A:

On the surface, the U.S. Social Security system and the Canada Pension Plan have a lot in common. Both are publicly provided, mandatory old age pension systems that have the option of providing disability and survivor benefits in addition to retirement assistance. The most striking difference, however, is not about which benefits are received by their respective citizenry, but in how solvent and sustainable the CPP is versus the troubled Social Security system.

Canada Pension Plan

CPP versus Social Security is not really an "apples to apples" comparison of government pension programs, because the CPP has a complementary program that Social Security does not, Old Age Security, or OAS. In every province except for Quebec, which has its own system, 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 died. In general, CPP tax rates and income thresholds are lower than Social Security, meaning that corresponding benefits also tend to be much lower.

Those taxed wages are placed into a trust fund that is managed by the CPP Investment Board, which in turn invests the funds into a portfolio of stocks, bonds and other assets. In this sense, the trust fund is much more real than the Social Security trust fund. When an individual reaches retirement age, his or her benefits are determined based on his or her 40 highest income-earning years. Individuals who earn more income, to a certain point, contribute more to the CPP and receive higher benefits in retirement.

Social Security

Social Security is a federal program in effect in every state, with no exceptions. Like the CPP, taxes are split between the 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 Medicare and Medicaid programs.

Social Security taxes are paid by all income earners, regardless of age. Retirees can claim benefits between the ages of 62 and 67, and benefits are determined by taking the 35 highest earning years in an individual's work history. Like the CPP, those with higher incomes see higher benefit levels in retirement.

It is the trust fund, however, that offers the most significant difference when comparing the CPP to Social Security. Unlike the CPP trust fund, which actually manages CPP taxed wages, the Social Security trust fund loans out 100% of its assets to the U.S. government. Money taxed for Social Security is not invested as earmarked for Social Security payments but instead spent on the general budget. This means the U.S. government must tax or borrow money to make Social Security payments. Budgetary shortfalls have threatened the solvency of Social Security on many occasions.

RELATED FAQS
  1. How does the Canada Pension Plan (CPP) work, and what asset mix does it hold?

    Learn the difference between a chartered financial analyst and the Canadian pension plan. Explore Canadian retirement options ... Read Answer >>
  2. Who is eligible for Canada Pension Plan benefits?

    Learn more about the Canada Pension Plan, who contributes to the plan and who can receive standard, disability, early retirement ... Read Answer >>
  3. How can you get your Canada Pension Plan (CPP) payments early?

    Learn about how Canadian taxpayers can receive benefits from their Canada Pension Plan before reaching normal retirement ... Read Answer >>
  4. What are Canada Pension Plan contribution requirements and rules?

    Learn about the Canada Pension Plan contribution requirements for Canadian workers and how those contributions determine ... Read Answer >>
  5. When should I take my Canadian Pension Plan distributions?

    The Canadian Pension Plan (CPP) is a retirement program from which contributing Canadians may receive payments at the age ... Read Answer >>
  6. What is the Social Security administration responsible for?

    Learn about the Social Security Administration's main responsibilities along with its history, structure and social safety ... Read Answer >>
Related Articles
  1. Stock Analysis

    Was It Really A Bailout?

    Although Americans are convinced that the TARP program was a waste of taxpayer money, the latest report indicates that most costs are not related to banks at all.
  2. Retirement

    Introduction to Social Security

    You've probably contributed to this fund, but will you reap the benefits? Find out here.
  3. Retirement

    How Pensions, Social Security Differ

    Both pensions and Social Security provide an income stream to retirees, but they differ widely on how they're structured and funded. Here's the lowdown.
  4. Retirement

    Social Security's Insolvency and Your Retirement

    The Social Security system could run out of money by 2031. Here's a look at some proposed solutions to the problem and what can be done to prepare.
  5. Financial Advisors

    When Taking Social Security Early Can Make Sense

    Sometimes it makes financial sense to take Social Security early. Here's a look at when this might be a good idea.
  6. Retirement

    What Will Social Security Look Like When You Retire?

    Many workers are not confident that Social Security will be around during their retirement. Here's what you need to know about its future.
  7. Financial Advisors

    10 Things You Need to Know About Social Security

    Every saver should know these ten things about Social Security retirement benefits.
  8. Retirement

    Will Baby Boomers Bankrupt Social Security?

    Will the massive Baby Boomer generation, now retiring in droves, bankrupt the Social Security System?
  9. Financial Advisors

    What Will My Social Security Check Look Like?

    It's important to know what your Social Security check will look like in retirement. Here's how you can figure it out.
  10. Financial Advisors

    How Social Security Will Change In 2015

    The average retiree’s check will rise by 1.7% in 2015, the Social Security Administration says. And the ceiling on taxable earnings will rise, as well.
RELATED TERMS
  1. Canada Pension Plan - CPP

    One of three levels of Canada's retirement income system, which ...
  2. Social Security

    A United States federal program of social insurance and benefits ...
  3. Social Security Benefits

    The monetary benefits received by retired workers who have paid ...
  4. Year's Maximum Pensionable Earnings - YMPE

    A figure set each year by the Canadian government determining ...
  5. National Social Security Fund (China)

    A government-controlled investment fund established primarily ...
  6. Actuarial Deficit

    The difference between future Social Security obligations and ...
Trading Center