PENSION INDEXATION – is the current method adequate?

By Goudu Kassa, Guest Contributor

“A Dollar Today is Worth More Than a Dollar Tomorrow”… how many times have we heard this expression? From the perspective of today’s pensioners this expression has taken on a greater sense of urgency. Pensioners on fixed incomes (CPP and OAS) are faced with an ongoing struggle to afford their basic daily needs in the continuing tight economy. It has become evident that our government needs to reassure pensioners on fixed incomes that their buying power will continue to have the same purchasing power over the years. The CPP and OAS rates are reached through a complex calculation termed ‘pension indexation’. Statistics Canada uses a formula based on the Consumer Price Index ( for a 12-month period ending in September to calculate the pension index. To explain further, the indexing method or adjustment is basically a compilation of price changes for goods and services we consume every day. For example, Statistics calculates CPP rate increases by taking the average Consumer Price Index (CPI) of a given year and compares it with the last year average CPI.  It then uses that difference to adjust our pensions benefit of the current year. With this adjustment retirees should be able to maintain the ability to purchase the same ‘basket of goods’ in future years. In essence, what pension indexation is trying to do is to make sure that those on fixed incomes will be protected from inflation and cost of living increases. Hence, accurate indexation of pensions is critical to the pensioners’ survival. I personally think that, since prices of goods and services fluctuate at different rates, the composition of the goods and services in CPI determination may skew the average CPI one way or the other. Could there be an inherent problem with the CPI adjustment? Is the ‘basket of goods’ used in the calculation adequately reflecting the low-income pensioner’s basket of goods? I know of many low-income pensioners who express dismay and concern when they see noticeable fluctuations in their weekly grocery bill and other basic expenses. The ‘basket of goods’ used in the CPI formula may not be relevant to that of the pensioner. Given the sober demographic forecast of an expanding seniors population and the pressure that will be placed on pension funds I believe it is highly relevant to pose this question: Is the CPI adjustment sufficient for those on fixed income to sustain the market fluctuations and inflation? We need to address that question in the context of the serious economic downturn we are experiencing. We also need to take a closer look at the ‘basket of goods’ included in the formula and how the Guaranteed Income Supplement (GIS) is applied. Low-income pensioners did not create the financial disaster and should not be cast aside casually after having made their contribution to our economy for decades. Pensioners do not have the same good fortune to receive a bailout as those in the financial industry and major corporations. Further, in future planning, our government should not ignore another challenging aspect of the changing demographics. That is, there is a serious need to undertake proper demographic planning in terms of immigration policy to increase the pool of younger workers. However, that poses a dilemma. Although encouraging immigration of younger workers should be given due consideration, that step would be more relevant when we have a healthier economy that generates sustainable employment opportunities. To sum up, I would say that the current method used by Statistics Canada (CPI) to calculate indexation is logical. However, this method is inadequate as it fails to keep up with the increasing costs of the complete ‘basket of goods’ needed by many seniors surviving on modest incomes.

About Golden Wave Movement Canada

The Golden Wave Movement is a made up of engaged individuals who have serious concerns about the increasing challenges retirees surviving on modest pension incomes face nowadays. While our main purpose is to raise awareness of the financial difficulties faced by this vulnerable group of citizens, we also intend to raise awareness regarding challenges related to their physical, emotional and psychological well-being and how to enjoy their golden years.
This entry was posted in Baby boomers, Basket of goods, Canada Pension Plan, Consumer Price Index, Financial industry, Guaranteed Income Supplement, Immigration policy, Old Age Security, Pension Indexation, Pension Reform, Pensioners, Seniors demographic, Statistics Canada and tagged , , , , , , , , . Bookmark the permalink.

10 Responses to PENSION INDEXATION – is the current method adequate?

  1. Marie H. says:

    For what is worth I see we have these options for our government to deal with the seniors’ demographic crunch and pension fund decline but most have somehwat of a downside:
    1) Increase the pension contribution of those who are in the workforce – very unpopular idea as that is basically a sly form of taxes.
    2) encourage immigration of younger applicants – However, it is essential that we have a stable and thriving economy with lots of jobs to accomodate any increase in new immigrants. Otherwise we will end up with large numbers of new arrivals who have to depend on social assistance. This will inevitably become a burden on social services, etc. Immigrant selection should be more fair and preference should not be given to particular ethnic groups. There are too many welll-educated new immigrants from certain countries whose credentials are not recognized and they end up driving taxi cabs and delivering pizza etc.
    3) promote increased birthrate in Canada – that option will take much longer to have an effect.
    4) workers should take more responsibility for their own pensions – this would be applicable if workers earn a living wage.
    There also has to be solid system in place re. regulations and transparency to protect pension savings from corporate mismanagement, subtle stock market manipulation and, yes, old fashioned fraud. Our government doesn’t seem to care about pensioners except when they are looking for votes. Check out those photo ops of politicans visitiing seniors’ residences during election time!!


  2. Lady DW says:

    It isn’t really government’s job to reassure pensioners. If that were the case, every citizen would have to be reassured of an adequate income for their entire lives. However, it is their job not to waste our taxes, look after the contributions and reform the pension’s legislation so that it is fair & gives pensioners an adequate income that provides food & shelter. If pensioners want to lead more extravgant lives, this they should provide for themselves.


  3. Fed up pensioner says:

    It is all well and good for some to suggest that seniors return to the workforce to make up for losses to their pensions… eg. Nortel fiasco etc. We need more protection of our pensions. We also need to ask this question – Are there really any jobs out there for seniors? Are these ‘McJobs’? Our young people are having a hard enough time finding work. There are those who have been in the workforce for a while who are very concernd about their jobs. Why should I have to work until I drop/


  4. SharonMc says:

    Great article & gives us much food for thought. Another trend that might negatively affect pensions is there seems to be increased opportunities for ‘contract work’ as opposed to permanent work. Apparently this trend is evident down east where there are lots of people immigrating from eastern Europe and Asia to the Maritimes with good technical and engineering skills. These people are mobile & are working as independent contractors in jobs that pay fairly well …and no CPP is deducted from their earnings so they are not contributing to the pension fund. This certainly points to a future where more workers taking full responsibility for survival in ‘golden years’ and not depend on government pensions.


  5. JQ says:

    Exactly what got us into this pension mess? We need to examine this more carefully so that it will be a lesson for the future. But, will it? Didn’t those math wizards at StatsCan who juggled those numbers overlook the trends related to a seniors demographic crunch? StatsCan should have placed sufficient emphasis on these trends much earlier? You are right to question whether the CPI formula being used to calculating the cost of the basket of goods is accurate. Maybe all the numbers coming out of Ottawa are just mumbo jumbo anyway!


  6. Ken P. says:

    In about 20-30 years there will be a huge population decline all around the world. That means there will be different shift in seniors’ demographics. China and India, for example, which are so densely populated will lose millions of its elderly people in 2-3 decades. Same will also apply to western countries. Not meaning to be crass or insenstive but nature sure has a way of taking care of things – it is just that nature takes a very long time to get the job done. In the absence of major wars on false pretexts, ‘pandemics’ (or planetary migration of the species) it seems clear that we have to give serious consideration to these options: 1) workers will have to increase their contribution to their company pension funds, 2) workers will be subjected to increased income tax or, 3) workers will have to ensure they contribute the maximum to RRSP and be resposible for their retirement income or, 4) have a major overhaul of the present tax structure to reflect a more equitable tax system.


  7. Frugal pensioner says:

    When the CPP was introduced so many decades ago no one gave a thought that a seniors demographic crunch would deplete pension funds. People need to take more responsibility for their own lives % not depend so much on government. Does anyone believe that government really cares about us? So we all have to be sensible in a society where so much is geared to meet the satisfaction of those who are wealthy. As for me, I don’t just talk about frugality, I live frugality. I don’t take expensive trips but am involved in my community doing volunteer work with other seniors. We also have to make decisions that will not result in financial difficulties. We are still in a very tight economy that is limping toward recovery. Some people (not all) who are whining about their inability to live on their fixed incomes should pause for a moment and stop spending money stupidly. Get rid of that sense of entitlement & this belief that the government should ‘take care of you’. You have to take care of ‘you’. So many of us have forgotten the wise words of our parents ….. ‘You have to save for a rainy day!’
    Frugal pensioner (Barrie)


  8. Jon_C says:

    I agree with the comment by Frugal Pensioner. While the method used by the government to caculate the CPI might be flawed thre is a need to place emphasis on ‘individual responsibility’. There are some people who, for whatever reason, have stubbornly refused to manage their money sensibly irrespective how much they earned during their working years. These people are not like those unfortunate Nortel employees who lost pensions.These are irresponsible people who need to get real. Get rid of this annoying sense of entitlement & manage your money better. The government cannot be responsible for ‘all the contents of your basket of goods’. Some things in your basket are frivilous & not basic necessities.


  9. RM says:

    Golden years is definitely a myth for seniors on fixed incomes. The government needs to develop a longterm social housing plan to deal with the growing number of seniors. Your suggestions for a more sustainable housing policy make sense. It is not only the flawed method used to calculate pension income. It also has to do with what other outrageous ways to spend our tax dollars. Recently I’ve came across a piece of information about a Bill #C-428 being pushed by Bob Rae and Ruby Dhalla that will allow elderly immigrants to apply for OAS in 3 years instead of a qualifying period of 10 years. I hope it does not pass. Our economy is in a big enough mess with out having to sink ourselves in a deeper financial hole. These elderly immigrants should be taken care of by their own families. That qualifying period of 10 years should not change. Our seniors who have worked for decades and contributed to the development of Canada are having a hard enough time trying to survive. If anything, the government should instead increase the OAS payment to our seniors strugglling on fixed incomes so they can have affordable housing.


  10. SL says:

    Have you seen that email doing the rounds of the internet comparing the fixed income of our seniors with that of what the refugees received? I was left speechless. Why is their such a huge discrepancy? A refugee receives a monthly pension of “$1,890.00 plus $580.00 in social aid to a total of $2,470.00”! A pensioner who has contirbuted to Canada for over 40-50 years cannot receive more than $1,012.00 in Old Age Pension and Guaranteed Income Supplement. Our senior citizens have made their contribution to Canada but refugees have not yet made theirs…yet. So why all this generosity to refugees! I don’t have problems with us helping those who come from places where they face awful persecutions, war or terrible natural disasters. With the exception of our indigenous people who have been here for thousands years and are still being treated badly we have all come from some place else. Yes, it is our duty as civilized people to help those who through no fault of theirs find themselves in terrible circumstances. But why is it so generous? We should provide affordable housing options for our seniors so they can live in dignity.


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