Your pension is going up but not by 3.8 per cent

Article published 4 August 2021

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THE rate of inflation for the twelve months to the June 2021 quarter was 3.8 per cent. At the end of March 2021, this rate was 1.1 per cent.

Inflation rates affect everybody but retired people especially. Higher inflation means two things for retirees: higher term deposit rates and higher pension increases.

The fly in the ointment is that inflation needs to be higher all the time for term deposit rates to go up and stay up.

Term deposit rates are linked to the cash rate set by the Reserve Bank. The Reserve Bank uses the cash rate to control the rate of inflation, putting the cash rate down if inflation is too low and up if it is too high.

But this inflation increase of 3.8 per cent in the June quarter will carry through into the pension when it gets indexed in September

Unfortunately, it doesn’t mean your pension is going up by 3.8 per cent.

The inflation increase during the two quarters relevant to pension indexation was 1.4 per cent. The Cost of Living Index increased by even more: 1.6 per cent, so it is what will be used in the September indexation.

The pension indexation increase will therefore be higher than what we have become used to. But it’s important to remember indexation increases are designed to cover higher living expenses. They protect the purchasing power of the pension, they don’t deliver real pension increases.

Also, the Reserve Bank has dubbed the June quarter inflation number a spike. In other words, the big increase was a one-off. The bank is therefore not touching the cash rate.

That means term deposit rates won’t move up just yet and pension increases after the next one in September won’t be very much

That is, if the Reserve Bank is right.


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