The United States has a similar structure of retirement planning that can be compared to Canada's four pillars. While the specific programs differ, the general concept of having multiple sources of income in retirement is the same. Here’s a breakdown of the four key pillars in the U.S.:
1. Social Security
• Description: Social Security is the U.S. government’s public pension system, funded through payroll taxes under the Federal Insurance Contributions Act (FICA). It provides retirement benefits to eligible workers, as well as disability and survivor benefits.
• Eligibility: To qualify, individuals must accumulate at least 40 credits, which typically equates to about 10 years of work. The amount of the benefit is based on lifetime earnings, and retirees can start receiving benefits as early as age 62, though full benefits are available at "full retirement age" (which ranges from 66 to 67 depending on birth year). Delaying benefits until age 70 can increase the monthly payment.
• Other Features: Social Security provides a progressive benefit structure, meaning it replaces a larger percentage of pre-retirement earnings for lower-income workers.
Key Resource to find more information: Social Security Administration (SSA)
2. Employer-Sponsored Retirement Plans
• Description: Many U.S. employers offer workplace retirement plans, typically in the form of:
o Defined Benefit Plans (pension plans): These provide a fixed, pre-determined benefit based on factors like years of service and salary.
o Defined Contribution Plans (such as 401(k) plans): Employees and employers contribute to individual retirement accounts. The retirement income depends on contributions and investment returns.
• Participation: Employees can contribute a portion of their paycheck to these plans, and employers often offer matching contributions up to a certain percentage. Defined contribution plans have largely replaced defined benefit plans in the U.S. private sector.
Key Resource to find more informationU.S. Department of Labor – Retirement Plans
3. Personal Savings and Investments
• Description: Similar to Canada, personal savings and investments are an essential pillar of retirement planning in the U.S. These include tax-advantaged accounts and other investment vehicles:
o Individual Retirement Accounts (IRAs): IRAs allow individuals to save for retirement with tax advantages. There are two main types:
Traditional IRA: Contributions are tax-deferred, and withdrawals are taxed in retirement.
Roth IRA: Contributions are made with after-tax income, but qualified withdrawals in retirement are tax-free.
o Other Investments: This pillar also includes other personal investments like stocks, bonds, real estate, and mutual funds that help build additional retirement income.
Key Resource to find more information IRS – Retirement Plans
4. Home Equity and Other Assets
• Description: For many Americans, home equity is a significant part of their net worth and can serve as a resource in retirement. Retirees can tap into home equity by downsizing, taking out a home equity loan, or using a reverse mortgage, which allows older homeowners to convert part of their home equity into cash without selling their home.
• Other Assets: This pillar can also include other assets like business ownership, rental properties, or annuities purchased through personal savings.
Key Resource to find more information: Consumer Financial Protection Bureau (CFPB) – Reverse Mortgages
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Comparison of the United States and Canada:
• Social Security in the U.S. is similar to Canada’s Canada Pension Plan (CPP).
• Employer-sponsored retirement plans (401(k)s, pensions) in the U.S. align with Employer Pension Plans in Canada.
• Personal savings and investments (IRAs, Roth IRAs, and other investments) are comparable to Canada’s RRSPs and TFSAs.
• Home equity is often considered the fourth pillar in the U.S., while in Canada, Old Age Security (OAS) is the fourth pillar.
Together, these pillars create a multi-layered approach to retirement planning in the U.S., just as in Canada, ensuring individuals have diverse sources of income and security in retirement.