From pensions to health benefits, the absence of inflation indexing is making us poorer

After inflation’s largest upswing in four decades, it’s finally simmering down. As of April, the annual rate of inflation was firmly nestled below 3 per cent – low enough that the Bank of Canada this week cut its benchmark interest rate for the first time in four years. With more cuts likely coming, a tough chapter for the economy is nearing an end.

But the inflation crisis will leave behind a nasty legacy, and not only because price levels are permanently higher. Many households have suffered a financial hit that could persist for years – even decades. The culprit? Canada’s piecemeal approach to inflation indexing.

Indexation means adjusting wages, benefits or other values in relation to something else, often a change in prices. Governments tend to make adjustments based on the Consumer Price Index (CPI), which measures the price change for a broad basket of goods and services – and is Canada’s go-to measure of inflation. To index something is to preserve its value.

For example, if someone received a $100 monthly benefit from the government and inflation rose by 5 per cent in a given year, ideally the benefit would get bumped up to $105. This would help the recipient maintain their standard of living.

Yet so many aspects of people’s financial lives – tax credits, social assistance and health benefits, to name a few – are not adjusted to retain their dollar value, depending on one’s province of residence or workplace benefit program. For some, the financial hit is relatively small; for others, it’s massive.

While Ontario’s CPI has risen 20 per cent since the fall of 2018, those on the Ontario Works benefits – a last line of financial help for individuals considered employable – have seen no increase in their monthly payments over that same period of time.

In Alberta, taxpayers shelled out $300-million more in personal taxes over 2020 and 2021, a result of the province temporarily unmooring its tax brackets from inflation in order to bring in more funds. And although a visit to the eye doctor is 20 per cent more expensive than it was five years ago, employer-sponsored coverage maximums for most Canadians haven’t changed. And that’s only three of many examples of how arbitrary indexation can affect people’s financial security.

Some Canadians have emerged from this bout of inflation relatively unscathed, thanks to tight labour markets that helped lift wages, along with strong investment returns that boosted wealth. Average hourly wages are also rising in real (or inflation-adjusted) terms. But the impacts of the inflation crisis are uneven, especially for those vulnerable people who rely on a patchwork of tax credits and government benefits to pay the bills.

The extent to which people struggle is often by design. Companies and policy makers limit or remove indexation – or avoid it altogether – to control costs. As a result, the real value of benefits falls over time. As families earn more money when wages keep pace with inflation, they no longer qualify for certain government tax credits. On the revenue side, when tax brackets aren’t adjusted for CPI, more money flows into public coffers.

“Generally speaking, governments use lack of indexation, or partial de-indexation, to save money,” said Sherri Torjman, a social policy consultant. “In most cases, people don’t realize how serious the impact can be.”

Open this photo in gallery:

CPP and OAS

Canada’s federal public pensions have been a rare cushion against inflation for seniors. As costs of living soared, those monthly payments closely followed suit.

Old Age Security (OAS) is a pension Canadians aged 65 and older can receive even if they have never worked. The Canada Pension Plan (CPP) is available to those who contributed to it from their paycheques over the years. Both are adjusted based on the full measure of Canada’s main official gauge of inflation. The same holds for the Quebec Pension Plan, which uses the same formula as the CPP.

In the four-year span between April, 2020, and April, 2024, OAS payments climbed by 16.3 per cent, just shy of the 18.3 per cent increase recorded by Statistics Canada’s measure of consumer price increases. (The small discrepancy is due to the fact that OAS benefits are adjusted for inflation every three months using the most recent three-month period available at the time of the calculation).

Another boost for older Canadians came from Ottawa’s move to raise OAS pensions by 10 per cent for Canadians aged 75 and over starting in July, 2022. That was in addition to recent enhancements of the Guaranteed Income Supplement, a monthly payment for low-income OAS pensioners.

CPP payments, meanwhile, which are adjusted once a year, have risen by 16.1 per cent.

But there are some wrinkles in that rosy picture, said Bob Baldwin, an Ottawa-based pension consultant and co-chair of the C.D. Howe Institute’s Pension Policy Council.

He points out that the CPP’s death benefit, a payment made to a deceased contributor’s estate or other eligible survivors, was capped at $2,500 in 1998 and has been frozen at that level ever since (the benefit was converted to a flat amount in 2019). Meanwhile, the average cost of a burial today ranges from $5,000 to $10,000, according to insurer Sun Life.

The 1997 reform of the CPP under the Liberal government of Jean Chrétien is best known for changing the pension’s funding arrangement and creating the CPP Investment Board, Mr. Baldwin said.

“But what got less attention at the time – and what has got less attention with the passage of time – is that there were a number of changes that were designed to reduce CPP expenditures,” he said.

The plan’s basic exemption – a minimum amount of earnings that’s exempt from the calculation of mandatory contributions every year – has similarly been frozen at $3,500. The result is that, as wages grow, an increasingly larger share of Canadians’ pay is subject to CPP withholdings, Mr. Baldwin said.

And, unlike the CPP, the OAS benefit calculation does not take into account the level of wages, which tend to rise faster than inflation, Mr. Baldwin said. Over time, the concern is the value of OAS benefits might considerably lag that of pre-retirement earnings for new pensioners, he said.

Bonnie-Jeanne MacDonald, director of financial security research at Toronto Metropolitan University’s National Institute on Ageing, sees another issue looming on the horizon.

Canada’s official inflation measure has traditionally kept up well with seniors’ living costs, she said. But that may stop being the case when the bulk of the country’s Boomer generation enters their 80s, and more people experience serious health issues and need care.

Given the current shortage of workers in long-term care, much of which isn’t covered by public funding, health needs could push average living costs far ahead of those faced by the general population for seniors with ailments and disabilities, Ms. MacDonald said.

The risk is that a significant share of older retirees will see their expenses rise faster than their public pension payments, she said.

Open this photo in gallery:

Disability benefits

For Tracey Crosson, the biggest casualty of rising prices was lunch.

The 52-year-old has been living on social assistance in Toronto since a car accident in 2015 left her with debilitating nerve damage. In July, she saw her monthly cheque from the Ontario Disability Support Program (ODSP) rise by $80, to $1,308 per month, a 6.5 per cent increase that came after the provincial government began adjusting the payments for inflation.

That was still not enough to cover the $1,315 rent for her bachelor’s unit, however, which climbed by another $27, to $1,342 a month in January.

For most of her other monthly expenses, she relies on donations and charity. Friends cover her phone and internet bills. The local Meals on Wheels brings five dinners per week in microwaveable containers.

A few other provincial and federal tax credits and benefits provide some cash to pay for the rest of the rent and some food.

But with grocery prices soaring for nearly three years, Ms. Crosson, who was already used to skipping breakfast and sometimes feels too weak to eat, said she has had to also give up lunch, which typically consisted of instant ramen or mac and cheese. She’s now down to one meal per day on the days when she does eat.

“Gotta do what you gotta do when you’re on the system,” she said.

Canada’s disability benefits are a case study in how even inflation indexation, where it exists, can be woefully inadequate protection against the ravages of skyrocketing consumer prices, public policy experts say.

Ontario is a perfect example. Premier Doug Ford’s decision in 2022 to start pegging ODSP to living costs, after a one-time 5 per cent increase, has made the province one of the few jurisdictions that adjust at least some of their basic social assistance payments to inflation. But the amount of the payments that are being adjusted for inflation were already so low they still leave recipients far below Canada’s official poverty line.

In fact, just about every household in Canada that is receiving social assistance – regardless of size, province or health considerations – is below the poverty line, based on the value of payments received, according to calculations from the Maytree Foundation, a non-profit.

“Historically, the issue is less about keeping up with inflation and more about just how deeply inadequate total welfare incomes have been,” said Jennefer Laidley, a researcher at Maytree. Now, because of the inflation surge, “we get an even worse situation.”

The federal Canada Pension Plan disability (CPP-D) benefits also falls short, for a similar reason.

The income support is available to Canadians who’ve contributed enough to the CPP and become unable to work due to a severe and prolonged disability. And unlike most social assistance programs, it is fully indexed, based on the same formula used for payments to retirees.

While successive federal governments tweaked the plan in various ways in the 1980s and 1990s, they never touched indexation, said Michael Prince, a professor of social policy at the University of Victoria.

“The CPP-D was, first of all, seen as an earned right,” Prof. Prince said, elaborating on the likely reason why Ottawa never attempted to freeze the payments, even when slashing spending elsewhere.

Still, the maximum payment for the basic CPP-D benefit currently amounts to just $1,606.78 a month.

The CPP-D was always supposed to be “a fairly modest program” meant to leave room for benefits from private-sector disability insurance, Prof. Prince said.

Today, though, even among Canadians who have workplace disability insurance, few can count on benefits that increase with inflation.

Three-fourths of the long-term disability plans monitored by AON Canada, a leading insurance broker, do not include cost-of-living adjustment provisions, according to Joey Raheb, chief commercial and broking officer for health solutions at the company. The cost of adding such a feature to an employer plan typically raises premiums by between 10 and 20 per cent, he added.

Open this photo in gallery:

To supplement the current patchwork of disability supports, the Trudeau government introduced in 2023 a long-promised federal disability benefit. But the new Canada Disability Benefit will provide just $200 a month, the government said in the federal budget this spring, an amount far lower than even modest estimates by experts of what the program would provide. Critics also warn that the current proposed eligibility criteria risk excluding swathes of working-age Canadians with severe disabilities.

It remains to be seen to what extent the benefit, whose design has largely been left to regulations that have yet to be drafted, will include inflation indexation and will be immune to clawbacks for those on social assistance or employer disability benefits.

Employer pensions

Outside of OAS and CPP, pensions that automatically and fully reflect the upswings of inflation are increasingly rare.

Less than 40 per cent of working Canadians are members of a pension plan, according to data from Statistics Canada. Those who aren’t must rely mostly on their own savings – without help from an employer – to pay for their retirement.

But even having a pension doesn’t guarantee smooth sailing through a bout of high inflation in one’s later years. In fact, even defined-benefit plans may fall short.

Traditional defined benefit pensions, which promise a regular income for life, have become much less common among private employers. Companies that still offer these plans – especially smaller businesses – usually don’t offer inflation adjustments, according to Mary Kate Archibald, an actuary at consulting firm Eckler.

Even in the public sector, more and more pensions offer what’s known as “contingent indexing,” meaning that whether and to what extent payments are adjusted for inflation hinges on the financial health of the plans, Ms. Archibald said.

For example, the Ontario Teachers’ Pension Plan uses the same inflation indexing formula as the CPP, but for those who earned pension credits from 2010 and afterward, benefit adjustments depend on the funding status of the plan.

Fortunately for retirees with many of those pensions, a decade of solid investment returns leading up to 2022 – and now healthy expected returns due to higher interest rates – have financially buoyed many defined-benefit plans in Canada despite the inflation run-up, Ms. Archibald added.

Thanks to those healthy financials, those plans were able to offer “fairly solid” inflation coverage throughout the past three years or so of ballooning living costs, she said.

Canadians with defined-contribution plans – a minority among those with pensions – have also had some wins in recent years.

These plans help workers save for retirement by coupling employee contributions with matching amounts from employers and investing the funds.

When it comes to putting the money into the plan, defined-contribution pensions have generally kept up well with inflation over the long term, said Janice Holman, a principal at Eckler. Amounts paid into the plan are usually set as a percentage of employees’ pre-tax earnings, meaning if your pay keeps up with living costs, so will the size of your pension contributions.

When taking money out, plan members are largely on their own about what to do with the funds, a challenge that became significantly trickier as inflation spiked.

Open this photo in gallery:

But the labour shortage that accompanied soaring consumer prices as Canada emerged from the depths of the pandemic has translated into gains for many workers taking up jobs with defined-contribution plans, according to Ms. Holman.

Eager to attract recruits, many employers shortened or scrapped waiting periods for new hires to join company pension plans, or made exceptions for coveted senior candidates, she said.

Concerns about older workers delaying retirement have also been an impetus for some firms to let new employees join sooner, Ms. Holman said.

In five out of 11 industries analyzed in a Sun Life survey of defined-contribution pensions and other employer-sponsored retirement savings plans, a majority of plans offered immediate eligibility to new hires, according to 2022 data.

More and more companies are shrinking or eliminating waiting periods, thinking this will help employees save more, eventually making it easier for them to stop working and transition off the firm’s payroll, Ms. Holman said.

“They’re understanding the challenges Canadians have with trying to retire out of a defined-contribution plan – so the fact that they have to manage the money themselves, that they’re concerned that inflation is going to eat away at their ability to maintain their lifestyle.”

Workplace health benefits

For many Canadians, workplace health benefits have softened the blow from higher prices for anything from dental exams to visits to the chiropractor. But with no automatic mechanism to adjust coverage maximums based on inflation, bigger health care bills are often digging deeper into employees’ pockets.

Climbing rents, pricier supplies and worker shortages have been pushing up costs for small businesses ranging from optometrists to massage therapists. That, in turn, has generally translated into higher fees for patients, experts say.

Prices for eyecare services have increased by 20 per cent since April, 2019, slightly outstripping the increase in overall CPI over the same period, according to Statscan. Dental care, which had been outpacing inflation since well before the pandemic, is now, on average, 23 per cent more expensive than five years ago.

A competitive job market has helped some groups of unionized workers win larger-than-usual benefit increases, according to labour leaders. And the pandemic prompted many companies to beef up mental health benefits, insurance insiders say.

But in many employer health insurance plans, most coverage limits haven’t budged.

Myles Sullivan, director United Steelworkers’ District 6, which represents the union’s workers in Ontario and Atlantic Canada, described some outsized wins – including on health benefits coverage – during recent bargaining rounds.

In several instances, he said, the union has been able to double members’ coverage for eyecare and paramedical services, which can include anything from physiotherapy to speech pathology therapy. On dental benefits, Mr. Sullivan reported cap increases of up to $1,000 per plan member and each of their dependants.

“When we sit down and negotiate right now, we are getting the best contracts that we’ve gotten in decades,” he said, something he portrays as a retention strategy for employers.

But those gains aren’t widespread, with the exception of mental health benefits.

Increased reports of stress, substance abuse and mental strain during the pandemic led to a “watershed moment,” with companies increasingly recognizing the need to boost supports and insurance coverage for employees, said JP Girard, executive vice-president and head of insurance at GreenShield.

“It’s no longer uncommon to see organizations provide annual maximums anywhere between $2,500 to $10,000 per plan member, plus per dependent,” he said, speaking of mental-health services.

But he hasn’t seen employers do the same for other benefit coverage caps, he added.

At AON, Mr. Raheb describes a similar trend. Richer mental health benefits are common, he said. But the average vision coverage maximum across the insurance plans AON monitors in Canada have remained at $250 every two years since 2019 for non-union employees. For plans subject to collective bargaining, the average cap has increased moderately to almost $350 every two years, he said.

For orthodontic services, a dental benefit typically subject to lifetime maximums, the average has stayed at $1,500 since before the pandemic for unionized plans. The average limit among non-union plans is similar, which reflects a slight growth from a typical cap of $1,250 as of 2019, Mr. Raheb said.

For paramedical services excluding mental health, the average maximum has remained consistent at $500 per practitioner per year for both unionized and non-union plans, he said.

Some employers have transitioned to a more flexible approach that imposes a single, higher cap across a variety of paramedical services. But the limit is typically lower than the sum of the previous single-category maximums, he said.

So, for example, a $1,500 maximum on all paramedical services might allow some workers to get more massages covered by insurance. But for an employee that used to max out their benefits across, say, five categories, the change amounts to a decrease in coverage, Mr. Raheb said.

“That’s the nuance,” he added.

Bracket creep

Earlier this year, the Nova Scotia government made a remarkable announcement: starting in 2025, personal income tax brackets and some non-refundable tax credits will be indexed to provincial inflation. These moves, according to the spring budget, will lead to foregone revenue in excess of $150-million annually by 2028.

Or put another way, taxpayers in Nova Scotia will save hundreds of millions of dollars collectively in the coming years.

While the government hailed this reform as the biggest tax break in the province’s history, one could argue it was long overdue: Since moving to a new tax system in 2000, Nova Scotia has not used indexation, leading to two-plus decades of effective tax hikes.

This phenomenon, known as “bracket creep,” has been a feature of fiscal policy making for decades. It affects all taxpayers, and it can serve as a stealth method for governments to shore up their finances.

The idea is simple enough. When tax brackets aren’t indexed to inflation, their real value declines over time. So if someone’s wages keep pace with inflation, they wind up paying more in tax – even though their purchasing power hasn’t changed. And eventually they get pushed into higher tax brackets.

This is precisely what happened a few decades ago. In 1986, the Progressive Conservative government under Brian Mulroney brought in a new formula that wound up freezing federal income tax brackets for much of the 1990s. This gave Ottawa a revenue boost of more than $10-billion in 1998 alone, according to estimates from the C.D. Howe Institute, a think tank.

Today, the situation is much different. Full indexation for federal tax brackets was brought back in 2000, and most provinces have moved in this direction, too.

Still, there are laggards. Prince Edward Island does not have an indexation system, although it has made ad hoc adjustments to tax brackets and rates in recent years. Ontario does not alter its top two brackets, which affects those with annual incomes of $150,000 and higher.

While more governments are embracing indexation, the risk is that they can always change their minds. In 2019, Alberta opted to de-index its tax brackets, non-refundable tax credits and social assistance payments, as the province’s finances were reeling from the decline in energy prices.

The ensuing “bracket creep” allowed Alberta to collect an additional $300-million in tax revenue over 2020 and 2021, according to estimates from University of Calgary researchers. With its finances buoyed by the global boom in commodity prices, Alberta announced the return of indexation in 2022.

Open this photo in gallery:

Recent moves

After inflation crested in mid-2022, policy makers announced a bevy of measures to help ease the cost-of-living crisis.

Alberta, Ontario and Nova Scotia were among the provinces to start – or restart – the indexation of some social assistance benefits and tax credits. Ontario will make inflation adjustments to the Guaranteed Annual Income System, which provides modest payments to low-income seniors. Starting this year, Nova Scotia is raising minimum wages by national CPI, plus a percentage point – ensuring that minimum-wage earners are getting real increases in pay.

While helpful, these policy changes are generally made when governments face pressure from constituents or find themselves in better financial shape. But not everyone stands to benefit.

Take Ontario Works (OW), which provides financial assistance to people in serious need. While Ontario is now adjusting disability payments for inflation, those for OW haven’t changed in nearly six years. More than 440,000 people are beneficiaries of the program, and that number has risen substantially over the past year.

The Premier, Mr. Ford, has characterized one group as deserving of help, and the other as less so.

“I always say, if someone’s on ODSP, I’ll support them for life,” he said at an event last June. But when it comes to OW, “it really bothers me that we have healthy people sitting at home, collecting your hard-earned dollars.”

This situation highlights the often arbitrary nature of social policy making. Ms. Laidley at Maytree said single adults relying on social assistance tend to face the toughest financial circumstances, although it’s pretty grim for just about every group.

“We have systems that actively create poverty by keeping incomes so low,” she said. “Inflation is just going to make it even harder for those folks.”