Measuring inflation: Should seniors get their own CPI?

The consumer price index is a measure of a basket of goods. It looks at things like beer, food and housing, but how appropriate is that measure when your clients retire and their main expenses shift to golf memberships, home care and home renovations?

In 2005, the U.S. Congress introduced a bill to establish a consumer price index for elderly consumers. The intend of this new CPI would be to measure cost-of-living increases for Social Security and Medicare benefits of aging U.S. citizens. Canada has no such measure and there are strong opinions on either side of the issue over whether we should.

One of the proponents of the idea is Moshe Milevsky, a professor at York University and the executive director of the IFID Centre. In his view, CPI is an average of an average: it’s an average of the population across different regions and it’s an average across age groups. “If you are in a particular group, your consumption, your spending is very different than the average nflation rate,” he says.

In the U.S., depending on where you live and what age you are, inflation can range from 2% to 10% a year, he explains. A key part of Milevsky’s argument: people’s spending habits starts to change around age 60.

“I think we have to start disentangling inflation from the cost of living,” he continues. “Inflation, that’s David Dodge’s job; Cost of living, that’s a personal thing,” he says.

Does that support the creation of a separate CPI for seniors? Peter Drake, vice-president of retirement and economic research for Fidelity, doesn’t think so. Drake says he did some research on this point several years ago early in his career and didn’t find any major differences.

Nor, in his opinion, would such an exercise be worthwhile. “Every client in retirement wants high-yield and everybody wants a cost of living index that applies to them,” he says. “Statistics Canada can’t do that.”

A study released Statscan in 1998 on this topic seems to confirm Drake’s assertion. Between 1993 and 1998, inflation impacted low-income households, senior citizens and low-income senior citizens about the same as it did the rest of the population. Senior citizens were impacted slightly more, but not significantly.

Although Statscan acknowledged that different groups do not have the same spending habits, the report notes that “prices tend to flow the same trend, which should result in relative prices that do not greatly vary from one group to another.”

The real issue for seniors is not simply that the price of items that they are buying are increasing faster than inflation, it’s that the elderly, who are often on a fixed income, are not in a position to deal with inflation.

That’s also the view from the trenches. Graeme McPhaden, a CFP with Armstrong & Quaile in Toronto, deals mostly with seniors and people nearing retirement.

While some of his client’s spending habits are different than the average population, he says they have the option to moderate the impact of inflation on their withdrawal rates. For instance, McPhaden has seen the cost of hobbies like knitting and gardening increase at a greater clip than inflation past few years.

The real issue, he says, is when it comes to larger issues like health care and travel. Some of his healthy clients have had to stop travelling altogether simply because the travel insurance costs are too high.

The best time to deal with inflation isn’t in retirement, but in the years leading up to it, he says. McPhaden asks his clients what they intend to do in their retirement and to project how much their dreams will cost when they finally do retire. It’s a pie-in-the-sky estimate, but that gets clearer as people approach the end of their working years, he adds.

“There are a lot of myths here,” Drake says. “A lot of people perceive that inflation is worse than it is.” The financial services industry needs to do a better job of educating Canadians about what’s in the basket of good used to calculate CPI, he adds.

Drake, however, agrees with Milevsky that there are strong regional differences that have to be accounted for. “The really big issues for seniors, was comparing seniors to seniors where they live,” he says. “There were much bigger differences for seniors group depending on where they live.”

Regardless of whether Statistic Canada needs a CPI for seniors or not, advisors should take the opportunity to talk with their clients about their intended spending habits in retirement.

Milevsky suggests asking questions like ‘What are you going to be doing in retirement, are you going to be traveling a lot or are you going to be spending time in the U.S.?’ Clients who plan to see the world in retirement should consider currency risk, not to mention medical expenses and travel insurance.

“Those kinds of questions will lead them to design a consumer price index for them, or personal cost of living index and that becomes the benchmark,” he says. “That’s what they have to try to target.”

Filed by Mark Brown, Advisor.ca, mark.brown@advisor.rogers.com

(11/16/06)