The United States and Canada have similar retirement services and programs. There are differences and, depending on your income level, they can be significant. If your resources are limited, Canada might be a better place to retire. The United States, on the other hand, offers more opportunities to acquire wealth. The following comparison illustrates both the differences and the similarities when it comes to American and Canadian retirement plans.
Both the U.S. and Canada provide workers with guaranteed income once they reach retirement age. In the U.S., Social Security is available, albeit with reduced benefits, when you reach the age of 62, and full retirement is either 66 or 67, depending on the year you were born.
Canada has a three-part system: Old Age Security (OAS), financed by Canadian tax dollars, provides benefits to eligible Canadians 65 years of age and older; the Canada Pension Plan (CPP), funded by payroll deductions (like Social Security), makes benefits available as early as age 60; and the Guaranteed Income Supplement (GIS) is available to the very poorest Canadians.
In both Canada and the U.S., the longer you wait to receive benefits, the more you get. Benefits top out at age 70 for citizens of both countries. Only the very poor do better in Canada. People with higher incomes tend to get more in benefits in the U.S., partly because high-income Canadians lose part of their benefits to “clawbacks.”
Private Pension Plans
Employer-provided defined benefit pension plans are available in both countries, but employers are shifting workers to defined contribution plans.
In the U.S., defined contribution plans are mostly 401(k)s. In Canada, the main defined contribution plan is called the Registered Retirement Savings Plan (RRSP).
In the U.S. a worker can contribute up to $18,000 to a workplace 401(k), plus another $5,500 to an IRA. Additional contributions of $6,000 for a 401(k) and $1,000 for an IRA are possible for those 50 and older.
In Canada, contributions to an RRSP cannot exceed 18% of a worker’s pay up to $26,010. This amount is reduced by the amount accrued in traditional pensions. This can effectively wipe out the possibility of any contribution to an RRSP. Canadians can also contribute up to $5,500 into a Tax-Free Savings Account (TFSA).
TFSA vs. Roth IRA
Canada’s Tax-Free Savings Account (TFSA) is roughly like the Roth IRA in the U.S. Both are tax-exempt and both are funded with after-tax money. Both provide tax-free growth and funds (including earnings) are tax-free upon withdrawal.
Both the TFSA and Roth IRA have a $5,500 annual contribution limit, but the TFSA has something called “contribution room.” Currently, if you take out a TFSA in 2017 and never had contributed to one in the past (since they came into being in 2009), you could contribute up to $52,000. This is because unused contributions can be rolled over.
Canadians file income taxes by April 30, Americans by April 15. In addition to federal taxes, most U.S. states impose an income tax. Canada taxes services via the Goods and Services Tax (GST) or the Harmonized Sales Tax, which resembles Europe’s Value Added Tax. The United States does not tax services.
Both the U.S. and Canada have a graduated income tax system. Canada’s rates begin much lower than those in the U.S., but overall, taxes in Canada are much higher than those in the U.S.
U.S. citizens can deduct interest expenses and property taxes on their homes. Canadians can’t. However, Canadians do not have to pay capital gains taxes when they sell their principal residence no matter how much it has gained in value. U.S. taxpayers can exclude up to $250,000 in capital gains on the sale of their home.
Canada’s healthcare system is funded by the government and accessible to all citizens without co-pays or deductibles. While Canada’s single-payer system pays 100% of all covered services, certain costs—such as dental procedures and optometry, along with pharmaceutical drugs—are not covered and either paid out of pocket or with private insurance.
In the U.S. if you are 65 or older, Medicare covers about 62% of healthcare costs. The balance is paid through supplemental insurance, Medicaid or out of pocket.
Another Difference: Higher Taxes
The Canadian system imposes higher taxes on citizens so the government can provide universal healthcare and pensions that ensure the country’s poorest seniors have a subsidized standard of living.
In the United States, the emphasis is on Medicare at a more basic level, with supplemental insurance making up the difference. Social Security provides modest pension support; savings and personal investment are expected to pick up the slack.