Reforming Social Security: U.S. and Canadian Perspectives
In the United States and Canada, Social Security and other pension benefits remain essential in ensuring the financial well-being and maintaining the basic living standards of the elderly. Policymakers in both countries have raised concerns with respect to whether or not public pension programs will have sufficient levels of funding to meet the needs of a rapidly increasing elderly population in the near future. The differences in the Canadian and American pension systems are worthy of discussion, especially as Social Security in the United States faces an anticipated long-term fiscal unbalance, while the Canada Pension Plan does not.
On Tuesday, April 15, 2008, the Canada Institute hosted an event featuring Daniel Béland of the University of Saskatchewan and current Woodrow Wilson Center Scholar, and Michael Wiseman of the George Washington University, for a discussion on the history, politics, and future of Social Security in the United States and Canada.
Relative Generosity & Poverty among the Elderly
Wiseman began the discussion with a presentation of a paper he and Martynas Ycas of the Social Security Administration (SSA) had produced in response to a question from the deputy commissioner of the SSA: is the Canadian system of pension and social security benefits more generous than that of the United States? A recent study by the Luxembourg Income Study project included a table of relative poverty rates among the elderly across a variety of countries. The rate in the United States was found to be 24.7 percent, while the rate in Canada was 7.8 percent. The SSA's deputy commissioner was rightfully concerned about such a vast difference between the two countries, which are often seen to be quite similar, and both Wiseman and Ycas were enlisted to investigate the problem more thoroughly.
To determine which country provides more generous basic benefits aimed at fighting poverty among the elderly, Wiseman compared the basic benefits each country offers to the poverty standard in the United States (defined as 50 percent or less of the median income level). The maximum basic benefit provided in Canada is 13 percent higher than the poverty level for unmarried individuals, and 45 percent higher for couples. In the United States, however, the maximum basic benefit is 20 percent below the poverty threshold for singles, and 3 percent lower for couples. Thus, according to Wiseman's research, the Canadian government is more generous in providing basic pension benefits than its southern neighbor. In his own words, Wiseman maintained that Americans should, "Look north...and admire the [Canadian] system."
While Wiseman's research demonstrated that the Canadian system is, in fact, more efficient at fighting poverty than that of the United States, Béland's research focused on why this is so by looking at the historical and political evolution of both systems, with a focus on earnings-related pensions. The modern American social insurance system has its roots in President Franklin Delano Roosevelt's New Deal. It was at this time, Béland said, that a fundamental disconnect between social assistance and social insurance was created in the United States. This dichotomy is present at both the political and ideological level, with insurance seen as more desirable than assistance.
At the time of the New Deal, social insurance was seen to be more sustainable as the benefits would be generated from contributions, instead of taken out of general revenues. The Social Security system was created in the United States in 1934-1935, to little fanfare, according to Béland. Before 1934, said Béland, ". . .very few people cared about old-age insurance, it was not a major issue at the time." There was a strong political demand for old-age pensions at large but not for old-age insurance, a measure imposed by the Roosevelt administration in the name of fiscal responsibility. However, Béland stressed that the program has expanded beyond its more humble beginnings to become the center of the modern American welfare state. Social insurance is still seen as the best way to combat poverty among the elderly.
According to Béland, in the field of old-age pensions, the dichotomy between social assistance and social insurance is not as central in Canada as it is in the United States. The idea of a system of universal benefits is also more acceptable among Canadians, and the logic of a program to provide benefits to the population, financed out of general revenues, is widely accepted. The cornerstone of the Canadian system, explained Béland, is a universal flat pension benefit originally inspired by a British model. This flat pension is supplemented by an income-tested benefit for low-income pensioners. Canada also has two earnings-related pension programs which are similar to the Social Security program of the United States; one for Quebec specifically and one for the nine other Canadian provinces. Canada, Béland said, is a late comer to the earnings-related pension scheme; the programs were created in 1966.
Investing Pension Surpluses
Demographic aging is a significant challenge to the long-term sustainability of public pension programs like Social Security and the Canada Pension Plan. While several options are currently being considered in the United States to address the long-term fiscal challenge facing Social Security —such as privatization and increased tax rates—Canada found what appears to be a viable solution to the United States' current problem in the 1990s.
The Canadian government's approach to solving its own Social Security revenues crisis, Béland said, centered on direct government investment of social security surpluses in equity. The Canadian government partly modeled its strategy after the government of Quebec's, which began to invest surpluses from the Quebec Pension Plan in the late 1960s as a way of stimulating economic development within the province. To orchestrate this plan, Béland said, the Quebec government created an investment board to oversee the management and investment of surplus funds in the Quebec Pension Plan. In the 1990s, the Canadian government followed suit, establishing its own investment board to manage Canadian Pension Plan surpluses. However, this Canada Pension Plan Investment Board is different from the Quebec model because it does not explicitly seek to stimulate economic development; its sole objective is to increase investment returns.
According to Béland, the CPP Investment Board has worked relatively well so far, and there is little evidence of political interference, something the board was designed to avoid. Nevertheless, there is no guarantee that Canada's model could be replicated successfully in the United States. Such an investment system, according to Béland, would face many obstacles, including fear among some sectors of the American public that such an investment board could be susceptible to political influence over how and where Social Security surpluses are invested.
There is not much support for the idea of the federal government directly investing American Social Security funds, Béland said, in part because of potential political interference but also because of the sheer size a Canadian-style system would have to be in the United States. He noted that the American population is ten times larger than that of Canada, so any direct government investment scheme would also be far larger. Americans, in general, are apprehensive about allowing their government to have too much control over the economy, and, successful as it has been in Canada, greater control over the economy is exactly what such a plan offers.
Drafted by Cami Woolam, Program Intern, Canada Institute
David Biette, Director, Canada Institute