More on pensions and inflation

David Harkness, Pension Chair, RTAM

In the Spring Issue of The Link (Spring 2022), TRAF provided an excellent and thorough—if distressing—analysis of the effects of inflation on a theoretical retiree’s pension and .91% Cost of Living Adjustments (COLA) in the light of 1%, 2%, and 3% average inflation regimes. Their graphs showed Base Pension, COLA, and the Inflation Gap (the amount the retiree would need to maintain a fully indexed pension). In short, the Inflation Gap is the loss in purchasing power.

We have expanded on their work, but included CPP and OAS. We took that same 2022 retiree, age 60 with a $3,000/month pension. We followed the .91% COLA predictions in average inflation regimes of 1%, 2%, and 3%, and included CPP uptake at age 60 and OAS uptake at age 70, with the increase to OAS at age 75. (Note that delaying uptake on CPP and OAS would result in higher incomes than the averages we used from government reporting). We did not include taxation data as there is wide variance in people’s situations. Our compounding and indexing amounts were calculated using this tool at Wealthsmart. They base their work on Statistics Canada reporting.

Let’s first look at graphs representing the information solely based on the TRAF pension.

We can clearly see the effects of compounding on the pension gap as time progresses without COLA keeping pace with inflation at these levels, and it is very disturbing. Yet, it is not the whole story. Let’s include CPP and OAS to give some context to future income expectations for our theoretical retiree.

Here we can see that OAS and CPP become increasingly important income streams as we age. Currently CPP is adjusted annually in January. OAS is adjusted quarterly. Both are fully indexed. As we can see, the Inflation Gap from our retiree’s TRAF pension still exists—and still means a loss of purchasing power from that income stream—but fully indexed CPP and OAS income streams do much to alleviate that pain.

Our final series of graphs is a simpler representation of what our theoretical retiree’s income stream looks like in context. Again, we have not included taxation or other income streams (RRSP, TFSA, investment income, other pensions) as those vary widely.

We can see that CPP and OAS provide a measure of security for us in retirement, but that still does not obviate the Inflation Gap that arises out of our TRAF pensions not being fully indexed. If you are talking to your local MLA, you may want to address the issue of increasing the formula that drives TRAF’s ability to provide a higher COLA or even full indexing.

In a future article, we will address other strategies to address that gap. Until then, live well and be happy.