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When it comes to retirement concerns, Canada and the U.S. are on equal footing

Most Canadians have the impression that Americans pay a lot less than we do in income tax, but that we have better pensions from government sources. If you subscribe to this tax envy and pension smugness, the reality will come as a surprise.

Consider government pension programs first. A single person who is age 65 with final average earnings of $100,000 would receive a Social Security pension of $2,404 a month in the U.S. while a Canadian with the same earnings would receive only $1,629 from CPP and OAS combined. The reason that U.S. Social Security pays so much more is that the ceiling on pensionable earnings is much higher. Under the Canada Pension Plan, one makes contributions and earns pension on just the first $53,600 of 2015 employment income. The equivalent earnings ceiling for U.S. Social Security pensions is US$118,500. This helps to explain why there is so much ongoing angst in Canada about the need to expand CPP while it is a non-issue in the U.S.

So why is the poverty rate among seniors so much higher in the U.S. (roughly 20 per cent versus Canada’s six per cent)? While higher-income Americans have better coverage than Canadians, lower-income Canadians, who are more likely to retire poor, fare much better than their U.S. counterparts. The U.S. has no equivalent to our Old Age Security pension that depends only on residency, or to our Guaranteed Income Supplement that depends on residency and income.

A comparison of the income tax burden is equally surprising. Take a higher income household in which the primary breadwinner makes $100,000 and the spouse makes $60,000. Under a certain set of assumptions, the total tax paid in the U.S. would be $48,000 versus just $43,000 in Canada. To calculate these tax bills, I assumed the following:

The U.S. situation is based on residency in New York state while the Canadian couple lives in Ontario.
There are no dependent children.
The tax calculation includes Social Security taxes and the Medicare tax in the U.S. while in Canada it includes CPP contributions and the Ontario health premium tax.
Employment insurance premiums are excluded.
Each couple is contributing 10 per cent of pay into tax-assisted retirement vehicles.
You might be inclined to think the example is skewed a little in Canada’s favour for a variety of reasons. Some states levy lower state income taxes than New York and some none at all. The Social Security taxes in the U.S. are higher but so is the pension benefit. Some deductions which are permitted only in the U.S. — a deduction for mortgage interest in particular — are not reflected in this comparison.

Resource By:http://business.financialpost.com/personal-finance/family-finance/when-it-comes-to-retirement-concerns-canada-and-the-u-s-are-on-equal-footing