How does the ongoing COVID-19 pandemic affect pension indexation and what impacts can we expect to see in the long term?
Every year, indexation is applied to members’ and survivors’ pensions. The indexation amount is calculated by using the Consumer Price Index (CPI) data published by Statistics Canada.
Every autumn, our mathematical members calculate how much their increase will be come January. It’s a question that’s on more minds this year, with the world economy in flux and COVID-19 making prices unpredictable. Both are impacting the CPI.
To understand this year’s indexation, it’s best to start with how Statistics Canada calculates the CPI and how it is applied to your pension. And in the spirit of 2020, we’ll also review how COVID-19 has affected the CPI and what Statistics Canada is doing about it.
The CPI is a measure of changes in the price of Canadian consumer needs. Statistics Canada measures the price of a fixed list or basket of goods and services that most Canadians purchase. These include food, shelter, household operations, furnishings, clothing, transportation, personal care, recreation, education, alcohol and now even recreational cannabis. The basket of goods is based on data from the Survey of Household Spending and each item in the basket represents consumer spending patterns and is given a proportionate weight. The weights reflect the relative importance of each good or service, based on each item’s share of total household consumption.
Generally, CPI data is used to calculate annual indexation to pensions, but Statistics Canada tracks changes monthly. In the case of federal retirees’ pensions, the annual CPI-based indexation applied each January is determined by the superannuation acts and the Supplementary Retirement Benefits Act. The acts specify that the increase is based on the percentage increase in the monthly average CPI over the preceding two years. The acts specify that calculation uses data over the 12-month period from Oct. 1 to Sept. 30. The last three months of the year are incorporated into the next year’s rates.
CPI versus cost of living
It is important to understand the difference between CPI and the cost of living.
Cost-of-living indices are conceptual measurements of the amount consumers need to spend, in a certain place and time, to maintain a standard of living or a given level of “well-being.” Cost of living reflects costs such as rent, transportation and utilities in a particular location, and it is useful in determining where, and how, you can live based on your income. Chances are your standard of living will be much different if you compare the cost of living in Toronto, Montreal or Vancouver to those of Sudbury, Rimouski or Prince George.
CPI is based on the price changes of a fixed basket or list of goods and services. It shows us inflation over time. As inflation increases, the buying power of a dollar falls. Because it’s based on the CPI, or actual price changes over time, pension indexing is intended to help pension incomes keep pace with inflation.
The CPI and pension indexing approximate the cost of living — but pension indexing doesn’t necessarily reflect the cost increases that can make it difficult to maintain a standard of living in a given place.
COVID-19 impacts
COVID-19 has introduced several problems for the calculation of CPI. Sometimes items have been unavailable, or many of the establishments where the items or services would be purchased were closed. Both Statistics Canada and its American counterpart — the Bureau of Labor Statistics — have limitations on data collection staff and item availability.
The pandemic has led to shifts in purchasing patterns, and these shifts impact the weights or relative importance of items in the basket of goods. For example, as Canadians shifted to working from home, transportation now represents a much smaller part of Canadians’ overall spending.
Before COVID-19, shifts in purchasing patterns evolved slowly, which meant the CPI’s basket weights could be updated less frequently and still reflect actual spending habits. The pandemic created a situation where consumer behaviours were altered quickly and significantly. To quickly learn the impact of COVID-19 on household spending, Statistics Canada partnered with the Bank of Canada and explored available, timely data sources. Together, they estimated the shifting consumption patterns created by the pandemic to derive an alternate set of weights, which were then used to calculate the CPI for the following months. They found a substantial difference in categories such as rent (which increased from 6.4 per cent to 9.13 per cent in terms of basket weight) and substantial declines in areas such as food purchased from restaurants (5.17 per cent to 2.91 per cent). This pandemic-derived basket weight allowed them to take a measure of the CPI that more accurately reflected people’s new spending habits.
As the virus stays with us over the long term, we are continuing to see fluctuations in prices and shifts in spending. Statistics Canada has said that while its partnership with the Bank of Canada allows for temporary access to necessary data, it requires ongoing access to reliable and timely information on expenditures to be able to properly monitor shifts in consumer spending.