After two Rugby World Cups, four Super Rugby titles and a record 148 Test caps, McCaw announced his retirement on Thursday.
Waugh, who did battle with McCaw at international and Super Rugby level, said the 34-year-old deserved to be remembered as the greatest ever.
"You can just see the bruises, the scars that he wears," he told Fox Sports.
"He came on to the scene a pretty fresh-faced young New Zealander and he finishes with such an outstanding record.
"I do think he's the best rugby player of all time.
"He's won more trophies and medals than any other player."
Waugh, who played for the Wallabies from 2000 to 2009, also lauded McCaw for being a "very, very smart player".