How will a Canada-US retirement showdown shake out?

An economist does a head-to-head analysis of the two countries’ retirement systems

By Leo Almazora

Dec 07, 2018

Aside from practically being next-door neighbours, Canada and the US are arguably very similar. But they differ in a few important respects — including how well-prepared their aging populations are for retirement.

“Certainly, the US and Canada are similar and any difference doesn’t lie in our two nations’ goals for retirement,” wrote Teresa Ghilarducci, former economics professor at the University of Notre Dame, in piece on Forbes.

Along with Ireland and the UK, Ghilarducci said the two North American countries use follow an “Anglo-American” model consisting of relatively small public pensions and tax incentives for voluntary employer-based pensions and retirement plans.

But in terms of elder poverty rates, the US does much worse than Canada (23% vs. 11%, respectively). She chalked up Canada’s lower poverty rates in part to the country’s more generous pension that’s funded by taxes from all wealth and income, compared to US Social Security that’s funded by earnings alone.

Citing University of Toronto Professor Keith Ambachtsheer, she said the system of tax breaks that the US applies to retirement plans could also play a role. Tax breaks in American retirement plans are more generous to the rich, with the top 20% in terms of wealth getting around 70% of the benefit.

“The Canadian plan has some good features Americans don’t have,” Ghilarducci continued. She said Canadian workplace retirement plans are portable, and those who participate in a Pooled Registered Pension Plan (PRPP) — a voluntary supplement to the Canadian state pension system that was adopted in 2012 — will see lower fees than in individual plans. Because of their pooling and investment diversity, she added, PRPPs also offer lower investment risks for employers and employees. But since they’re voluntary, coverage is low.

Compared to the US, Canada’s health care system also lifts a significant financial weight off its citizens’ shoulders. Canada’s system is government-funded and accessible to all without co-pays or deductibles, she said. In contrast, the US Medicare program extended to people over 65 can require high premiums and co-pays, and doesn’t cover dental, vision, hearing aids, and long-term care; overall, it covers only about 60% of American seniors’ healthcare costs.

But the Great White North faces a looming threat: with the national savings rate dipping to its lowest in more than a decade — the household savings rate fell to 0.8% in the third quarter this year, and has averaged 1.4% over the last year — there’s a strong feeling that the country’s economic growth is ending. The household savings rate for the US, meanwhile, was 6.6% in August, though it is still lower than it was in the 1980s.

“Both nations have flawed retirement saving systems,” Ghilarducci said. “Pension plans in the 1980s helped households build up buffers. DB plans were used for many things; they were especially valuable tools to off-ramp workers in recessions. In contrast, people with DC plans clung to their jobs, making the recession worse.”

Follow WP on Facebook, LinkedIn and Twitter