Did you know that Canada Pension Plan (CPP) benefits are adjusted each year, to keep pace with the cost of living?
The calculation is based on the Consumer Price Index (CPI), a measure developed to reflect what Canadians spend on food, shelter, clothing, transportation, health care and other common household expenses.
But that’s not the only way inflation can affect the CPP. It can impact investment returns too – positively and negatively. The CPP Investments team – which invests the assets of the CPP that aren’t currently needed to pay pension, disability and survivor benefits – keeps a close eye on inflation rates around the world and how they may impact the Fund.
As President and Chief Executive Officer John Graham said: “Our broadly diversified portfolio with investments in infrastructure and real estate is reasonably positioned to weather inflationary pressures.”
Infrastructure and real estate investments such as airports, toll highways, utilities and sustainable energy projects, as well as home and office buildings, generally perform well over the long term and are likely to continue producing a stable stream of income during inflationary periods. Some will earn their investors more money as a result of rising prices, and see their value grow over time.
These assets deliver an additional benefit. They tend not to perform the same way stocks and bonds do. So, they add valuable diversification to the CPP Fund’s investment portfolio. Including investments that behave differently under various market conditions helps cushion the Fund against market and business-cycle volatility.
The cost of living
All of this is important because the cost of living never stops changing. It may not always feel like it, but a modest level of inflation is a sign of a healthy economy.
Prices rise because the cost of producing the goods and services we consume goes up. Raw materials and wages are two obvious examples. Your favourite restaurant can’t be expected to charge you the same prices after its staff has been given an annual raise, or if the price of food has increased dramatically.
Deflation can be a bigger problem. When prices fall, people delay purchases because they’re likely to be cheaper in the future. And businesses cut back on production because they’re earning less. Both contribute to a shrinking economy.
Deflation can’t trigger a cut in CPP benefits though. The legislation that created the Canada Pension Plan prevents that.
What’s most important is that CPP Investments makes portfolio decisions based on the assumption that inflation is constantly changing. It is one of several factors that inform investment decisions every day.
Learn more about how we invest in real assets.