How Does the Canada Pension Plan differ from Social Security?

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.

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 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.