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Did you know that your Canada Pension Plan (CPP) benefits increase slightly every year? Or at least, most years. The CPP payout is indexed to inflation, meaning that the more the cost of living goes up, the more your CPP goes up. The increases are generally incremental, but in years of elevated inflation, they can be large enough to be noticeable.
That’s significant because, ever since the beginning of 2022, inflation across Canada and the Western world has been elevated. In 2022, both Canada and the U.S. experienced inflation rates that approached double digits. Inflation has come down since then. However, the 2.5% year-over-year increase observed in the last month for which we have data, was still substantial.
The recent, elevated levels of inflation have bearing on how much CPP you will get next year. In this article, I will explore how much your CPP is likely to increase next year due to this year’s increase in the CPI.
How the cost-of-living adjustment is calculated
The CPP cost-of-living adjustment is calculated based on the prior year’s inflation rate. “Inflation” here means the percentage increase in the Consumer Price Index (CPI) from November two years ago, to October last year. This fact creates some confusion because the “year” here is not a standard calendar year, nor is it the Federal Government’s fiscal year (April 1 to March 31).
The reason Statistics Canada uses November 1 to October 31 for calculating the CPI increase is because data sometimes has to be revised. So, the agency needs to use an “early” period in order to publish the data in a timely fashion. Once the StatsCan report is live, the CPP Board can calculate the inflation adjustment.
How much you’ll get in 2025
We still don’t have all the CPI data for the November 2023 to October 2024 period, so we can’t say with certainty how much CPP payments will go up in 2025. However, inflation over the last 10 months accounted for 83% of the total inflation for the period that will eventually be reported, and averaged about 3%. So, it’s likely that CPP payments will go up 3% next year, unless there is an unexpectedly large change in the CPP in September and October.
Investing to supplement your CPP
The above discussion about CPP cost-of-living adjustments goes to show how volatile the CPP can be. Payouts are always changing, and while they usually go up, they can go down in times of deflation. This is one reason why it’s good to supplement your CPP income with stocks and ETFs – ideally held in an RRSP or TFSA.
Consider Brookfield Asset Management (TSX:BAM), for example. It’s one of Canada’s oldest companies, an asset manager whose history dates all the way back to the 1800s. It got a breath of new life when Bruce Flatt took over as CEO in 2022. His aggressive leadership style propelled the company to 16% compounded annual (CAGR) growth, better than the S&P 500 and even Berkshire Hathaway in the 2002–2014 period!
How has Brookfield Asset Management done so well?
First off, it’s an asset manager with a low-asset/low-debt business model, which helps it achieve high margins.
Second, the company has a great reputation, having been held or praised by finance luminaries as diverse as Bill Ackman, Mohnish Pabrai, Chuck Akre, and Howard Marks.
Third and finally, the company is part of the broader Brookfield Ecosystem, which provides it with excellent research and support.
None of this praise is meant to say that you should just invest all your money in BAM and call it a day. In investing, diversification is key. On the whole, though, I’d say that BAM stock merits a place in a diversified portfolio. The dividends it pays are substantial.
