Tuesday, January 28, 2014

Canada Pension Plan (CPP) versus US Social Security (SS) - "Star-Spangled Happiness" or "On Guard"?

Doing the Canadian Financial Planning course allows me to look at the US and Canadian government retirement systems.

One would think that good old collective high tax Canada would have a better system, right?  Well, maybe not, it depends, your results may differ, etc. etc.

Canada

  • Health care is no cost
  • Maximum CPP premium is $2,425 Cdn for a working person
  • Maximum CPP benefit per month at 65 is $1038 Cdn.  This is fully taxable.
  • Maximum OAS benefit per month at 65 is $551 - $1047 Cdn
  • OAS is clawed back (taxed back) starting at about $31,000 yearly income for a couple (it's complicated) and it is completely clawed back (you lose it completely) at around $116,000.  Anyone with appreciable savings, a pension, or who starts to draw on their RRSP will generally lose some or all of the OAS.  Even if it is not clawed back, OAS is taxable.
  • Summary: a person will get up to $2085 Cdn per month, but more likely you will get around $1,000.  It is taxed.
USA
  • Health care is provided by Medicare with premiums of $117 to $405.  The top premiums are for people earning well over $400,000 US.  Compare that to the clawback limits on OAS above.  The system is complex (parts A, B, C, D) and seems to be designed to ensure that anyone with reduced mental capacities will not be able to figure it out.
  • Maximum Social Security and Medicare tax for a working person is $8,950.
  • Maximum Social Security is $2,642 at age 65.  This is only partially taxed.  If you earn over $44,000 as a couple, 85% of it will be taxed at normal income rates.  This is not a clawback, just a normal income tax.
  • Summary: a person will get up to $2,525 per month after paying for Medicare, if you were a high income earner and have appreciable savings, pension.. you will likely get about $2,300 per month and 85% will be taxed.  
So which system is better?  Hard to say definitively.  The social security tax in the USA is higher than the CPP tax in Canada, but the benefits are better in the USA.  Medicare in the USA is complex to understand and costs something per month, but you have more freedom in terms of supplementing this health care.  Speaking like a lawyer, it depends.....

So do we have:

Star Spangled Happiness?

OR

Is Canada Standing on Guard for You?

Can we Settle this on the ice?



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