contributed by Stephen Thompson
A steady stream of income is important to your retirement and government retirement income comprises an important component of that retirement income. Canada provides Old Age Security (OAS) and Canada Pension Program (CPP) while the United States has Social Security. These benefits are paid monthly and very importantly, are adjusted periodically in line with the cost of living. The mechanics of that adjustment is explained here and may be of interest.
CPP & OAS Adjustments
Canada adjusts both CPP and OAS using the Canadian Consumer Price Index (CPI) All-Items Index. The CPI compares the cost of a fixed basket of goods and services purchased by Canadian consumers. The basket includes food, shelter, clothing, transportation, healthcare, etc. Neither CPP, nor OAS benefits are cut if the index calculation declines.
Canadian benefit adjustments are not made at the same time for the two government programs. The CPP adjustment is a one-time adjustment made at the beginning of the calendar year and is based on the percentage change in prices from one 12 month period to the previous 12 month period. For example, the adjustment put in place on January 1, 2014 was calculated on the average CPI from November 2012 through October 2013 divided by the average from November 2011 through October 2012. The result of 0.9% was the CPP benefit adjustment made in January 2014.
Note: Québec Pension Plan (QPP) follows the same annual adjustment formula and process as CPP.
The OAS benefit is made on a quarterly basis through the year. Adjustments take place in January, April, July, and October. The adjustment is the average Canadian CPI for the most recent three month CPI period divided by that of the last CPI period in which the OAS amounts increased. For example, the percentage increase for the quarter ending in September 2014 was calculated by comparing the average CPI for the February to April 2014 period to the August to October 2013 period, which was the last period in which the OAS benefit amount increased. The result was a 1.3% increase in the benefit. An adjustment was made in the OAS benefit beginning in October 2014.
Social Security Adjustment
Social Security benefits are also adjusted annually. The annual Cost of Living Adjustment (COLA) is based on the percentage increase in the Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W) prepared by the US Bureau of Labor Statistics in the US Department of Labor. The adjustment is based on the change in the index from the third quarter of the previous year to the third quarter of the current year. If the index increases, the higher benefit payments commence in January of the next year. If the increase in the CPI-W is at least one-tenth of one percent (0.1 percent), there will be a COLA; however, if the increase is less than 0.05 percent, or if the CPI-W decreases, there will not be a COLA adjustment of the benefit.