Canada vs. the U.S: Does our retirement funding stack up?

This article originally appeared on benefitscanada.com

In Canada, there has been a lot of talk about the current public retirement system and how it should be improved. But how does Canada’s program shape up against others?

The retirement programs in both Canada and the U.S. are similar, as they both provide social insurance for low-income individuals facing poverty through general tax revenue.

On top of that, a more comprehensive system provides for retirement benefits proportional to contributions through an individual’s working career.

Read: 8 reasons to retire in Canada

Here’s a head-to-head comparison from PBI Actuarial Consultants of the Canadian and American systems:

	Canada	U.S.
Description	Three pillars: Old Age Security (OAS), the Guaranteed Income Supplement (GIS) and the Canada/Quebec Pension Plan (C/QPP). OAS provides a flat benefit to all retired Canadians who qualify but includes a clawback formula depending on retirement income. The GIS provides additional benefits for individuals with very low income. The CPP provides benefits to retired Canadians based on contributions made during their working careers. Retirement age for the CPP is 65 in 2012; early retirement is possible with reductions of the benefits from age 60.	Two pillars: Supplemental Security Income (SSI), Federal Old Age, Survivor and Disability Insurance (OASDI). SSI provides benefit payments to very low income individuals (age 65 or older) who are blind and/ or and disabled. OASDI provides retirement benefits based on individual earnings and contributions throughout their career. For individuals born on or after 1960, the normal retirement age for access to OASDI benefits is 67 in 2012. Early retirement is available starting at 62, with a reduction in the lifetime benefits to account for the longer payment period.
How it’s funded	The OAS and GIS are funded from general tax revenue. The CPP is funded by employee and employer contributions. The contribution rate of CPP is 4.95% for employees and 4.95% for employers, up to maximum covered earnings, also called Year’s Maximum Pensionable Earnings (YMPE). The YMPE for 2012 is $50,100.	The SSI is funded by government revenue, and the OASDI is funded by employee and employer contributions through payroll tax. The contribution rate for OASDI is 6.20% for employees and 6.20% for employers. The maximum covered earnings for 2012 is $110,100.
Benefits calculations	CPP retirement benefits are calculated based on an individual’s career earnings. The earnings are indexed to take into account changes in standards of living, and the lowest 15% income earning years are excluded (it will be changed to 17% in 2014). The maximum CPP benefit for the year in 2012 is $987 per month, and benefits are adjusted annually for cost-of-living increases. The maximum OAS benefit for January 2012 is $540 per month. OAS amounts are reviewed quarterly.	OASDI retirement benefits are based on an individual’s covered earnings up to a maximum amount during his or her career. Earnings prior to age 62 are indexed using the Average Wage Index to reflect changes in standards of living. The 35 highest indexed yearly earnings are then used to calculate an average. This average is then converted into monthly amounts and broken down into three portions with a different replacement rate applied to each portion. The total benefit calculated this way is called the Primary Insurance Amount (PIA). The PIA is then indexed to the retirement age and reduced for early retirement, if applicable, to calculate the monthly pension payments. In 2012, the maximum OASDI pension is $2,513 per month at full retirement age. OASDI benefits are reviewed every year for cost-of-living adjustments. SSI pays monthly benefits to people with limited income and resources who are disabled, blind or age 65 or older. Blind or disabled children may also get SSI.

Canada

U.S.

Description

Three pillars: Old Age Security (OAS), the Guaranteed Income Supplement (GIS) and the Canada/Quebec Pension Plan (C/QPP).

OAS provides a flat benefit to all retired Canadians who qualify but includes a clawback formula depending on retirement income.

The GIS provides additional benefits for individuals with very low income.

The CPP provides benefits to retired Canadians based on contributions made during their working careers.

Retirement age for the CPP is 65 in 2012; early retirement is possible with reductions of the benefits from age 60.

Two pillars: Supplemental Security Income (SSI), Federal Old Age, Survivor and Disability Insurance (OASDI).

SSI provides benefit payments to very low income individuals (age 65 or older) who are blind and/ or and disabled.

OASDI provides retirement benefits based on individual earnings and contributions throughout their career.

For individuals born on or after 1960, the normal retirement age for access to OASDI benefits is 67 in 2012. Early retirement is available starting at 62, with a reduction in the lifetime benefits to account for the longer payment period.

How it’s funded

The OAS and GIS are funded from general tax revenue. The CPP is funded by employee and employer contributions.

The contribution rate of CPP is 4.95% for employees and 4.95% for employers, up to maximum covered earnings, also called Year’s Maximum Pensionable Earnings (YMPE). The YMPE for 2012 is $50,100.

The SSI is funded by government revenue, and the OASDI is funded by employee and employer contributions through payroll tax.

The contribution rate for OASDI is 6.20% for employees and 6.20% for employers. The maximum covered earnings for 2012 is $110,100.

Benefits calculations

CPP retirement benefits are calculated based on an individual’s career earnings. The earnings are indexed to take into account changes in standards of living, and the lowest 15% income earning years are excluded (it will be changed to 17% in 2014).

The maximum CPP benefit for the year in 2012 is $987 per month, and benefits are adjusted annually for cost-of-living increases.

The maximum OAS benefit for January 2012 is $540 per month. OAS amounts are reviewed quarterly.

OASDI retirement benefits are based on an individual’s covered earnings up to a maximum amount during his or her career.

Earnings prior to age 62 are indexed using the Average Wage Index to reflect changes in standards of living. The 35 highest indexed yearly earnings are then used to calculate an average. This average is then converted into monthly amounts and broken down into three portions with a different replacement rate applied to each portion.

The total benefit calculated this way is called the Primary Insurance Amount (PIA). The PIA is then indexed to the retirement age and reduced for early retirement, if applicable, to calculate the monthly pension payments.

In 2012, the maximum OASDI pension is $2,513 per month at full retirement age. OASDI benefits are reviewed every year for cost-of-living adjustments.

SSI pays monthly benefits to people with limited income and resources who are disabled, blind or age 65 or older. Blind or disabled children may also get SSI.

Comparing the differences

The main difference between the OASDI and CPP is in the level of coverage.

In 2012, the OASDI’s covered earnings are $110,100, while CPP covers only $50,100 of earnings. The difference in coverage represents a difference in philosophy on retirement saving responsibilities. Instead of mandatory saving through payroll deduction, the Canadian system expects individual citizens to take more responsibility and save—particularly middle- to high-income earners.

Read: Sequence of retirement meetings and CPP and life expectancy

The long-term sustainability of the two programs is also reflective of differences in consideration and approach; the governments must decide on how the program should be financed and how its funds should be invested.

The CPP is in good financial health, but given the current economic conditions and the aging population in the U.S., for example, changes will need to be made to the OASDI in the near future. The required changes could include increasing contribution rates, decreasing benefit levels or increasing the normal retirement age.

Comparing the differences

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