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The Liberals have consistently touted the inflation proofing of federal benefits as a protection against the rapidly rising cost of living, and a political defence of their economic management.

Last December, Finance Minister Chrystia Freeland responded to questioning on inflation by pointing to the indexation system for federal benefits.

“So, I think one piece of assurance that we can collectively offer to the most vulnerable Canadians is the benefits they depend on are actually going to be linked to the costs that they face in their lives,” she said at a Commons finance committee hearing.

That point was again made in the April budget, as part of the Liberals’ case that Ottawa is taking action on inflation.

But the purchasing power of federal pensions, child benefits and low-income credits is shrinking this year as the surge in inflation outpaces slow-moving indexation formulas. To put it another way, those benefits are, in the short term, not fully linked to the costs that Canadians face in their lives.

The Parliamentary Budget Officer said this week that Old Age Security payments have lost ground against inflation since the start of the pandemic. Increases to OAS payments have offset just under two-thirds of the increase in the Consumer Price Index between February, 2020, and April, 2022, as the chart below shows. The same is true of payments under the Guaranteed Income Supplement.

Those two programs are the most responsive to inflation, since they are adjusted quarterly. Other kinds of federal payments (including the Canada Pension Plan, the Canada Child Benefit and the GST/HST credit for low-income households) are only adjusted annually and are significantly lagging changes in inflation.

CPP payments rose by 2.7 per cent in January, short of the 3.4-per-cent rise in the CPP in 2021. The gap is even bigger for the CCB and for GST/HST credits, scheduled to increase 2.4 per cent in July.

Those shortfalls result from the vagaries of the indexation formulas, which use average changes in inflation over time to calculate increases. That effect is most pronounced for CPP, CCB and the GST/HST credit, since their indexation increases are based on average changes over 12 months. For the CPP, that 12-month period spanned November, 2020, through to October, 2021. For the other programs, the 12-month period is slightly different, running from October, 2020, through to September, 2021.

But in both cases, that 12-month period includes a number of months when inflation was extremely low – pushing down the average and making the indexation increase smaller than it otherwise would have been. The same effect, in a less-pronounced form, is at work in the indexation formula for OAS and GIS, which uses a three-month average.

Another factor, harder to capture, is the difference between what seniors buy and the basket of goods used to calculate the CPI. Some studies have shown that senior-specific inflation is consistently higher than the overall CPI, in part because older Canadians spend a larger proportion of their income on food. That’s particularly germane in 2022, with food prices rising much faster than other parts of the CPI.

Assuming there isn’t a new spike in inflation, the indexation formula will eventually catch up with CPI – months in the case of OAS and GIS, and more than a year for the other programs. In the meantime, however, seniors, families and low-income households will see the purchasing power of their benefits shrink.

A half-century ago, at the start of the 1970s inflationary spiral, the federal government moved to protect pension payments from inflation, fully indexing the CPP, OAS and GIS and shifting the latter two to quarterly adjustments rather than annual changes.

So far, the government has given no indication that it intends to tweak the indexation system. In a statement, Ms. Freeland’s press secretary, Adrienne Vaupshas, said the federal government is continuing “to focus on supporting hard-working Canadians and will have more to say soon.”

Ottawa has taken other steps, including a one-time $500 payment to OAS recipients last August and a scheduled 10-per-cent increase in July for recipients over 75.

Bill VanGorder, chief operating officer and chief policy officer for the Canadian Association of Retired Persons, says Ottawa should focus its attention on increasing the GIS, in order to target the poorest seniors. In addition, he suggests, the government should consider moving the CPP to quarterly indexation, as is the case with the OAS and GIS.

Others, including Parliamentary Budget Officer Yves Giroux, take a more cautious view of changing the frequency of indexation. Mr. Giroux notes that it is relatively easy to adjust the OAS and GIS on a quarterly basis, since the roster of recipients is relatively stable. That’s less the case with the CCB or GST credits, he notes.

Moving the CPP to quarterly adjustments would be even more fraught with complications, says Bernard Morency, an adjunct professor with the Retirement and Savings Institute at HEC Montréal. “The government system is not a yacht, it’s an oil tanker,” he says.

Administrative inertia aside, Mr. Morency says any change to the frequency of indexation would also likely have to be matched by more frequent changes to CPP contribution limits. Workers would not be happy about more frequent increases in their payroll deductions, he adds. Plus, changes to the CPP require the consent of the provinces.

But if the current surge in inflation proves to be long-lived, as was the case in the 1970s, then there could be good reason to rethink the indexation rules, Mr. Morency said. “If that happens, then it’s a whole different game.”

Tax and Spend examines the intricacies and oddities of taxation and government spending.

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