Government pensions (aged, comsuper, dfrdb etc), and some commercial annuity products, are generally indexed to inflation. How this is calculated is anybodies guess (only kidding :-P). For government aged pensions its calculation is thus. There’s a bit of history of pensions indexation here
The rough version is it is calculated for each January and July retrospectively (e.g. in January the increase is base on the CPI figures from the previous September and March).
When you’re figuring out your ‘how much do I need to retire’ numbers I think it’s useful to have an idea of average indexation amounts, thus you can make some guesstimate calculations of likely increases over, say, the next 5 or 10 years and see if your numbers still ‘stack up’.
So below is the indexation numbers for the past 30 odd years. Most interesting are:
- The green line which shows indexation amounts per year. As you’d expect this is a bit ‘bumpy’ with inflation rising and falling on a yearly basis. Interesting to note the smallest increase in the last, say, 10 years has been 1%, and the corresponding largest 3%.
- The red line is a simple moving average (SMA) of the green line over the previous 10 years and provides a useful ‘trend’ indication. It’s no surprise CPI has been falling over the last decade. But the trend also shows that for the time being 2% annually is still a fair figure to use as a guide for pension increases over the next 5 years. After that, on trend, I guess one would expect that figure to fall toward 1.5%