Social Security Contributions in Canada: Revenue, Rates and Rationale

(Disponible en français : Les cotisations de sécurité sociale au Canada : recettes, taux et justification)

Governments can finance the goods and services provided to citizens through various means, including through taxing, investing and borrowing. The first – taxation – can take several forms.

In Canada, federally funded or federally sponsored initiatives can be financed by personal income taxes, corporate income taxes, consumption taxes and social security contributions.

This HillNote analyzes the revenue, rates and rationale relating to social security contributions. Other HillNotes examine these factors for personal income taxes, corporate income taxes and consumption taxes.

Revenue

In Canada, federal social security contributions include contributions to the Canada Pension Plan (CPP) and the Quebec Pension Plan (QPP), as well as Employment Insurance (EI) premiums.

As shown in Figure 1, in 2015–2016, federal social security contributions were the second largest contributor to federal tax revenue and social security contributions, at $81.8 billion, or 23.1%. Between 1984–1985 and 2015–2016, this percentage ranged from 16.0% to 23.9%.

Figure 1 – Federal Tax Revenue and Social Security Contributions, 2015–2016 ($ billions)

SSC Fig1_E

Notes: “Social security contributions” are Canada Pension Plan and Quebec Pension Plan (CPP and QPP) contributions, and Employment Insurance premiums. While the QPP operates exclusively in Quebec, QPP contributions are combined with contributions to the CPP, which operates in the rest of Canada, thereby giving rise to the term “federal.” “Corporate income taxes” includes the capital tax on financial institutions.“Other taxes and revenues” are non-resident income taxes, revenue from federal Crown corporations, net foreign exchange revenue and revenue from other programs.
Sources: Figure prepared by the authors using data obtained from: Statistics Canada, “Table 385–0032: Government finance statistics, statement of government operations and balance sheet, quarterly,” CANSIM (database), accessed 31 January 2017; and Receiver General for Canada, Public Accounts of Canada 2016, Volume 1, 2016.

Rates

For 2017, the CPP and QPP contribution rates of 4.95% and 5.40%, respectively, are applied on employment income between the basic exemption amount of $3,500 and the maximum pensionable earnings amount of $55,300.

In all provinces except Quebec, the EI contribution rate is $1.63 per $100 of insurable earnings below $51,300. Because Quebec employees are covered by the Quebec Parental Insurance Plan, the Employment Insurance Regulations allow these employees to pay a lower EI contribution rate of $1.27.

According to the Organisation for Economic Co-operation and Development (OECD) publication Revenue Statistics – OECD countries: Comparative tables, social security contributions to all levels of Canadian government as a proportion of total tax revenue and social security contributions have increased over time, rising from 10.5% in 1980 to 15.1% in 2014.

As shown in Figure 2, social security contributions in Canada in 2014 represented a smaller percentage of total tax revenue and social security than in the United States, at 24.1%. The Canadian proportion was also less than the average for OECD countries, at 26.2%.

Figure 2 – Social Security Contributions as a Percentage of Total Tax Revenue and Social Security Contributions, All Levels of Government, OECD Countries, 2014

SSC Fig2_E

Source: Figure prepared by the authors using data obtained from Organisation for Economic Co‑operation and Development, Revenue Statistics – OECD countries: Comparative tables, OECD.Stat (database), accessed 13 February 2017.

Rationale

Social security contributions are generally thought to be mandatory amounts paid to governments that result in an entitlement to future benefits when certain qualifying conditions are met. These benefits are usually contingent on a life event, such as retirement, disability, death or involuntary loss of employment.

Depending on the social security measure and the country, contributions may be made by one or more of the following: employees; employers; self-employed persons; and unemployed individuals.

Governments worldwide rely on social security contributions to finance expenditures on social security programs, such as government-sponsored pension plans and employment insurance.

Social security contributions – including those made in relation to the CPP, the QPP and EI in Canada – may have smaller negative effects on the number of hours that a person decides to work than do personal income taxes.

This result may arise because the same contribution rate is applied on pensionable or insurable earnings within the contribution thresholds, and because contributions on each additional dollar of income cease to be made once contribution limits have been reached.

By comparison, under Canada’s personal income tax system, tax rates increase with income, which may reduce the number of hours that employees work.

Moreover, the link between social security contributions and the benefits they finance helps to preserve incentives to work to a greater extent than do income taxes. For example, individuals may view social security contributions as “forced saving” or “forced participation in an insurance plan,” rather than as a tax.

Also, compared to the personal income tax system, social security contributions are easier to administer and have lower compliance costs; personal income taxes are applied on multiple income sources, and are subject to numerous credits and deductions.

Moreover, CPP, QPP and EI contributions are made on a broad, clearly defined range of employee earnings and according to uniform contribution rates. Furthermore, both employee and employer contributions are remitted by the employer, thereby simplifying collection.

Some commentators have suggested that, relative to other taxpayers, those with higher incomes pay proportionately less in social security contributions. Figure 3 presents the situation in Canada, where – as a percentage of income – middle-income earners contribute the most to federal social security programs.

Figure 3 – Estimated Canada Pension Plan, Quebec Pension Plan and Employment Insurance Average Contributions as a Percentage of Total Income from Taxable Sources, by Income Group, 2016

SSC Fig3_E

Source: Calculations by Édison Roy-César, Library of Parliament, using Statistics Canada’s Social Policy Simulation Database and Model (SPSD/M), version 22.3. The Library of Parliament is entirely responsible for the use and interpretation of this model.

As earnings rise above the maximum amounts on which contributions are made, taxpayers pay a smaller share of their annual income in the form of CPP, QPP and EI contributions. Furthermore, higher-income earners tend to generate more revenue from sources on which social security contributions are not made, such as capital gains.

Partly because the first $3,500 in annual pensionable earnings is exempt from CPP or QPP contributions, low-income earners pay a smaller share of their income in the form of CPP, QPP and EI contributions than do middle-income earners. Also, low-income earners tend to receive more taxable government transfers, in respect of which social security contributions are not made.

Some observers suggest that social security contributions – such as those for the CPP, QPP and EI program – that are applied only on labour income may be particularly costly for employers in labour-intensive sectors.

That said, regardless of their sector, employers may attempt to shift the cost of their social security contributions to employees in the form of lower compensation and/or to consumers in the form of higher prices for goods and services. In the latter case, firms’ international competitiveness may be harmed if their foreign competitors do not make the same contributions, make contributions at a lower rate and/or pass the cost of their contributions to employees.

Some empirical evidence suggests that social security contributions are borne mostly by employees, especially in the long run and when applied broadly across sectors. Therefore, the impact of social security contributions on the competitiveness of domestic firms may be limited.

Additional Resources

Canada Revenue Agency, EI premium rates and maximums, 26 September 2016.

Canada Revenue Agency, CPP contribution rates, maximums and exemptions, 1 November 2016.

Retraite Québec, The Québec Pension Plan at a glance.

Authors: Dylan Gowans and Simon Richards, Library of Parliament