Inflation for Retired Canadians - Some Surprises

Back in May, my post Inflation Ain't What It Used To Be mentioned that inflation for US seniors / retirees has been consistently higher than for the average population by about 0.5% per year. I speculated that Canada might be similar but had no proof. I was taken aback a bit when Stats Can said they had no information on this topic. That's not true. I've now found some.

The May 2005 issue of Stats Can's CPI Review contains a research article Is Inflation Higher for Seniors? by economist Radu Chiru. Its overall conclusion about the period 1992-2004: "...the Consumer Price Index tracked very closely the inflation experienced by seniors as a group". Over the whole 12 years, inflation for seniors was 26.1% versus 24.4% for the Canadian average / official CPI, a difference of 0.11% per year. Apparently, things that cost seniors more or that they buy more of were more or less offset by things that went up less or that they use less. For instance, cable TV was a bigger ticket item for seniors and it went up far faster than most other items, costing seniors more, but tuition went up really fast too, and they pay much less of it.

However, an average can mask divergences - remember the old joke about putting one foot in the oven and the other in the fridge and being comfortable on average? This study's surprises:

• seniors renters (22.7% inflation) came out much farther ahead than home owners (28.1%); shelter is a much bigger chunk of spending for seniors; mortgage costs are not really to blame (few seniors have mortgages and rates were low) so the likely culprit is zooming property taxes! I note that the "renters are winners trend" has continued unabated as the latest annual CPI shelter costs show howmeowner costs racing upwards while rental costs crawl up, way below the overall inflation rate.
  
• the lowest income quintile (20% of the population) seniors actually experienced lower price rises than the highest income quintile (maybe because they would mostly be renters?) - amazing, the poor became relatively richer and the richer became poorer!
• where you live makes a big difference - Alberta was the inflation champion of Canada with seniors CPI going up 32% and official CPI 30.4% in the 12 years and a quick scan through the CPI by province tables shows that trend continued through 2008. The good places with inflation 4% lower than the Canadian average (mainly due to energy costs, according to the Radu study were Quebec and Newfoundland / Labrador. Quebec had the smallest gap between official and seniors CPI. Through 2008, Quebec was still tracking below Canadian average CPI. If only income taxes (which are not part of the CPI numbers - the Your Guide to CPI says it so eloquently: "Income taxes are excluded because it is impossible to associate
  a specific amount of tax paid with a specific quantity of services received." - i.e. one cannot tell how much tax is wasted) were lower in Quebec, it could be declared Canada's retirement heaven.

The Stats Can conclusion is a start towards reassuring seniors and retirees who rely on its fairness for maintaining purchasing power of income or investments that are indexed to the overall CPI like real return bonds, Canada Pension Plan income, OAS and private pension cost-of living adjustments.

Another study published in the December 2006 issue of Canadian Public Policy generally seems to corroborate Chiru's conclusions - Matthew Brzozowski, Does One Size Fit All? The CPI and Canadian Seniors. The abstract says: "... the CPI inflation rate overestimated the average inflation rate faced by Canadian senior households during the 1970s and the 1980s but has accurately measured average inflation for such households during the 1990s."

That comment about the 1970s and 1980s reminds us the future might not be like the past - if CPI previously overestimated seniors inflation, in future it could underestimate the rate by a lot more than the small amount it did between 1992 and 2004. Items that seniors consume in much greater proportion like food, shelter and health care compared to the general CPI weighting (see Radu paper for breakdown) are the ones to watch in balance with the ones used a lot less, like cars, alcohol/tobacco and recreational equipment.