Wednesday, 22 July 2009

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.


Traciatim said...

Of course if you owned your home with no mortgage in retirement and are paying 2000 a year in property tax and it increased to 2560, your expenses went up by 28% . . . however the renter is probably paying close to 10000 a year for rent and their increased by 'only' 22% up to 12200 . . . who came out ahead?

CanadianInvestor said...

Traciatim, that's a possible point. I think is it answered by the Spending Patterns Table near the beginning of the study. The table says that both senior renters and homeowners devote the same 14.7% of their spending to either rent or mortgage/taxes/other homeowner expenses. So unless renters are much richer and spend a lot more in total terms than homeowners (in fact, it's the reverse I believe) the renter seems to me to really be coming out ahead.

Seniors who own a home but don't have high income may get squeezed out of their home by those rapidly escalating costs e.g. taxes go up because property values rise steeply but the senior has no good way to convert the capital gain into their income to pay the rising costs. Reverse mortgages theoretically could work but from what I've read, the costs are so high it is a bad deal.

Anonymous said...

In B.C., you can defer your property taxes until your house is sold and the government hardly charge over 2% on defer taxes. You can invest money somewhere else.

Anonymous said...

While I tend to agree with you most people have a hard time thier mind around the idea that renting is better than retirement. Even with the hidden costs of homeownership I can't see it being more than renting.

Also the idea is once the mortgage is gone you can more into savings.

Rob in Madrid

Anonymous said...

in addition to my previous comment wouldn't an asset rich car flow poor senior suffer much from renting, after all each month you have to fork out 800-900 (in Kitchener Waterloo for example) a month in rent, certianly less than property taxes.

Personally I'm surprised that both pay the same percentage of income.

rob in madrid

CanadianInvestor said...

It seems a house never stops needing renewal, updating, repairs. New windows, kitchen or bathroom redone, roofing, carpets, floors redone, leaks fixed, furnace replacement, landscaping, drive repaved, patio redone, painting. I'm not very much surprised the total expenses after the mortgage gets paid off could still take up the same chunk of income. Just when the mortgage gets paid off, it's time for major upgrades. It's like roadwork, it just never stops. ... Now to go do some exterior paint on wood trim ... if it ever stops raining long enough!

btw, that BC tax-deferment deal sounds wonderful. According to the BC gov't website, the rate is only 1.5% right now, though it is revised up or down with general interest rates and has been as high as 4%. Time to do a little digging as it appears that the City of Ottawa has a similar program, though the interest rate charged is 5%. Thanks for the blog post idea!

Toronto condos blog said...

Exactly, you are absolutely right. Even though it seems easy - you contact a loan, buy a house, rent it and it earns you a lot of money. It is not that simple. After paying off your debt, you need to invest to the house again and again. Best, Elli.

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