Q: Have you evaluated the effect of inflation on retirement income that is not indexed or is up to 3%, just one year later?
Hughes Roy
A: Do not adjust your device. Like in the movie Honey, I cut down on the kids, many retirees will see their pensions decrease because of the inflation which has just woken up. In fact, the consumer price index climbed 4.4% in Canada and even 5.1% in Quebec in September. Unheard of in 30 years.
If his pension is not indexed at all, a worker who retired at age 60 will have lost a quarter of his purchasing power at age 75 and half at age 95, since inflation is 2% on average, which is the Bank of Canada’s target.
So that makes a huge difference in the long run, even if inflation is moderate.
In the private sector, some workers are fortunate enough to have an annuity that is fully indexed, which protects them against inflation. But many others are only entitled to a partial adjustment or to… no indexation at all.
Among the many civil servants covered by the RRGOP, for example, different formulas overlap.
For years accumulated before 1982, the pension is fully indexed. We then changed the formula, which was very expensive, because inflation was over 10% at that time.
For subsequent years, retirees are entitled to inflation minus 3%. Except that from the beginning of the 1990s, as inflation never exceeded 3%, indexation was zero.
From 2000, the formula therefore changed again. For the years accumulated thereafter, the plan offers half the inflation rate (or inflation minus 3% if this method is more advantageous).
In the end, retirees are therefore not fully protected against the increase in the cost of living.
On the other hand, the Quebec Pension Plan (QPP) offers a pension that is fully indexed, an asset that has great value. Pensions increase in January, based on the previous year’s inflation, measured at the end of October.
So you are right to say, Mr. Roy, that there is a lag between the rise in prices and the rise in rents. In addition, it should be noted that the QPP uses the inflation rate for Canada and not that of Quebec, which will probably pay less this year. But the reverse could also be true.
To mitigate the effects of the risk of inflation, future retirees may consider postponing their pension, suggests Retraite Québec. Each month of deferral increases the pension for the rest of your life.
Note also that, in his mini-budget scheduled for November 25, Finance Minister Eric Girard should give a boost to Quebecers who are hit by the rise in the cost of living.
So stay tuned.