Guaranteed Income Supplement (GIS) Status Amongst the Retired Population – An Analysis of the Incidence and the Dynamics

1. Guaranteed Income Supplement (GIS) Status Amongst the Retired Population – An Analysis of the Incidence and the Dynamics Ross Finnie David Gray University of Ottawa Yan Zhang September 2011

2. We gratefully acknowledge the generous financial assistance provided by the Canadian Labour Market and Skills Research Network and Human Resources and Skills Development Canada. We have benefitted from suggestions from Tammy Schirle, Kevin Milligan, and Alex Grey

3. Homage to Charlie!

4. Policy context • The head of the baby-boom is retiring… • …into a hodge-podge of public and private pension schemes • Both types are under financial duress • Nonetheless, official poverty rates among senior citizens are relatively low • We are most concerned with adequacy of resources of retirees

5. GIS program • Last layer of the social safety net for senior citizens • Demogrant • Totally means-tested • Sharp clawback mechanism, giving rise to strong work disincentives • Benefits are modest, but overall expenditures high • $ 652 / month for singles, $ 862 / month for couples • $ 6.8 billion in 2006

6. GIS program (cont.) • Given the requirement to renew annually and the very strict means testing, one can expect transitions across the threshold of eligibility

7. Outcomes of interest • Receipt of GIS benefit during a calendar year • Dynamics of GIS receipt • Transitions into GIS receipt status after the youngest age of eligibility • late retirement • Exhaustion of savings • Loss of spouse • Transitions out of GIS receipt status (not nearly as common) • Re-entry into the labour force • Pension fund withdrawals • Gain of spouse

8. Objectives • Calculate descriptive statistics pertaining to the dynamics • Incidence of GIS • Descriptive analysis with cross-tabs • Multi-variate models • Include proxies of retrospective permanent income received at peak of earnings profile

9. Key role for permanent income • To the extent that workers are able and willing to save for retirement, measures of permanent income during their working lives should have high explanatory power • Ideal policy scenario • Most of those relying on GIS in retirement would have been low-income workers

10. Potential influences other than permanent income • Failure to save adequately for retirement • Myopia • low financial literacy • Subjective rate of time preference • Bad luck and/or flawed investment strategy • Negative shocks to earnings in final third of career • Disability • Divorce / death of spouse • Family responsibilities (undue expenses)

11. antecedents • Abbott et al. (2008) • policy issues surrounding retirement • especially adequacy of old-age benefits • Milligan (2005), Milligan and Schirle (2008), Baker et al. (2003) • focus on labour market disincentives for the public pension schemes • Luong (2009) and Poon (2005) • deal with take-up and application rates for GIS

12. Antecedents (cont.) • Uppal et al. (2009) is closest to our work • “Pathways into the GIS” • Investigate incidence of GIS receipt and its determinants • They include proxies for permanent income and changes in income leading up to retirement • We model receipt at annual frequency with repeated observations • We include certain contemporaneous traits

13. Data • Longitudinal administrative data base (LAD) 20 % file • until 2008 • GIS receipt reported at individual level…. • …but entitlement determined at couple level • Precise record is ‘net federal supplements – GIS or spouse’s allowance’ • Not reported separately before 1992 • we can observe incomes back to 1982 • Certain reporting lags exist • receipt for 65-year olds might not be well measured • Structure of the cohorts for regression analysis

15. Empirical approach for incidence • Follow from age 65 • Unit of observation is person-year • Follow some subjects well into their 80s • Binary dependent variable • LPM and logit specification • Avoid including regressors that are highly correlated with contemporaneous measures of income • would generate mechanical, tautological effects

16. Empirical approach for incidence (cont.) • Seek proxy for permanent income that is not highly correlated with current income • Market Income when 50-52 years old • 13 years removed from the minimum age of eligibility of 65 years, • Even longer elapsed time period for older subjects

17. Empirical approach for incidence (cont.) • Regressors divided into thee types • Year effects • Demographics • Cohort year • Age • Gender crossed with marital status • Province • SMA size • Residency status (binary) • Immigrant status (how long in Canada?)

18. Empirical approach for incidence (cont.) • income-related variables at age 50-52 • Market income • Flags for • EI receipt • self-employment status • RRSP contributions • RRP contributions • union membership

19. Descriptive analysis of incidence • Based on 27 cohorts • defined by calendar year in which the individual turns 65 (1982-2008) • Figure 1 shows incidence rate by calendar year for 67-year olds • for all cohorts pooled together • Snapshot: 34 % in 1992, 30.5 % in 2006 • No evidence that outreach program launched in 2002 had the expected impact

20. Within full scale there is not a large change

21. Magnifying there is an uneven downward trend since early 1990s

22. Descriptive analysis of incidence (cont.) • Figure 2 shows the incidence rate as a fraction of the cohort that becomes age eligible • All cohorts pooled together • What happens to these cohorts as they age beyond 65 years old? • Incidence rate rises • Implying that entries dominate exits

23. Incidence rises monotonically with age(all cohorts combined)

24. Same figure rescaled

25. Descriptive analysis of incidence (cont.) • Figure 3 shows these incidence profiles for selected cohorts • They tend to rise with age

26. Rising incidence with age within earlier cohorts

27. Rising incidence with age within later cohorts

28. Results from multi-variate analysis • Reference category has following attributes • Single male • Native Canadian • Ontario • Resident of Canada • Speaker of majority language • ASR > 500,000 • Permanent income 30-40 K

29. Results from multi-variate analysis (cont.) • Not previously self-employed • Not previously on EI • Not previously unionized • Not previously contributed to RRP • Not previously contributed to RRSP • Constant term = about 0.39 • Selected results shown as deviations

30. Results from multi-variate analysis (cont.) • R-bar2 = 0.265 • there is thus a huge wedge between permanent income and contemporaneous income upon which entitlement for GIS is based • Diagrams show incidence: • Including only the demographics as controls • Including both the demographics and income-related variables • All specifications include age, cohort, and (age * cohort) indicators

31. East-West divide very clear – Nfld. has the highest rate

32. Immigrants much more likely to claim

33. Having a partner matters much more than gender

34. Negative, monotonic effect of permanent income

35. Effect of self-employment negative;RSPs and RRSPs not substitutes

36. Other multi-variate findings • Non-residents of Canada unlikely to claim • Recent immigrants to Canada unlikely to claim • Area size of residence – mostly monotonic pattern • Incidence decreases with density • Role of population density important for EI as well

37. Dynamics • Follow all subjects for five-year period between the ages of 66-70 years • Calculate relative frequencies for discrete distribution of 0,1,2,3, or 5 years of receipt • 71.3 % of beneficiaries persistent • Over interval from 66-70 years of age, 4 or 5 years of receipt out of potentially 5 years • 28.7 % are intermittent, so dynamics cannot be ignored

38. Only 42 % never receive benefits; those who do tend to be persistent

39. Among those entering at age 66, over 80 % of them claim every year

40. Dynamics (cont.) • Cross-tabulated results • Same empirical patterns as the case for receipt during any given single year • Any factor that raised the likelihood of that outcome also applied to the outcome of persistent use

41. Conclusions • Rough approximation of incidence rate: 1 in 3 • Little evidence of administrative anomalies • Having a partner has strong negative impact on receipt • matters much more than gender • No evidence that outreach program of 2002 had expected impact • Incidence tends to rise monotonically with age • Entries outweigh exits

42. Conclusions (cont.) • Mild downward time trend over cohorts • east-west divide amongst incidence rates very sharp • Not unlike EI and CPPD • immigrants more likely to claim • Provided that they have met the residency requirements

43. Conclusions (cont.) • Proxy for permanent income explains only a minor proportion of the variation • Further research warranted into whether: • Individuals who could save for retirement are not • Negative shocks during the final third of the career are frequent • Certainly has the right sign • Next stage is to estimate hazard models of entries into and exits from the GIS regime