congress further noted.
As of 2021, Social Security’s total annual cost exceeds its total income. But the trust fund’s reserves will supplement the program’s proceeds so that Social Security can pay full benefits by 2033 (for retirees) and 2057 (for the disabled). In theory, this gives policymakers time to develop a financing plan to increase Social Security.
The Canada Pension Plan does not currently face a similar problem.