Public finance and legislative procedures

Social Security in the U.S.: Better than CPP and OAS?

According to a 2009 poll by the National Academy for Social Insurances, 2/3 of Americans would choose to strengthen the United States' Social Security System over using its revenues to balance the national deficit (Leigh, 2010). Given the volatile state of the economy and the recent decrease in the international credit standing of the United States, the overwhelming support for bolstering a program that assists the elderly and the disabled demonstrates the exigence of such a program to protect workers in their retirement or in their time of medical need. Contrast this need, though, with the findings from the Cato Institute regarding the solvency of the U.S. Social Security System:

The Social Security system will be effectively bankrupt by the year 2013, when annual payroll taxes will be insufficient to meet annual benefit demands. Not coincidentally, that is when the baby boomers will start retiring (Cato, 1996).

It is apparent that to fund the need for this vital public safety net, changes to our current system must be instituted. However, proposed changes to the Social Security System of the U.S. invariably spark a bonfire of political rhetoric and partisan attacks. As much as change is necessary, wisdom is just as, if not more, requisite before overhauling a system that many Americans rely upon for a basic standard of living. In the spirit of such enlightenment, a comparison of the United States Social Security System to that of the Social Security System of Canada highlights many possible solutions.

The Social Security System of the United States owes its roots, in part, to the institution of military pensions during the Civil War, and in employer-provided pension plans for the most fortunate of workers. The Great Depression brought about the most devastating economic crisis the United States had ever seen. As often happens in desperate times, desperate measures were called for by a variety of groups advocating for the elderly and those unable to work. Policies such as "Ham and Eggs," "The Townsend Movement," and "Every Man a King," among others, were proposed as ways to help those no longer able to help themselves. While state pension programs existed, and while some politicians advised either expanding these state welfare programs or doing nothing, President Franklin Delano Roosevelt ushered in a brave new idea during his first term in office. This program of "Social Insurance," wherein workers would provide for their future economic security through taxes paid while they were employed. Interestingly enough, by the time Roosevelt's "Social Insurance" plan was adopted in 1935, 34 other nations, including Canada, had social insurance policies already in place (SSA.gov).

In the decades following the institution of the Social Security Act, many changes were made to it, most notably COLAs (Cost of Living Increases) first in the 1950s and later in the 1970s, the institution of Medicare in the 1960s, to recent incentives to work as contrasted with the original rule that those collecting Social Security be substantially retired. (SSA.gov). Under the Obama administration, HR-1, the "American Recovery and Reinvestment Act of 2009" was signed, appropriating an additional $1 billion to the Social Security system. While this has not been without controversy, the infusion of funds provided a needed upgrade to the informational technology system necessary to oversee such a large program, as well as extending $250 credits to eligible adults (SSA.gov).

Similar to the United States, the Canadian system of social insurance underwent great change during the Great Depression. In contrast to the U.S. system, however, the Canadian system began its institution with disability insurance demanded by trade workers during and after WWI, not as a demand, necessarily, for elderly benefits. In 1919, the federal Liberal Party attempted to pass legislation mandating health care and contributory old age pensions. While this plan, the BNA Act, was not approved, in 1927, the federal government of Canada approved the conditional grant, that allowed, among other things a pension plan for the "deserving" elderly. Like the U.S., the Canadian economy was rocked by the Great Depression. The social aid programs in place served insufficient to fill the needs of the burgeoning destitute population, and donations from charitable organizations failed to keep pace with the need for assistance (the Canadian Encyclopedia).

Like in the United States, WWII solved many of the woes of the Canadian economy. A new emphasis on the government as a force for providing for the social good of the people. In 1940, an amendment to the BNA was passed, followed by the first institution of unemployment insurance in Canada. The Marsh Report offered a comprehensive social security plan for Canada that included old age pensions paid for by employment taxes, as well as a public health plan. The Canadian Social Security system continued to grow, subject to the political whims of the time, until the 1970s. After this time, reforms were called for, as the system was growing too expensive (the Canadian Encyclopedia).

Both the Canadian Social Security system and the United States Social Security system currently face the problem of rising costs and increased spending. According to United North America, the United States publicly spends 1.8% more than Canada on Social Security and related programs than Canada, with Social Security comprising 6% of the U.S. budget as compared to 4.2% of the Canadian budget (United North America). Does this equate to a higher standard of living for retirees in the United States over those of their Canadian cousins?

Unlike the United States, which has only the contributory (though non-voluntary) Social Security system, Canada has two programs in place to assist seniors. The first, OAS (Old Age Security) is non-contributory. The only factors needed to qualify for this benefit, typically around $500 a month, is old age, and a number of years spent living in Canada, currently 20 years post 18th birthday (HRSDC.ca). This program is meant to primarily assist the lowest income seniors, with benefits decreasing for seniors of income of $66k, and disappearing completely for seniors who make $110k. The second program, the CPP (Canadian Pension Plan), is contributory, like the United States Social Security system. Also, like the U.S. Social Security system, the CPP provides survivor and disability benefits.

The primary difference between Canada's CPP and the U.S.'s Social Security is in the maximum tax rate. The maximum tax rate under the CPP is 9.9%, up to $42,100, shared equally between employee and employer. By contrast, the maximum tax rate under Social Security is 12.4% up to $106,800. The maximum tax under Social Security is three times that of the CPP. Because the amount taxed is lower, benefits received under the CPP are also lower. Under the CPP, the monthly income at age 65 is roughly $960; under Social Security, the average benefits are $2,366 at age 66 (TFB, 2011).