Reader KD always gives me good suggestions. In my post about backdoor Roth IRA, KD suggested that I add some charts. I did, and I think the charts made a big difference. In my post about Social Security family benefits, KD suggested that I look into the system in Canada and compare it with Social Security in the U.S. Great suggestion, thank you KD!
Canada has two government sponsored programs for retirement: OAS and CPP.
OAS stands for Old Age Security. OAS is non-contributory. You get OAS just for being a senior citizen. The primary qualifying factors are age and number of years lived in Canada.
Basic OAS benefit is about $500 a month (the values of Canadian dollars and US dollars are about equal right now). Low income seniors receive an additional supplement. OAS starts phasing out through repayment if a retiree’s income is above $66k. It completely disappears if a retiree’s income is above $110k. The low base benefit amount, the low-income supplement, and the clawback mechanism make OAS a means-tested basic safety net.
CPP stands for Canada Pension Plan. Citizens in Quebec have a similar program called QPP – Quebec Pension Plan. Like Social Security, CPP provides disability and survivor benefits in addition to retirement benefits. I only look at the retirement benefits in this post.
The current CPP tax rate is set at 9.9% up to $42,100, equally shared between the employee and the employer, just like Social Security. By comparison, Social Security tax rate is 12.4% up to $106,800. The maximum tax for Social Security is about three times the maximum tax for CPP.
Because CPP’s tax rate and wage cap are lower, the benefits are also lower. The maximum CPP benefit at age 65 is $960 a month. The maximum Social Security benefit is $2,366 at age 66, before any spousal or child benefits.
CPP also has a trust fund, but CPP’s trust fund is real. An independent CPP Investment Board invests the trust fund in actual marketable securities: stocks, bonds, real estate. Social Security trust fund loans out 100% of its assets to the U.S. government, which spent it on the general budget. When Social Security needs the money to pay benefits, the U.S. government must tax its citizens or borrow from someone else to repay the Social Security trust fund.
When it comes to benefits to a current or former spouse or life partner, CPP is completely agnostic. When a couple divorce or separate, their CPP credits built up when they were together can be split between the two. A CPP recipient can also choose to share a portion of his/her CPP benefits with a spouse or partner. In either case, the total benefits don’t increase. There won’t be a case where one person contributes and current and former spouses plus several children all receive benefits without any reduction to the contributor’s benefits. The splitting and sharing provisions in CPP address the uneven income and marriage/divorce situations very elegantly.
I see Canada’s OAS and CPP programs have a better setup than Social Security in the U.S. They are more of a safety net, less of a retirement program retirees can live on 100%. The CPP trust fund is real, and will grow. Family benefits aren’t free. These characteristics make Canada’s OAS and CPP programs more sustainable than Social Security.