Pensions and Inflation

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CanadaAir
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Pensions and Inflation

Post by CanadaAir »

Inflation impacts pensions.

Signing up for a $80,000/year pilot pension in 2013 planning to retire in 2033.

Inflation decreases the value of that pension to $60,000/year in 2023.
By 2033, the pension may deflate to $40,000 or $30,000/year.

Inflation impacts pay, and future pension payouts.
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Re: Pensions and Inflation

Post by rooster »

CanadaAir wrote: Sat Apr 22, 2023 11:41 am Inflation impacts pensions.

Signing up for a $80,000/year pilot pension in 2013 planning to retire in 2033.

Inflation decreases the value of that pension to $60,000/year in 2023.
By 2033, the pension may deflate to $40,000 or $30,000/year.

Inflation impacts pay, and future pension payouts.
Ok and?
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TalkingPie
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Re: Pensions and Inflation

Post by TalkingPie »

I'm a bit confused, probably because I haven't been exposed to the kind of pension that's being described here.

The ones I'm familiar with are:

1) Defined benefit pension. The payment amount on these is typically based on your 3 or 5 highest earning years, so if inflation occurs throughout your career, that's accounted for at your retirement date because your wages will also have risen. Yes, if it's not an indexed pension, inflation will erode the buying power of your payment throughout your retirement years.

2) Defined contribution pension. The payment on these is based on the financial performance of the funds you're invested in. Normally, prices, revenue, and stock prices scale with inflation, so you're covered pretty well.

Some airlines do a hybrid of 1) and 2), but signing up for a pension with a defined payout 20 years in advance is not something I've heard of. Who offers these?
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CaptDukeNukem
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Re: Pensions and Inflation

Post by CaptDukeNukem »

CanadaAir wrote: Sat Apr 22, 2023 11:41 am Inflation impacts pensions.

Signing up for a $80,000/year pilot pension in 2013 planning to retire in 2033.

Inflation decreases the value of that pension to $60,000/year in 2023.
By 2033, the pension may deflate to $40,000 or $30,000/year.

Inflation impacts pay, and future pension payouts.
Inflation affects everything. I fail to see what you’re getting at.
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CanadaAir
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Re: Pensions and Inflation

Post by CanadaAir »

The post
TalkingPie wrote: Sat Apr 22, 2023 7:59 pm I'm a bit confused, probably because I haven't been exposed to the kind of pension that's being described here.

The ones I'm familiar with are:

1) Defined benefit pension. The payment amount on these is typically based on your 3 or 5 highest earning years, so if inflation occurs throughout your career, that's accounted for at your retirement date because your wages will also have risen. Yes, if it's not an indexed pension, inflation will erode the buying power of your payment throughout your retirement years.

2) Defined contribution pension. The payment on these is based on the financial performance of the funds you're invested in. Normally, prices, revenue, and stock prices scale with inflation, so you're covered pretty well.

Some airlines do a hybrid of 1) and 2), but signing up for a pension with a defined payout 20 years in advance is not something I've heard of. Who offers these?

The original post was a simplified example.
Indicating that inflation erodes buying power & difference between planning for a set pension amount 20 years in advance based on today's value.
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TalkingPie
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Re: Pensions and Inflation

Post by TalkingPie »

CanadaAir wrote: Sat Apr 22, 2023 9:11 pm The original post was a simplified example.
Indicating that inflation erodes buying power & difference between planning for a set pension amount 20 years in advance based on today's value.
Oh, ok. So just stating the obvious, then.

To try to squeeze some juice out of this thread for anyone new to pursuing financial independence, the Trinity Study is worth reading up on. There are arguments as to whether the conclusions they reached will continue to be accurate in the future, but based on past performance, the study concluded that if one were to save up a diversified investment that tracks the stock market, such that one could live off of 3-4% of that investment annually, it is highly unlikely to ever run out of money, even over a 30+ year timeline and even when adjusting cost of living to inflation. This gave rise to the so-called 4% rule, theoretically making it simple to know approximately how big a nest egg you need for retirement.

It follows from this that if you multiply your anticipated spending rate by 25 (or 33, if you use a more conservative 3% withdrawal rate), that's the number you should be striving to save for. For example, if you think you'll need $80,000 per year in your first year of retirement, you'll need about $2 million invested by the time you stop working.

There are lots of retirement calculators online. I like this one: https://networthify.com/calculator/earl ... awalRate=4

Or just get a job at a major airline with a defined benefit pension and buy as much house as the banks will let you. That seems to work out for a lot of guys.
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Re: Pensions and Inflation

Post by Bede »

CanadaAir wrote: Sat Apr 22, 2023 9:11 pm The original post was a simplified example.
Indicating that inflation erodes buying power & difference between planning for a set pension amount 20 years in advance based on today's value.
But that's not exactly how it works. You're not banking on an $80k pension when you start out- you're banking on 2% of your salary per year worked when you retire. If your pay increases with inflation, so does your pension payout.

Where inflation DOES impact your pension is that most DB pensions aren't indexed so if you retire with an $80k pension, you will still be getting $80k when you die, which is less in real terms than when you retired which should be obvious.
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BigQ
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Re: Pensions and Inflation

Post by BigQ »

In an environment with 10% inflation, a retiree can expect to lose 50% of his or her purchasing power of their retirement benefits in 5 years.

CPI is more like CP-lie. The real number is much higher.

Think about all the boomers about to retire with a 50k/yr DB pension and a 1200/month CPP/OAS payout. Their DB pension is about to purchase the equivalent of 25000/yr in purchasing power, and the CPP and US Social security are both expected to run out of funds by 2030-2033.

In the next 5 years we will have an epidemic of homeless retirees and the housing market flooded with houses - and no-one to buy them.

If you are young, don't get into debt now, it will be the greatest purchasing opportunity of rental SFH real-estate ever.
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Re: Pensions and Inflation

Post by mmm...bacon »

BigQ wrote: Sun Apr 23, 2023 2:19 pm In an environment with 10% inflation, a retiree can expect to lose 50% of his or her purchasing power of their retirement benefits in 5 years.

CPI is more like CP-lie. The real number is much higher.

Think about all the boomers about to retire with a 50k/yr DB pension and a 1200/month CPP/OAS payout. Their DB pension is about to purchase the equivalent of 25000/yr in purchasing power, and the CPP and US Social security are both expected to run out of funds by 2030-2033.

In the next 5 years we will have an epidemic of homeless retirees and the housing market flooded with houses - and no-one to buy them.

If you are young, don't get into debt now, it will be the greatest purchasing opportunity of rental SFH real-estate ever.
Where do you get that from? Every accounting that I seem to be able to find says that CPP will be solvent for at least the next 75 years..
As for 'no-one to buy them' - 400,000 people per year are coming into Canada, and they all need somewhere to live, so I wouldn't hold your breath for a housing crash anytime soon...
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BigQ
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Re: Pensions and Inflation

Post by BigQ »

mmm...bacon wrote: Sun Apr 23, 2023 2:41 pm
BigQ wrote: Sun Apr 23, 2023 2:19 pm In an environment with 10% inflation, a retiree can expect to lose 50% of his or her purchasing power of their retirement benefits in 5 years.

CPI is more like CP-lie. The real number is much higher.

Think about all the boomers about to retire with a 50k/yr DB pension and a 1200/month CPP/OAS payout. Their DB pension is about to purchase the equivalent of 25000/yr in purchasing power, and the CPP and US Social security are both expected to run out of funds by 2030-2033.

In the next 5 years we will have an epidemic of homeless retirees and the housing market flooded with houses - and no-one to buy them.

If you are young, don't get into debt now, it will be the greatest purchasing opportunity of rental SFH real-estate ever.
Where do you get that from? Every accounting that I seem to be able to find says that CPP will be solvent for at least the next 75 years..
As for 'no-one to buy them' - 400,000 people per year are coming into Canada, and they all need somewhere to live, so I wouldn't hold your breath for a housing crash anytime soon...
https://thehill.com/business/3927807-so ... -analysis/

https://www.npr.org/2023/03/31/11673789 ... ams-budget

https://www.washingtonpost.com/business ... -projects/

https://ca.news.yahoo.com/social-securi ... 25572.html

https://www.foxbusiness.com/economy/soc ... y-expected


As for the "no-one to buy them part"...

It takes about 3 generations of immigrants to be fully integrated in their new economy, especially in ours where our highly-technical productive society does not easily recognize the skills acquired overseas ("how many doctors drive taxicabs in Toronto"). It is a process that takes time, it's not an "immediate integration and 6-figure salary" - especially with such a high ratio of the 400k coming as students. This makes the 400k/yr immigrants not contenders to immediately purchase a $500,000 condo or a $1.2mil house in Toronto, this makes them contenders for jobs that they are over-skilled for (read: underpaid)(read: limited means)(read: poor by "our" standards)(read: unable to buy a SFH in YVR YYZ YUL YYC),etc.

If the market of starter homes is overbought while the market for mid and high-price homes undersold, it will drag down the values on homes that people still hold a mortgage on in the last 5 years of their working lives. There are many of those people who have 75% of their total retirement funds locked into the value of their homes because they spent their lives upgrading their homes while buying 4% MER mutual funds in their group RRSPs. Those people are screwed.
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Re: Pensions and Inflation

Post by Bede »

BigQ wrote: Sun Apr 23, 2023 2:19 pm CPI is more like CP-lie. The real number is much higher.
Do you have a credible source for that?

Also, those sources noted above are for social security in the US. Do you have any reference for CPP in Canada?
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Re: Pensions and Inflation

Post by Arnie Pye »

Keep sitting on the sideline with cash in hand and I'll keep buying investment properties. 20 years from now, we will see who is further ahead.
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Re: Pensions and Inflation

Post by BigQ »

Bede wrote: Tue Apr 25, 2023 10:09 am
BigQ wrote: Sun Apr 23, 2023 2:19 pm CPI is more like CP-lie. The real number is much higher.
Do you have a credible source for that?

Also, those sources noted above are for social security in the US. Do you have any reference for CPP in Canada?
http://www.shadowstats.com/alternate_da ... ion-charts

Tl;dr:
CPI calculations have been altered in the 90s and again in the late 2010's to show lower CPI on paper. By the pre-1990's methodology, the CPI should be approx 3% higher than the current government reported rate. CPI calculations also do not include food and energy in their methodology, hence why both are up 30-40% in a year but the CPI made it up to only 8% - people don't buy as much consumer electronics and cars if they can't afford food, which skews the results towards a lower number.

CPP:
https://www.osfi-bsif.gc.ca/Eng/Docs/CPP30.pdf
page 23: The pension plan requires average real wage growth of 1% until 2095, and it's reliance on rates of return vs capital inflows will increase

https://www150.statcan.gc.ca/n1/en/pub/ ... t=5xMD-ia6
Real wage growth numbers show most real wage growth in the last 20 years came from those about to retire in 5-10

https://www.cbc.ca/news/business/bank-o ... -1.6750502
BoC Director Tiff Macklem says wage growth is biggest impediment to a lower inflation, will use higher rates to reduce it
https://ca.finance.yahoo.com/news/the-c ... 47799.html
Fed Chair Jerome Powell says he wants to have 3 million Americans lose their jobs so he can curb inflation

There is an existential inability for CPP solvency and inflation reduction to happen at the same time. The CPP had a loss in 2019 which was a year the SP500 increased by 32%. While the CPP looks strong and can claim "at least 75 years of solvency", the inflows assume a wage growth that will not be there in the coming years, if the BoC achieves it's target. No rate increase? Rampant inflation and destruction of the value of a CAD. Rate increase? No wage growth
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Re: Pensions and Inflation

Post by Bede »

Good post. Thanks.
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CanadaAir
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Re: Pensions and Inflation

Post by CanadaAir »

TalkingPie wrote: Sat Apr 22, 2023 10:08 pm
CanadaAir wrote: Sat Apr 22, 2023 9:11 pm The original post was a simplified example.
Indicating that inflation erodes buying power & difference between planning for a set pension amount 20 years in advance based on today's value.
Oh, ok. So just stating the obvious, then.

To try to squeeze some juice out of this thread for anyone new to pursuing financial independence, the Trinity Study is worth reading up on. There are arguments as to whether the conclusions they reached will continue to be accurate in the future, but based on past performance, the study concluded that if one were to save up a diversified investment that tracks the stock market, such that one could live off of 3-4% of that investment annually, it is highly unlikely to ever run out of money, even over a 30+ year timeline and even when adjusting cost of living to inflation. This gave rise to the so-called 4% rule, theoretically making it simple to know approximately how big a nest egg you need for retirement.

It follows from this that if you multiply your anticipated spending rate by 25 (or 33, if you use a more conservative 3% withdrawal rate), that's the number you should be striving to save for. For example, if you think you'll need $80,000 per year in your first year of retirement, you'll need about $2 million invested by the time you stop working.

There are lots of retirement calculators online. I like this one: https://networthify.com/calculator/earl ... awalRate=4

Or just get a job at a major airline with a defined benefit pension and buy as much house as the banks will let you. That seems to work out for a lot of guys.


Thanks for info.

Most pilots wont have defined benefit & aren't indexed.
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