Canadians who are working, are required to pay into Canada Pension Plan (CPP) and are I believe they are entitled to a fair benefit which maintains its purchasing power over time. One of the criticisms of the Canada Pension Plan is that the survivor’s benefit is too small yet there is another shortcoming that is usually ignored by the recipients.
Many of us who receive the Canada Pension Plan (CPP) are happy that the payment we receive increases every year. The CPP has a built-in inflation adjustment which is supposed to help keep the spending power of the plan the same as when you first received it. This indexing is a critical aspect of CPP due to the impact of the ‘compounding effect’. Therefore, it is important that the annual CPP adjustment be sufficient to maintain purchasing power.
The annualized returns on CPP investments over the last 10 and five years and for fiscal 2018 are 8%, 12.1% and 11.6% respectively. In addition, CPP is projected to be self-sustaining for at least 75 years even with the index.
According to the experts, the annual inflation adjustments made to CPP retirement benefits aren’t sufficient to cover the rising cost of household spending. The index is used by calculating the Consumer Price Index (CPI), which is a measure that examines the weighted average of prices of a basket of consumer goods and services, such as transportation, food and medical care. It is calculated by taking price changes for each item in the predetermined basket of goods and averaging them.
"The CPI" is a bit of a misnomer. There are actually several CPI measures. Statistics Canada's all-items CPI (the latest monthly update of which is being released Friday morning) is the most widely used. The CPI refers to changes in the price of an average household basket composed of 12 broad categories of goods and services. The CPI basket weights are mostly based on StatsCan’s Survey of Household Spending (SHS).
The SHS basket is broader than the CPI basket. It includes additional components that are not considered "current consumption."
The "all-items" CPI basket is neither as comprehensive as the SHS basket nor does it measure their common items the same way. The difference between the two baskets is because of how items under the shelter cost component are measured.
The CPI basket excludes mortgage principal, opting instead for a much lower expenditure weight to reflect long-term housing depreciation. Also, the CPI basket either partly or entirely excludes current costs of land, renovations, condo and lot fees, indirect taxes and transaction fees for primary residences, and most current costs for secondary residences.
The "core" CPI, excludes even more: The costs of fruits and vegetables, gasoline, fuel oil, natural gas, intercity transportation, tobacco and mortgage interest, as well as all indirect taxes.
The differences between the CPI and SHS baskets are not arbitrary. The all-items CPI exclusions seek to limit costs to net household spending on shelter. The additional exclusions seek to further reduce price index volatility. With this view, food, fuel and transportation are excluded, as their prices are mostly determined by relatively volatile international commodity markets. And mortgage interest is excluded because higher mortgage costs are both a cause and an effect of higher CPI.
CPI includes eight broad expense categories: Food, Shelter, Household Operations, Clothing, Transportation Health, Recreation, and Alcohol. Each category includes several sub-components. These sub-components are supposed to reflect typical Canadian consumer spending. The basket is updated every four years based on the average daily spending of a fixed basket using the retail cost goods and services. Unfortunately, many government-provided goods and services for which there is no market or comparable retail price are excluded.
The Federal Government’s Survey of Household Spending (SHS) is a more inclusive indicator of consumer retail spending which is also used to measure inflation. SHS would be a better benchmark for adjusting CPP annually but it too has its shortcomings. For example, SHS uses longer reference periods for goods and services that are more expensive or, purchased irregularly.
SHS is also used to calculate such key statistics as GDP and CPI and is used by federal and provincial ministries and departments to develop social and economic policies. While not a perfect measure, SHS would appear to be a more appropriate measure for determining the annual CPP adjustment.
Some experts I have read believe that an annual increase of 1 to 2% in the CPP benefits in addition to the index, could easily be covered by CPP investment earnings at no additional cost to taxpayers or the government. This increase would help seniors who have been retired for 20 to 30 years and who are faced with the high cost of ageing. According to a senior who wrote to the Prime Minister, “there seems to be no regard for people who have been retired for 20 or 30 years”. “They have been marginalized or forgotten. It is quite true that their pensions are increased yearly to account for inflation. But inflation is one thing, AGING is quite another.”
One thing is clear: A great deal of what's in the average Canadian household's annual shopping cart is not in the CPI basket. And that difference in basket composition has resulted in a divergence in their respective trends. Between 1997 and 2011, the years for which SHS data are available, household spending increased an average of 3.4 percent annually. Over the same period, the all-items CPI increased 2.0 percent a year. A 1.4 percent difference may not seem like a great deal of money but over time that will add up. Over the 14 year period, for example, an average pensioner earning $7, 000 a year in 1997 would have lost over $1,500 in spending power.
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