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. 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 >>
  4. How are payments calculated on a Canadian Pension Plan (CPP)?

    Learn what factors are considered when calculating your Canada Pension Plan retirement benefits, and discover how to get ... Read Answer >>
  5. What are the steps to applying for a Canada Pension Plan (CPP)?

    Learn how to apply for Canada Pension Plan, part of Canada's retirement income system. Also find out about available benefits ... Read Answer >>
Related Articles
  1. Retirement

    Introduction to Social Security

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

    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.
  3. Retirement

    Who Pays Your Social Security Benefits?

    The short answer is, current earners. Taxes on current wages pay the Social Security benefits of retirees, the disabled, children and other beneficiaries.
  4. Retirement

    4 Things That Are Reducing Your Social Security

    Worried about Social Security dwindling? We discuss four ways it’s already happening.
  5. Retirement

    The Purpose of a Social Security Statement

    Learn what information your Social Security benefit statement contains and how you can use the information to more intelligently plan for retirement.
  6. Retirement

    How Does US Social Security Measure Up Abroad?

    Social Security is a hotly debated topic. After examining the retirement plans of three different countries, the U.S.'s does not come out the winner.
  7. Retirement

    How Social Security Works After Retirement

    Millions of Baby Boomers are looking forward to collecting benefits, but several factors can affect how much they get and whether the money is taxed.
  8. Retirement

    When Do I Stop Paying Social Security Tax?

    Almost never, unless you belong to one of these special groups.
  9. Financial Advisor

    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.
  10. Financial Advisor

    10 Things You Need to Know About Social Security

    Every saver should know these ten things about Social Security retirement benefits.
RELATED TERMS
  1. Canada Pension Plan - CPP

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

    The tax levied on both employers and employees used to fund the ...
  3. Outside Earnings

    Income that temporarily reduces a retired individual's Social ...
  4. Year's Maximum Pensionable Earnings - YMPE

    A figure set each year by the Canadian government determining ...
  5. Actuarial Balance

    The difference between future Social Security obligations and ...
  6. Integrated Pension Plan

    A pension plan that is tied to an individual's Social Security ...
Hot Definitions
  1. Portfolio Investment

    A holding of an asset in a portfolio. A portfolio investment is made with the expectation of earning a return on it. This ...
  2. Treynor Ratio

    A ratio developed by Jack Treynor that measures returns earned in excess of that which could have been earned on a riskless ...
  3. Buyback

    The repurchase of outstanding shares (repurchase) by a company in order to reduce the number of shares on the market. Companies ...
  4. Tax Refund

    A tax refund is a refund on taxes paid to an individual or household when the actual tax liability is less than the amount ...
  5. Gross Domestic Product - GDP

    The monetary value of all the finished goods and services produced within a country's borders in a specific time period, ...
  6. Inflation

    The rate at which the general level of prices for goods and services is rising and, consequently, the purchasing power of ...
Trading Center