Governments finance the goods and services that they provide in various ways, including through taxing, investing and borrowing activities.
The first of these activities – taxation – can take several forms. In Canada, sources of funds that help to finance federal initiatives include social security contributions, personal income taxes, corporate income taxes and consumption taxes.
With a specific focus on contributions to the Canada Pension Plan/Quebec Pension Plan (CPP/QPP) and Employment Insurance (EI) premiums, this HillNote provides information about the revenue, rates and rationale relating to such contributions and premiums. Other HillNotes discuss federal personal income taxes, corporate income taxes and consumption taxes.
For the purposes of this HillNote, the term “federal social security contributions” includes contributions to the CPP/QPP and EI premiums. Figure 1 shows that, in 2019–2020, these contributions and premiums amounted to $94.1 billion, and represented 23.2% of total federal tax revenue and social security contributions.
Figure 1 – Federal Tax Revenue and Social Security Contributions, 2019–2020 ($ billions)
Notes: “Social security contributions” are Canada Pension Plan and Quebec Pension Plan (CPP and QPP) contributions, and Employment Insurance premiums. The QPP operates exclusively in Quebec, with the CPP operating in the rest of Canada. For the purposes of this figure, QPP contributions are combined with contributions to the CPP, giving rise to the term “federal.”
“Consumption taxes” are the Goods and Services Tax, the Harmonized Sales Tax, energy taxes, customs import duties, other excise taxes and duties, and fuel charges.
“Other taxes and revenues” are non-resident income taxes, revenue from federal enterprise Crown corporations and other entities, net foreign exchange revenue and revenue from other programs.
Sources: Figure prepared by Nathalie Pothier, Library of Parliament using data obtained from: Statistics Canada, “Table 10-10-0015-01: Statement of government operations and balance sheet, government finance statistics (x1,000,000),” Database, accessed on 16 February 2021 (for CPP and QPP values); and Receiver General for Canada, Public Accounts of Canada 2020, Volume 1, 2020.
For 2021, CPP and QPP contribution rates of 5.45% and 5.9%, respectively, apply on employment income between the basic exemption amount (BEA) of $3,500 and the maximum pensionable earnings amount (MPEA) of $61,600. Both employees and employers make contributions at the applicable rate; contributions by self-employed persons occur at the combined employee and employer contribution rate.
For the CPP, the employee and employer contribution rate on annual earnings above the BEA and below the MPEA is scheduled to increase to 5.95% by 2023. Beginning in 2024, additional CPP contributions – at a rate of 4% – will be required on employment income between the MPEA and an upper earnings limit. Quebec is implementing changes to the QPP that are similar to those being made to the CPP.
In all provinces except Quebec, employees pay EI premiums at the rate of $1.58 per $100 of insurable earnings below $56,300. Because of the Quebec Parental Insurance Plan, the Employment Insurance Regulations allow employees in Quebec to pay a lower rate of $1.18 per $100 of insurable earnings below $56,300.
Regardless of whether an employee works in Quebec or elsewhere in Canada, the employer pays EI premiums of up to 140% of the amount of EI premiums paid by its employees.
Self-employed persons can register to obtain certain EI benefits, with their premiums based on those payable by employees.
According to the Organisation for Economic Co-operation and Development’s (OECD’s) Revenue Statistics – OECD countries: Comparative tables, social security contributions to all levels of government in Canada, as a percentage of total tax revenue and social security contributions, increased from 5.6% in 1965 to a high of 15.5% in 2003. In 2019, this percentage was 14.0%.
As shown in Figure 2, in 2019, social security contributions to all levels of government, as a share of total tax revenue and social security contributions, were 14.0% and 24.9% in Canada and the United States, respectively.
Figure 2 – Social Security Contributions as a Percentage of Total Tax Revenue and Social Security Contributions, All Levels of Government, OECD Countries, 2019
Note: Because 2019 data are unavailable for Australia, Japan, Mexico and the average for Organisation for Economic Co-operation and Development countries, the figure provides 2018 data for these jurisdictions; for Australia, the percentage is 0.0%. The percentages for Denmark and New Zealand for 2019 are 0.1% and 0.0%, respectively.
Source: Figure prepared by Nathalie Pothier, Library of Parliament using data obtained from Organisation for Economic Co‑operation and Development (OECD), “Revenue Statistics – OECD countries: Comparative tables,” Database, accessed 15 July 2021.
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 often contingent on a life event, such as retirement, disability, death or involuntary loss of employment.
Governments worldwide rely on these contributions to finance expenditures on such programs as government-sponsored pension plans and employment insurance.
Depending on the type of social security program and the country, contributions may be made by one or more of the following: employees; employers; self-employed persons; and persons who are not part of the labour force.
When compared to personal income taxes, 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 of work.
This result may arise because the same contribution rate is applied on pensionable or insurable earnings within contribution threshold amounts. It might also occur because contributions on each additional dollar of income cease to be made once contribution limits have been reached.
Moreover, the link between social security contributions and the benefits that they finance might provide fewer disincentives to work than do personal income taxes. For example, individuals might view social security contributions as “forced saving” or “forced participation in an insurance plan,” rather than as a tax.
Social security contributions are thought to be regressive in at least some countries. Figure 3 shows that, in 2018 and as a percentage of their taxable income, Canadian taxpayers with an annual income between $50,000 and $60,000 contributed the most – on average – to the CPP, the QPP and the EI program.
Figure 3 – Average Canada Pension Plan and Quebec Pension Plan Contributions and Employment Insurance Premiums as a Percentage of Total Income from Taxable Sources, by Income Group, 2018 Estimates
Note: The figure was prepared by the Library of Parliament using estimates derived from 2015 data on taxpayers who had income, regardless of whether they made contributions to the Canada Pension Plan or the Quebec Pension Plain, or paid Employment Insurance premiums.
Source: Calculations by Emmanuel Preville, Library of Parliament, using Statistics Canada’s Social Policy Simulation Database and Model (SPSD/M), version 27.0. 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 and QPP contributions and EI premiums.
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 and QPP contributions and EI premiums than do middle-income earners.
Employers may attempt to shift the cost of 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. If employers do not shift the entire cost, their international competitiveness may be negatively affected if their foreign competitors do not make the same types of contributions, make contributions at a lower rate and/or pass on more of the cost of their contributions to employees.
Empirical evidence is mixed regarding whether social security contributions are borne by employees more so than by employers, or vice versa. The extent to which employees and employers bear the costs of these contributions might depend on the contribution rates that they pay and the extent to which they can shift the costs of their contributions.
Canada Revenue Agency, EI premium rates and maximums, 4 November 2020.
Canada Revenue Agency, CPP contribution rates, maximums and exemptions, 4 November 2020.
Kees Goudswaard and Koen Caminada, “Social security contributions: economic and public finance considerations,” International Social Security Review, Vol. 68, No. 4, 2015.
Organisation for Economic Co-operation and Development, Pensions at a Glance 2019: OECD and G20 Indicators, OECD Publishing, Paris, 2019.
Authors: Simon Richards and Brett Stuckey, Library of Parliament
Categories: Economics and Finance