Parts Are Reprinted From The Bookkeeper's Notes Issue 5 August 2011
I came across a March 19, 2010 article on CBC News - Business at cbc.ca. It was titled, Sorry, Canada, the U.S. has the Better Safety Net by Tony Keller.
I found the article interesting ... so I thought I would a take a brief look at the Canada pension plan versus the U.S. social security (pension) plan.
In Canada, the CPP was overhauled in 1997 because it became evident in the early nineties that the fund would not be able to support today's Baby Boomers. The CPP was designed to be a "pay as you go" fund ... creating an intergenerational transfer of funds.
What do I mean by intergenerational? It means today's workers fund today's retirees. The changing demographics were a factor in putting the CPP in jeopardy.
The CCP is funded by payroll tax contributions shared between the employee and employer equally. Self employed people pay both parts. It does not receive direct government funding.
Bruce Cohen and Brian Fitzgerald in The Pension Puzzle explain that the current system can no longer go broke because "its primary asset is the ability to tax employees and employers".
Since the 1997 overhaul, benefits will be funded by a mix of contributions and investment income (see CPPIB) beginning in 2021. Until then, it continues being funded by contributions ... i.e. "pay as you go".
The Canada Pension Plan Investment Board (CPPIB) was created in 1997 to manage the CPP investment portfolio. It operates like a private sector investment management company with several legislative safeguards to protect it from political interference.
The funding of the program is now reviewed every three years (with the current rate at 4.95%) and the $3,500 not subject to contribution was capped where previously it had been indexed. This cap diminishes its value over time.
The death benefit was also frozen at $2500 instead of being tied to inflation.
In addition, changes were made to tighten up the disability program that had become "a significant expense".
All these changes have resulted in Canada's CPP being "a well-funded, actuarially sound pension scheme", says Tony Keller.
Keller feels the real flaw in Canada's CPP system is that it "meets only a small fraction of that [a retiree's income] requirement. If you retire at age 65, the maximum you can receive (excluding OAS which can be clawed back) is $11,520 a year in 2011. ($12,150 in 2013)
Not everyone receives this maximum as it is a contributory plan. This means most Canadians will need to supplement this pension with private retirement funds. See The Bookkeeper News for the proposed PRPPs.
The earliest you can retire is age 60 with normal retirement at age 65. More changes to the CPP came into effect in 2011 ... and are being phased in over the next five years. The changes encourage workers to stay employed/delay retirement until age 70 and discourage workers from retiring at age 60. Click here to read about these changes.
Click here to find out current CPP payroll tax rates.
Service Canada has a retirement calculator to help you estimate your retirement income. You can find it at www.servicecanada.gc.ca> Life Events> Retirement Planning> Estimate your retirement income.
Tony Keller says in his article that the American safety net is wider than the Canadian one.
The federal retirement (old age) plan is funded through payroll taxes called FICA (Federal Insurance Contributions Act).
An article in Wikipedia suggests the Federal Old-Age and Survivors Insurance Trust Fund will be exhausted by 2036 if no legislative action is taken. At that time, benefits are expected to be reduced to 75% of current levels.
The plan has gone through a number of changes since its inception in 1935. But it appears that the U.S. may have to go through some additional pension reform as Canada did in the nineties.
Wikipedia explains that "current year expenses are paid from current Social Security tax revenues.". Any excess is invested in Treasury Notes and "indirectly finances the federal government's general purpose deficit spending" ... i.e. Congress borrows the surpluses that are meant to "cover the added retirement costs of the "baby boomers"."
The earliest you can retire is 62. Full retirement is between the ages of 65 to 67 ... it depends on the year you were born. You can delay retirement to age 70.
The current U.S. payroll deduction is higher than Canada's 4.95% for employees and employers at 4.2% for employees under the 2010 Tax Relief Act (6.2% for 2013 and 2014) and 6.2% for employers.
The U.S. also has higher maximum insurable income than Canada in 2011 at $106,800 and $48,300 respectively ($113,700 and $51,100 in 2013). This means Americans get higher benefits when they retire than Canadians do ... about $28,000 to our $11,000 (numbers rounded) in 2011 ($30,000 to our $12,000 in 2013).
Click here to find current FICA payroll tax rates.
Click here to read about FICA payroll tax deposits.
The Social Security Administration website has a retirement calculator to help you estimate your benefits. You can find it at www.ssa.gov/estimator.