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Inflation and Indexation

In our society, the cost of goods and services has a tendency to increase every year. This is what we call inflation. Inflation has a direct impact on your buying power. When prices increase, your buying power decreases. However, your buying power increases when prices decrease. To maintain your buying power, you must take inflation into consideration.

Inflation is usually measured using the consumer price index (CPI), which is set by Statistics Canada using a basket of consumer goods and services. The index allows us to estimate the average price variation of goods from one year to the next.

For example, in Québec, the CPI increased from 129.7 to 132.6 between June 2018 and July 2019. The inflation rate was therefore 2.2% ((132.6 – 129.7) ÷ 129.7 = 2.2%).  It usually varies between 1.0% and 3.0% per year.

The following table shows the future cost of $10 000 in buying power, calculated using different inflation rates over three decades.

Cost of $10 000 in buying power according to inflation rates and the number of years
Inflation rate10 years 20 years 30 years
1.0% $11 046 $12 202  $13 478 
1.5% $11 605  $13 469 $15 631 
2.0% $12 190  $14 859  $18 114 
2.5% $12 801  $16 386 $20 976 
3.0% $13 439  $18 061  $24 273 

As a result, with a 2.0% inflation rate, if you spend $10 000 per year, making the same purchases in 10 years will cost you $12 190.

In the last decade, the annual inflation rate has always been under 3.0% and, according to specialists, it should remain around 2.0% in the long term. Although it seems unlikely that it should reach 11% like in 1980, it could be possible.

Annual indexation of the pensions under the Québec Pension Plan

When a value is adjusted according to an index or reference rate, it means that it is indexed. Generally, retirement income that comes from personal savings is not indexed. Consequently, its buying power decreases over time.

However, pensions paid under the Québec Pension Plan and the Old Age Security Program, as well as the Guaranteed Income Supplement are indexed according to the consumer price index (CPI).  The pensions are indexed for beneficiaries to maintain the same buying power over the years.

The indexation rate of benefits under the Plan correspond to the percentage of adjustment of the amounts paid to beneficiaries. The indexation rate is set in January in accordance with the average CPI, which is calculated using data published by Statistics Canada for the 12-month period ending on 31 October of the previous year. The annual average corresponds to the Québec Pension Plan pension index.

For example, from 2018 to 2019, the QPP pension index increased from 130.0 to 133.0. This means that the pensions' indexation rate for 2019 was 2.3% ((133.0 – 130.0) ÷ 130.0 = 2.3%). However, if, for a given year, the pension index were lower than the year before (deflation), the pension amounts would remain the same.

Indexation rate of pensions under the Plan according to the year
 YearIndexation rate (%)
2019 2.3
2018 1.5
2017 1.4
2016 1.2
2015 1.8

Summary

Inflation is a key factor to consider when planning your retirement withdrawal strategy. Part of your savings is protected: your pensions paid under the Old Age Security Program and the Québec Pension Plan, for example. As for the remainder, you have to plan enough savings to counter inflation and maintain your buying power.  

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