The Retirement Prospects of Immigrants: Getting Worse? Presentation to PMC Winnipeg Node Meeting September 29, 2009 Derek Hum Wayne Simpson

Canada’s Demographic Setting Aging Population Structure Low Fertility Rates Slow Labour Force Growth

Canada relies on Immigrants Population Growth Labour Force Growth Productivity

Public Pensions in Canada Pay As You Go (Entitled/Workers ratio) Success will depend upon: – Productivity – Labour Force Growth Plus – Immigration Levels – Immigrant Economic Performance

Pressures on Public Pensions Increase in ratio of Entitled/Workers Maintain Benefit Levels Maintain Stable Premiums Permit Flexible Retirement Options Permit Flexible Retirement Date

CPP Benefits related to: Individuals’ Work History Life time Earnings Program applies to all Workers --- Native Born and Immigrants

Economic Integration of Immigrants Do immigrant wages and earnings converge to their Canadian native born counterparts, quickly and completely? If so, retirement prospects of immigrant are similar to those of other Canadians?

Two Aspects of Convergence Entry Effect (Typically Negative) Assimilation Effect (Historically Positive)

Negative entry effect Immigrants suffer initial disadvantage upon entry to Canada (language, adjustment difficulties, lack of knowledge about labour markets, human capital and social network deficiencies Immigrants often assumed to possess superior motivation and industry

Assimilation effect (Convergence) over time, difficulties are overcome, and with superiour motivation and effort, typically “catch up” to native born. (convergence) In the past, immigrants typically became more “successful” than native born vis a vis earnings

Immigrant Integration (Past)

Immigrant Integration (Present)

Recent Experience of Immigrants Immigrant Earnings have not converged as quickly Some estimates indicate growing negative entry effect Some estimates suggest immigrants will never catch up in their lifetime

Summarizing: Past and Present Past cohorts experienced small negative entry effects, fast assimilation and rapid convergence (even overtaking native born economic performance) Present cohorts face: large (and growing) negative entry effects, slow and slowing assimilation, and Many immigrants will not experience convergence over their working lifetime.

Why Integration has slowed 1/3 decline attributed to source region Declining returns to foreign experience/ schooling for immigrants from “non- traditional” source countries more important Unemployment effect, especially for immigrants

Convergence and Retirement Question: Will immigrants achieve earning patterns similar to comparable native born workers? If so, retirement prospects of immigrants will be similar to native born Canadians. If not, immigrants will experience lower pensions, higher poverty, lower well being.

Immigrant Earnings Profiles Typically measured using Census PUMFs, Cross-sectional PUMFs “blended” to produce “quasi-panel” estimates of immigrant and native born earnings over time Correct for “across cohort” bias in cross- sectional comparisons to obtain (1) “Entry effect/gap” and (2) “Within cohort” estimates of 5-year growth rates in earnings

Quasi-Panel Estimates of Immigrant Earnings Profiles (Entry and Growth)

Correct for “cohort bias” arising from “declining cohort quality” of immigrants over time (rising entry effects) Choose an appropriate native born comparison/control group that “looks like” the foreign born group – 20% Random sample of nb? (Baker&Benjamin, 1994; Grant, 1999; Frenette&Morissette, 2003)

Comparison/control group of native born: 20% Random sample of nb? Match recent immigrants to nb labour market entrants (young adults) (Green&Worswick, 2003; Frenette&Morissette, 2003) Statistical match of the fb sample with the nb sample (nearest neighbour or kernel matching): matching estimator is mean earnings difference between matched samples

Quasi-Panel Estimates of FB Earnings Profiles with Random and Matched NB Samples (B&B Specification)

Summary of Results: Similar results for B&B and F&M specifications Entry effects are larger with matched NB sample but pattern otherwise similar to random NB sample Within-cohort growth of earnings substantial and may imply eventual parity/integration Projections of the immigrant integration profile are unreliable

Implications for Pensionable Earnings or the “Pension Gap” What are the implications of the gap between fb and nb earnings for private pensions, CPP/QPP? What “pot of money” at entry would represent the gap faced by an immigrant cohort during a work career of 25 years? Can calculate for earlier cohorts, e.g , and estimate for later cohorts based on “eyeball” estimates of integration profiles

Table 1. Estimated Pension Gaps as Percentage of Native Born

The Pension Gap in the Survey of Labour and Income Dynamics (work in progress) SLID 2002 Public File provides tax record information for RPP contributions and private pension income by immigration status, age, and sex Is there a difference in RPP contributions for fb and nb men who are not retired? Is there a difference in private pension income for fb and nb men who have retired (older immigrant cohorts)?

Conclusions Immigrants to Canada continue to do worse in terms of entry earnings relative to nb Gap in pension incomes between fb and nb men will likely rise SLID analysis of pension contributions and incomes (to come)