Canada and U.S. Retirement Showdown: Which Offers More for Retirees?
Let’s just say this — in all-out ground war between Canada and the U.S., Canada just can’t compete. After all, Canada’s defended by a few notoriously out-of-date military aircraft, and for some time, the country’s largest fleet of submarines was making a tour around a pirate ship in a shopping mall.
Of course, aside from a hard-fought game between the Boston Bruins and the Vancouver Canucks, there isn’t much animosity between the two countries. After all, we have a lot in common. We share an official language, we have access to the same media and, in many cases, we share a lot of the same values. And here’s another thing we have in common — in January 2012, LIMRA, an association of insurance companies, released a survey of pre-retirees in both countries and found that about half in each said they weren’t confident they could maintain their desired lifestyle during retirement. It’s an interesting statistic because planning for retirement is quite different in the U.S. as compared to Canada.
So, in the spirit of friendly cross border competition, I decided to put Canada and the U.S. head-to-head. Which country is best for retirees? Let’s take a look at a few key factors. (See also: Choosing a Retirement Account: What's Available, and What's Best for You?)
Let's start with the biggie. Which nation offers its residents the better retirement planning options?
In the U.S., people can opt to save for retirement using a number of different vehicles, including the Traditional IRA, Roth IRA, SEP IRA, SIMPLE IRA, a qualified plan (including the 401(k) and profit-sharing plans), the 403(b) or some combination of these plans (whew!).
Of course, not all of these programs are available to everyone — and many aren’t suitable for everyone:
- With a Traditional IRA, you get a tax deduction for your contributions but are taxed when you withdraw the funds in retirement.
- With a Roth IRA there’s no tax deduction, but qualified withdrawals are tax-free.
- Employer-sponsored plans like 401(k)s and 403(b)s offer all sorts of other options.
In a word, finding the right retirement plan — and following the rules — is notoriously complicated in the U.S. On the other hand, the number of choices available makes it easier for people to find just the right fit for their financial situation.
Besides the few remaining employer sponsored retirement plans, Canadians rely on the one, the only retirement saving tool available to them — the Registered Retirement Savings Plan (RRSP).
In a nutshell, this plan allows working Canadians to contribute 18% of their earned income up to a maximum of $23,820 in 2013, and to deduct that contribution from their taxable income. The money isn’t taxed until it is withdrawn during retirement. And compared to U.S. plans, RRSPs are subject to few rules and restrictions. It’s basically a type of investment account, so people can invest in whatever they like and park that money in whatever bank they choose. As long as they stay within the contribution limits and avoid making early withdrawals, they won’t run into any fees or red tape.
The Verdict: The U.S. is known as the land of opportunity and when it comes to retirement plans, it’s got just about every option anyone could need. The problem is that with all the different plans and all their various rules about contributions, withdrawals and "qualified distributions," things can get more than a little confusing. And all of this can serve to deter people from doing what really matters — saving their money.
The RRSP is simple and the tax deduction encourages Canadians to save. I’m going to give Canada the point on this one.
Government Sponsored Retirement Programs
In both nations, private retirement accounts are back-stopped by government support. Which is tops?
There are two government sponsored retirement programs in the U.S.: Supplemental Security Income (SSI) and Federal Old Age, Survivor and Disability Insurance (OASDI). The former provides benefit payments for very low income or disabled individuals. The latter, known as Social Security, has people contribute when they're employed and then provides retirement benefits later in life. In 2012, the maximum OASDI benefit is $2,513 per month at full retirement age, which is 67 as of 2012. During their careers, employees contribute 6.2% of their earnings to Social Security, a number that’s matched by employers.
In Canada, the government sponsored retirement model has three pillars:
- Old Age Security (OAS), which provides a flat benefit to all qualifying Canadians but includes a clawback formula depending on retirement income.
- The Guaranteed Income Supplement (GIS), which provides additional benefits for low income retirees.
- The Canada Pension Plan (CPP) (or QPP in Quebec), which, like Social Security, provides benefits to Canadians based on their employment contributions.
The big difference is the maximum benefit. For Canadians, CPP tops out at $987 per month at full retirement age, which is 65 years. OAS adds up to another $540 per month. In other words, most Canadians stand to get a lot less from the government when they retire. To be fair, Canadians also contribute less — 4.9% of earned income, which is also matched by their employer.
The Verdict: It’s hard to argue that getting more money from the government is a sweet deal, but that money has to come from somewhere. That’s part of the reason why Social Security may be unsustainable by 2033, according to the Congressional Budget Office, while (at least so far) CPP is well-funded and sound enough to be around for future generations of Canadians.
Who wins out on this one? It’s a toss-up. Government-sponsored income is what keeps many people afloat, but although many people in Canada complain that the CPP doesn’t go far enough, a higher payout comes at a cost. Plus, although in theory the low CPP payout should encourage Canadians to max out their RRSPs, many don’t.
Canada, with its government-funded health care system, would seem to be the clear winner here. Is it?
If there’s one huge difference between retiring in Canada compared to retiring in the U.S.,and it’s health care, says Dale Walters, a Certified Financial Planner and author of "Taxation of Canadians in America."
"Medicare, as a government-subsidized plan, is similar to the provincial health care in Canada, but there’s a large portion that comes out of the retirees’ own pockets. So Americans have those ever-increasing health care costs to deal with," Walters said.
A 2012 report by the "Journal of General Internal Medicine" found that 75% of Americans who were eligible for Medicare paid at least $10,000 per year out of pocket for health care expenses, and that health care costs put seniors under major strain.
In Canada, basic health care is mostly funded by the federal government and the provinces. So, for the most part, visiting the doctor and being treating in hospital comes free of charge. And while additional costs such as prescription drugs and other medical supplies and products may have to be purchased by retirees or are only covered on a limited basis, you’d be hard pressed to run up a five-figure health care bill in Canada, no matter how sick you got.
The Verdict: Whether the cost of health care is a real issue for a retiree in the U.S. depends on personal circumstances, but it’s hard to deny that these costs can be dangerously high for some American seniors. That puts Canada on top here. But there’s one big exception. If you need a hip replacement, an MRI or even just a trip to the emergency room, in Canada, you’ll probably be in for a wait — often a long one.
Because retirees in both countries are earning less than in their working years, tax burden is relatively low. Where is it lower?
At a glance, the tax rates for Canada and the U.S. appear to be similar, but Walters says the marginal tax rate in the U.S. puts a smaller burden on those in the highest income brackets and provides more opportunity for tax breaks. The result? Significantly lower taxes.
"In the U.S., there is a big difference between gross income and taxable income. In Canada, those are pretty close together. That can mean paying about 30% less tax in the U.S. compared to Canada," Walters said.
Canadians hit the highest tax bracket (29%) at just over $130,000 in income, compared to nearly $400,000 to hit the maximum 35% tax rate in the U.S. For Canadians, that means higher taxes during their working years and, because of the relative lack of deductions, possibly in retirement as well. According to a 2012 report by CBS, Canada also tends to have higher sales tax. That’s why the U.S. is increasingly being touted as a tax haven for Canadian retirees!
The Verdict: Canadians pay more taxes, which can make it harder to save for retirement and pay for what they need once they get there. In a straight comparison, the U.S. comes out on top here. I’ll leave it to others to argue about who gets more for their money.
Cost of Living
It won't matter how much you've socked away for retirement if the stuff you need to buy costs too much.
A bigger market means lower prices. So, thanks to a population that’s nearly 10 times that of its neighbor to the north, the U.S. enjoys lower prices on just about everything. According to Numbeo.com, consumer prices are more than 16% lower in the United States than in Canada. And, of course, as a result of the recent crash in the real estate market, buying a home in a retirement-friendly Southern state is cheaper than ever.
The Verdict: The cost of living in the U.S. is considerably lower than it is in Canada. For American retirees, (and Canadian snowbirds) this is a good thing. The U.S. definitely scores a point over Canada here.
If there’s one last thing that matters to a lot of retirees, it’s climate. Unless you’re one of the hardy few who love the icy winter wind that seems to be inescapable in most Canadian cities, the U.S. has Canada beat hands down on this one. According to Herschel Gavsie, an immigration attorney at Greenspoon Marder in Miami, this has lead to an increase in the number of "endvestors," a term used to describe the growing ranks of real estate investors who’ve been snapping up properties in the U.S., especially in warm, coastal states like Florida.
The Verdict: Many people envision living out their final days on a warm, sunny beach; just try finding one of those in Canada. Point for the U.S.
And the Winner Is...
This is hardly a scientific analysis, but I’m going to give the win to Canada for one simple reason. According to Walters, Canadians tend to have more retirement savings and better financial knowledge than their aging American peers. Why is that a win? Because whether you’re retiring in the United States or the Great White North, both systems have the resources to help you pave the way for a comfortable retirement. The key is to learn about the programs and benefits available where you live and work to use them to your advantage.
Oh, and if you feel like you’re getting the short end of the stick, you can always take a hike to the closest border crossing. But be forewarned. You know what they say about the color of the grass on the other side of the fence.
What do you think? Is the U.S. or Canada a better place for retirees? Share your insight and experience in comments!