Retire Smarter

  Stretch the dollar of limited income

Retire in Costa Rica or Panama?

   May 05

Retire in Costa Rica or Panama?

This is a brief and none exhaustive overview of living conditions in both countries from retiree prospective. There is abundance of free information available for whoever is interested in further details.

Both countries are reachable by land and sea, have stable, non-violent governing system, neither have army. Both countries offer choices of very stable climate: cooler in higher elevations and warm on lowland and beaches. Few people realize that the seasonal fluctuation of temperature is just few centigrades in warm and cooler climates. Both countries are widely known for their excellent health care. Both are destinations of health tourism and dental tourism. The health care facilities are world class, many better equipped than leading hospitals in USA and the professionals are frequently trained in USA or Europe. Major operations cost about 10% of what they cost in USA. Health insurance is mandatory in Costa Rica, but it costs in the neighborhood of $50 per month. Health insurance is voluntary in Panama, but you better show up with proof of capability to pay their fees when you arrive at the emergency room if you do not have insurance!

Costa Rica is widely known for its beauty because they started promoting tourism much earlier than Panama. With that came retirees and people looking for winter homes. Few years ago retirees were entitled various tax benefits for moving and living in Costa Rica. Costa Rica is prevalently Spanish speaking country. They came, many of them despite the language barrier. Influx of expat money pushed up real-estate prices, provided welcomed employment for local lower skill workers and big growth for retail industry. There are substantial expatriate communities in the country. Everything was happy for retirees.
Then the advocates for poor challenged the preferential tax treatment of foreigners. The government at that time (few administrations ago) gave in and removed them. Of course, government needs more money to support the growing infrastructure needs for retirees. It seemed unfair for local Costa Ricans to carry the burden for them. As a result the potential expatriates got a sticker shock when evaluating the cost of bringing their family vehicle over from US or elsewhere. The import tax frequently exceeds the price one paid for a used vehicle. It is expensive to move with your furniture and other things you are used to. The import taxes are not specific to retirees, everyone pays them on imported goods and retailers can only pass them on to their customers. As a result all goods not produced locally are much more expensive in Costa Rica. Unfortunately, Costa Rica does not produce cars, tools, appliances and many other things one needs to live.
There is a simple reason for high taxes. Prevalent revenue source for Costa Rican government are taxes. The country does not have meaningful natural resources to export, but they need to subsidize their good public health care and education, superior to any other country in Central America. Scarcity of government resources for other important aspects of life like infrastructure becomes evident while driving there. With the exception of few new roads they are poorly maintained. A paved road outside main highways (which are 2 line country roads by US standards) is a rare find. What’s worse, they do not seem to have knowledge or money to build roads so that they would last in tropics. The cell phone coverage and Internet access outside the cities is spotty, the government owned telecom and power companies still hold monopoly on most resources and correspondingly the progress is slow and painful. Costa Rica infrastructure is probably worst in Central America, below Mexico and Guatemala.

Panama is well known by Panama Canal and some are also aware of its natural beauty rival to neighboring Costa Rica. Different from Costa Rica this country inherited from US advanced telecom and power infrastructure in addition to the roads and knowledge how to build them in tropics. There are numerous descendants of foreign canal operation crew living every where although prevalent language is Spanish. Most people in big cities speak or understand English to some degree and it is not rare to find same in the interior of the country. Roads and traffic are comparable to US (including traffic jams in Panama City!). Although Panama also imposes taxes on many imported goods they generally are in level of 5 – 15%. The Panama the Canal produces more than $1 billion revenue per year for the government. For a small country of less than 4 million people this pays for many infrastructure and social programs. That’s why Panama is also known as a country with one of the lowest tax burdens in the world.
Panama legal system is in principle similar to that of advanced societies, but it is a very young country. Panamanians count the age of their country from the year Americans left – 2000. Correspondingly, there are many aspects still not regulated by laws and laws that are written fit in less than 200 pages. While that saves many trees it also leaves numerous aspects for interpretation and need for frequent amendments and re-writes. In Panama one must be prepared for changes.
Panama has numerous indigenous tribes with their own colorful culture and traditions. Many people in interior have some of their ancestors from these tribes. In general, Panamanians have an eye on beauty. Much more than any other Central American country they decorate their houses no matter how primitive or small these are, plant pretty plants in their yards and water them diligently during the dry season. Yet, occasionally one can see some people dumping their trash on the road-side ditch. Panamanians always dress up and wash and wax their cars at least twice a day based on how they look. There are noticeably more new cars on the roads than in any other Central American country. Mostly Toyota, but also Nissan and Hyundai seem to be in favor. While Panamanians earn less money than Americans, their dollar (Balboa) goes much further and the end result is higher living standard.
In recent years largely due to lack of and/or deficiency of laws Panama lived through its own real-estate boom and bust. Mostly funded by external money, Panamanians did not suffer nearly as much as Americans. The economy grew slower, but has never contracted. With the world economic confidence rebounding the depressed projects have a potential for life. This year has seen substantial pickup in real-estate and construction activity in the city. Gradually this flows over to the interior as well. With the delay in implementation of many projects the laws may have been changed from the laws at the time the purchase decisions where made and some investors may feel cheated. Yet this is not because anyone is out there to screw them, but because they failed to properly assess the risk of investing in a young country.

Different from Costa Rica, Panama has poor education system. Teacher’s unions blame it on the lack of funding. Yet, the school buildings I have driven by (even the schools of tiny villages with a dozen or less students attending) are externally in very good condition. Whether money actually buys better education is debatable. It is well publicized that cost per public school student in Detroit school district is one of the highest in the country, while by the academic results of their students are at the very bottom.
Whatever the actual reason, the kids don’t learn much in Panama schools. Availability of cheap, but well educated workforce is the reason why large multinational companies relocating their operations (Intel, HP, Aetna, Bank Of America, …) are picking Costa Rica over Panama. This is very good news for Costa Rica government, but I am not so sure about retirees. With solid influx of foreign high tech companies will come different, higher salary levels as every new company wants to attract the “cream of the crop”. All good so far, but wage inflation is also the leading cause of price inflation. In Costa Rica in average above 10% yearly. One of the lowest levels in Costa Rica history was 8.3% inflation in 2009 (while the economy shrank 2.5%). In comparison 2009 inflation in Panama was 2.6% while the economy crew 2.4%. It matters to retirees because our social security benefits are indexed to the official consumer price index in the USA which stood at -0.34% for 2009 while the economy crew at 0.18%
In rough comparison average Panama price levels are about 70% of these in Costa Rica and less than 50% of USA. Some items, like cars, are more expensive in both countries, but others are cheaper. Due to lower import taxes Panama is well supplied by most goods they do not produce themselves. That includes electronics and tools (roughly same price as in US). On average cars in Costa Rica are much older because of very high import taxes. Not so much in Panama, but still older than in US. On the bright side, both countries have substantial population of car mechanics. Their labor is cheap which makes maintenance of older vehicles economically feasible. This is specifically true for major Asian makes because the spare parts are also readily available.
Another aspect that makes Panama beneficial destination for retirees are “jubilado” benefits. This is how Panama calls all retired people domestic or immigrants. Probably because retired expatriates will usually obtain a pensionado visa they are known outside Panama as pensionado benefits – same thing. A wide spread discounts on variety of services (e.g. entertainment 50%, hotel rates 30 – 50%, airline tickets 25%, 20% medical consultation …etc.) apply to this group of people. While not earned in this country I do enjoy same benefits as native Panamanians. I feel welcomed and motivated to contribute to the society. Imagine a 50% off hotel rates in the USA (and not paying income tax on this “income”).

Like always, there is rarely an ideal choice. One has to look for aspects that are of highest value and priority for them. For me the low price levels, low inflation, low taxes, more advanced infrastructure, vibrant economy and significant none tax government revenue over weigh the potential benefits of better education system and risks of changes in laws. I understand that some of these benefits may change or be eliminated in the future. With inevitable growth of globalization of economies the demand for shipping can only grow. Correspondingly, the Panama “cash cow” will support its growth for foreseeable future relieving the pressure on government to increase taxes. In addition, crude oil and gas reserves were discovered in Eastern Panama and this country is brave enough to ignore the tree-huggers and start exploring them.
Flight back to family takes 2.5 hours, more with all the inconveniences in airports. To prove to myself that an alternative exists and is real, not imaginary I drove from Florida down to Panama in March 2010. Following posts relay this adventure. I’ll share what I saw and experienced while on the road through 5 states of US and Mexico, Guatemala, El Salvador, Honduras, Nicaragua, Costa Rica to Panama.

You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.

One Comment

  1. Tim Meinrath says:

    Thanks for the comparison. My wife and I have visited each country two or three times.

    This expresses my conclusions better than I could. Didn’t know the deficiency in the Panama education system. We don’t have kids so it stayed under our radar.

Leave a Reply