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

Both offer benefits, but what individuals pay in—and get out—differs

Reviewed by Marguerita ChengFact checked by Suzanne Kvilhaug

The Canada Pension Plan (CPP) and the U.S. Social Security system are publicly provided pension systems. They both provide retirement, disability, and survivor benefits. However, the amount individuals pay and the benefits they receive differ.

Key Takeaways

  • The Canada Pension Plan (CPP) and Social Security are government-sponsored retirement income programs.
  • CPP tax rates and income thresholds are generally lower than Social Security.
  • 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 in U.S. Treasury securities.

Canada Pension Plan

The Canada Pension Plan (CPP), established in 1966, is one of three Canadian retirement income systems that provides retirement, survivor, and disability benefits. Most Canadians contribute to the CPP. A Quebec Pension Plan (QPP) provides similar benefits to its residents.

Individuals contribute to the CPP if they are over 18 and earn more than CA$3,500.Based on earnings, the employee and employer contribution rate is 5.95% each, and the self-employed contribution rate is 11.9%. In 2024, Canada introduced an additional maximum pensionable earnings amount, adding CPP contributions of 4% for both employers and employees or 8% for the self-employed on earnings between CA$68,500 and CA$73,200.

The CPP Investment Board invests the assets “to maximize returns without undue risk of loss.”For 2024, the maximum monthly retirement benefit is CA$1,364.60. CPP benefits are based on how much and how long individuals have contributed.

Important

The Quebec Pension Plan is the equivalent of the CPP in the region. In 2024, its contribution rate is 10.8%, split equally between the employer and the employee.

CPP Benefits

  • Retirement pension. Individuals can start full CPP retirement benefits at age 65 or get a permanently reduced amount as early as 60. For those who start benefits as late as age 70, benefits will have a permanent increase.
  • Post-retirement benefit. Individuals under age 70 can keep working while receiving a CPP retirement pension, and contribute toward post-retirement benefits that increase retirement income.
  • Disability benefits. Individuals get disability benefits and are below the age of 65 and can’t work due to a disability.
  • Survivor’s pension. A surviving spouse or common-law partner can collect benefits based on the employee’s record.
  • Children’s benefits. Severely disabled dependent children can receive benefits if individuals die or become severely disabled.

Social Security

Established in 1935, Social Security is a federal benefits program in the U.S. Employees and employers pay 6.2% each in taxes to contribute. Self-employed individuals pay the full 12.4%. Earnings are taxed up to $168,600 in 2024. The maximum contribution for individuals is $10,453.20 (.062 x $168,600). For the self-employed, it’s $20,906.40.

Most people must pay into Social Security, regardless of age. Individuals must have 40 work credits or 10 years of earnings to qualify for Social Security benefits. Benefits are based on the highest-earning 35 years of work.

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 “Social Security.”All Social Security payroll taxes are allocated to the trust funds, and Social Security’s benefits and administrative costs are paid out. The trust funds are invested entirely in U.S. Treasury securities.

Note

Some groups are exempt from paying into Social Security and may include qualifying religious groups, nonresident aliens, and foreign government employees.

Social Security Benefits

  • Retirement benefits. Full Social Security retirement benefits start between ages 66 and 67, depending on an individual’s birth year. Retirees can get a permanently reduced amount as early as age 62, or an increased amount if they wait until age 70 to collect.For 2024, the maximum monthly retirement benefit at age 62 is $2,710, and $4,873 for age 70.
  • 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.

Funding Shortfalls

In 2024, the Canada Pension Plan does not face a budget shortfall. However, according to the 2024 Annual Report of the Board of Trustees of the Federal Old-Age and Survivors Insurance and Federal Disability Insurance Trust Funds, Social Security benefits funded by the OASDI fund are projected to pay 100% of total scheduled benefits until 2035. Following the depletion of the fund’s reserves, continuing total fund income will pay 83% of benefits.

The OASDI fund combines the Old-Age and Survivors Insurance (OASI) Trust Fund and the Disability Insurance (DI) Trust Fund. Based on projections, The OASI Trust Fund alone will be able to pay 100% of scheduled benefits until 2033 with continuing program income sufficient to pay 79% of benefits. The DI Trust Fund can pay 100% of the total scheduled benefits through 2098.

Can Individuals Collect Both Social Security and Canada Pension?

Those with credits for both programs can benefit from one or both programs. Individuals who do not meet the basic requirements for one program may still be eligible for partial benefits.

What Is the Difference Between a Pension Plan and Social Security?

Pension plans are typically funded through employer and employee contributions. Social Security is funded through payroll taxes on workers. These taxes fund the benefits paid out to those not working or retired.

Can Retirees Collect a Pension and Social Security?

Yes, individuals can legally collect a pension and Social Security. Depending on the pension benefit, Social Security benefits may be reduced. Individuals should check with a tax advisor to determine the best setup for their situation.

The Bottom Line

The Canada Pension Plan and the U.S. Social Security program are pension programs for retirees in the respective countries. While the programs have their differences, both seek to provide income and a certain standard of living for retired individuals.

Read the original article on Investopedia.

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