Comparative Analysis: Retirement and Pensions in North America

Published 2023-11-25 10:26:33
Pensioners analysing their budget - Credit: Image by Drazen Zigic on Freepik

The United States faces a concerning trend of insufficient retirement savings, with the Social Security under strain. In contrast, Canada's pension system, including programs like Old Age Security (OAS) and the Canada Pension Plan (CPP), provides more income certainty for seniors, resulting in significantly lower poverty rates among the elderly compared to the US. We compare both pension systems in this article.

There are some similarities but glaring differences between the pension funds of both these countries, from how they are funded and managed to the payouts to their pensioners. Canada enforces higher income tax on its citizens to support its universal healthcare and pension fund compared to the US.

With rapidly ageing populations, many Americans and Canadians face the daunting task of supplementing their income to provide for their retirement years with their existing state pension plans.

America's looming retirement crisis: struggles, shortfalls, and social security challenges

In a little under ten years, a substantial sector of the US population will be over 65 years old. This means approximately 73 million people- around 20% of the population- will be ready for retirement.

However, a very small percentage of these people can afford to retire and live comfortably. The average retirement value that some financial professionals advise having is around $1.25m or £1m.

Insufficient savings for retirement

Financial experts believe that over 50% of Americans between the ages of 55 and 66 have no savings or any personal retirement funds. Even those people who do save money are saving insufficiently with the average retirement investment account, for a person over 65 years, sitting at only $407,581– much lower than the expected sum necessary to live comfortably. 

Additionally, the average income for people over 65 years is $47,620, according to the US Census Bureau. This amount misses the mark for a comfortable retirement in most states. Estimates from GoBankingRates, which is an American-based personal finance guide, place comfortable retirement in California at $90,399 and in Texas at $60,353. These two states are the most populated in the US.

This undersaving trend is expected to increase the number of working people over the age of 75. Between 2020 and 2030 the number of employed seniors is expected to double as per the US Bureau of Labour Statistics.

The sector of the population most affected will be the poorest and the inequality will be even more pronounced in the elderly. A majority of retired Americans will not be able to lead fulfilling and comfortable lives during retirement, with a daily routine based only on sleeping and watching television, which makes up how the average retiree in America spends their day currently.

Social Security

In the US, eligible retirees receive social security which is comparable to a state pension. Pensioners can use the social security programme to collect retirement benefits from the minimum age of 62. The longer you delay collecting a monthly pension, the higher the monthly payment to you grows.

Social security makes up a large portion of their income for almost 12% of men and 15% of women. The payments depend on the employee’s highest earnings in 35 years of employment which is then adjusted for an average wage inflation. The average benefit is presently $1,784 a month.

However, the social security programme is under immense strain by the sheer numbers of retirees and potential pensioners on the horizon.

Fund trustees forecast that in ten years the collective retirement and disability fund will be drained and only be able to pay about 77% of all scheduled benefits from any income the social security fund may have. Some believe the system will fail even earlier.

Private Pension Plans

People with private pension savings, like the 401K plans, can retire much earlier if they don't have to solely depend on social security.

401K plans are tax-efficient investment accounts from which withdrawals without any penalties are possible after turning 55 years old, under certain conditions.

Canada's robust pension system: ensuring financial stability for seniors

Government or public pensions in Canada form one of the largest retirement incomes for seniors. They provide senior citizens with income certainty even when they are unable to work.

Some retirement plans are contribution-based, others based on age, whilst some depend on employment earnings, company pension plans and even personal savings.

Canada has a higher income tax compared to the US to fund their universal healthcare and pension fund.

Additionally, Canada has the lowest poverty rate for people over 65 years compared with other age groups in the country. It is half the poverty rate for Americans in the same age category.

This is due to several reasons, like greater contribution limits to retirement accounts and lower distribution limits compared with American retirement accounts. 

Types of plans

Canada has a three-part system for pension plans.

The Old Age Security (OAS) is subsidised by general tax revenues. Old Age Security is for people over the age of 65 years and who have lived in Canada for more than ten years. A typical OAS monthly payment for an individual who has resided in Canada for a minimum of forty years after reaching the age of 18, is currently CA$687.56 for those aged 65 to 74, and CA$756.32 for people 75 years and older.

The Canada Pension Plan (CPP) is subsidised by payroll taxes. Canadians over the age of 60 years are eligible for a monthly payment from the Canada Pension Plan if they have worked and contributed to the Canada Pension Plan.

The Guaranteed Income Supplement (GIS) is available to very low-income citizens. The Guaranteed Income Supplement is a pension benefit for those people who are eligible for OAS and have a low income. The Guaranteed Income Supplement income ranges between CA$618.15 and CA$1,026.96 depending on the individual’s marital status. Those who have a maximum annual income of CA$38,592.31 can receive CA$1,305.71 monthly.

The Clawback provision helps maintain a progressive system

The OAS recovery or repayment, which is also known as the clawback provision or repayment, stipulates individuals over 65 years who are high-income earners might face a reduction or complete cessation of their OAS pension payments depending on certain calculations.

The clawback threshold is reviewed and adjusted annually for inflation. Once an individual's income surpasses this threshold, the government starts to claw back or reduce the OAS benefits. The reduction is calculated based on a predetermined formula that gradually decreases the pension payments until they reach zero.

Individuals may delay receiving their OAS benefits to get higher payouts later. This can be delayed by up to five years to the age of 70. But OAS benefits are taxable with clawback provisions for high-income earners.

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Author: KashGo
Expat Mum in the Desert and content writer for

For other discussions, advice, question, point of view, get together, etc...: please use the forum.

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