NB Financial Innovation
A Demographic Time Bomb: The Urgent Need to Prepare Undocumented Hispanic Immigrants for Retirement
Editor’s note: This post is part of NextBillion’s ongoing look at domestic financial innovation for low-income people. Find other articles on the subject here.
The United States is home to some 11.3 million undocumented immigrants, according to Pew Research Center estimates. Three of every four of these are Latin American. This number stabilized and even dropped in the economic turmoil in the aftermath of the 2008 financial crisis – in fact, since the Great Recession ended, more Mexican immigrants have returned to Mexico from the U.S. than have migrated here.
Fewer new arrivals mean that those immigrants who remain are aging and more likely to be long-term residents. The median length of time that unauthorized immigrants have lived in the U.S. is now nearly 13 years, up from less than eight years a decade earlier. Among unauthorized adults, 62 percent in 2012 had lived in the U.S. for a decade or more, compared with 35 percent in 2000.
With longer tenures, many of these immigrants started families in the U.S. and now live with their U.S.-born children. As they age, questions regarding the place and resources to retire have started to surface. Many of them hope to retire in their home countries one day – and many others look forward to living the rest of their lives in the U.S. But both of these groups have something in common: They are woefully underprepared for the financial burdens of retirement.
A hidden crisis in the making
To gain an insight on how immigrants are preparing for their retirement years, in 2013 Hispanic Wealth conducted a survey among more than 4,000 Mexican authorized and unauthorized immigrants to the U.S. More than half (55 percent) of respondents expressed their desire to go back and retire in Mexico, implying that at least six million Mexicans would return to their country during the course of the next three decades. This is the equivalent of the entire population of the state of Puebla, the sixth largest state in Mexico. The finding also implies that about five million will stay and retire in the U.S., which is equivalent to the entire population of Colorado.
Those returning and those staying will likely have a reduced working capacity, scarce assets and increasing needs for medical care. By and large, those returning will not qualify for Mexican Social Security benefits, having spent their working years generating income abroad. And many of those staying will not qualify for Social Security benefits in the U.S., many of them having paid into a system from which they’re unable to claim benefits. Yet the Hispanic Wealth survey also showed that five out of ten Mexicans surveyed expect to collect a pension in the U.S. from the Social Security Administration (SSA), while only one in ten seemed to have the conditions that would entitle them to receive one. These immigrants seem destined to fall through the cracks between the safety net systems of both countries. What’s more, many are not physiologically or culturally prepared for retirement, and the implications to them, to their families and to society are severe. In reality there is no safety net for millions of immigrants.
Even so, I’m optimistic – because helping them is not only possible, it also makes economic sense.
Homes vs. 401(k)s
Let’s start by acknowledging that most Hispanic immigrants come to the U.S. from countries with capital markets that are less developed than those in the U.S. The first implication of this is that the model for wealth accumulation for immigrants observed back home excludes the use of financial markets, but is concentrated in the use of property. A second implication is that the model for financial education for immigrants needs to include a change in beliefs about the benefits, uses and impacts of financial markets, in order to help them incorporate themselves into American society.
It should be no surprise then that the recession hit Hispanic families incredibly hard. Lending abuses that were the primary cause of the housing crisis were concentrated in the Latino community. In 2010 the National Council of La Raza warned us about the potential impact of the recession: “The worst may be yet to come; it is estimated that more than 1.3 million Latino families will lose their homes to foreclosure between 2009 and 2012. The loss of a home is traumatic for most American families, but it can be particularly devastating for Latino families. For those Latinos who are homeowners, their house represents two-thirds of their household wealth.”
Unfortunately, in a 2014 report, the Pew Research center confirmed that the median wealth of Hispanic families had still not fully recovered from the crisis. From 2010 to 2013 the wealth of Hispanics decreased 14.3 percent while for non-Hispanic Whites median wealth increased by 2.4 percent. Pew provided one explanation for this: “Given that a much higher share of whites than blacks or Hispanics own stocks— as well as mutual funds and 401(k) or individual retirement accounts (IRAs)—the stock market rebound since 2009 is likely to have benefited white households more than minority households.”
Considering the likelihood that Hispanics would have a retirement account, the Center for Retirement Research at Boston College concluded that “African Americans and Hispanics are less likely to have the kinds of jobs in which participation in a 401(k) plan is possible; they are less likely to have the earnings, job tenure, and other factors that would cause them to participate in a plan; and, once in a plan, they are less likely to have the taste for saving that would result in a high contribution rate.”
Meanwhile, the false expectation of receiving a Social Security pension is making many Hispanic immigrants place undue trust in a coverage to which they are not entitled. Laws enacted in 1996 and 2004 make Social Security benefits unavailable to unauthorized immigrants residing in the U.S., even though (contrary to popular belief) many of them do pay the Social Security tax.
Will information lead to action?
This problem is hiding in plain sight, and the consequences of not acting to facilitate the retirement saving needs of immigrants are easy to anticipate: millions destitute both in the U.S. and their countries of origin, and undue strain on their families to support them, which could impact the social mobility of the U.S.-born second generation.
So why is it that as a society we avoid the conflict and don’t do anything about it? One possible reason is the complexity that a comprehensive solution would imply. A Social Security model based on a demographic pyramid in a country like the U.S., where the native-born population reproducing at below replacement rates, requires immigration to support the base. In such a system there is an implicit social contract between the current generation paying for the benefits of past generations, under the expectation that future generations will be funding their benefits. New immigrants, with their higher birth rates, play an important part in this equation. So ideally countries would institute a mechanism to fund everyone’s pension, rather than solving the retirement problem of one country by creating a funding problem in another.
Hispanics understand this reality well. Many people in Latin America provide financial support for their aging parents and expect the support from their kids when they grow old. But Hispanic immigrants, as acculturation advances after a few years, start to think differently. Many fulfill their filial obligation by sending money to their parents, yet they do not want to be a burden to their kids. Despite the fact that the current social contract extends to both past and future generations, the immigrant’s dilemma is how to help their parents while making the dreams of their children come true. Carrying the financial weight of their parents during old age will be an impediment in realizing the American dream of their children, and many immigrants know it. They don’t want to be the reason why those dreams are shattered.
A reason for optimism
There are a number of innovative programs and enterprises working to address the financial needs of Hispanics. But any programs that hope to take on the retirement savings crisis must speak directly to the undocumented immigrant community’s needs. Being an immigrant implies many sacrifices, and for the most part, those sacrifices are motivated by improving the conditions of their families. Educating Hispanic immigrants about retirement is not about teaching them finances, or discussing with them the Protestant ethics of hard work and frugality, but about telling a story that resonates with their culture. The story needs to show how they can fulfill their long-term immigrant projects of protecting their family and growing their wealth. It needs to point toward an end game to the immigrant’s quest, letting them visualize the steps to this goal, and providing the guidance and tools they need to complete the journey. The tools and mechanisms exist in the market, where organizations and enterprises are offering products ranging from formalized lending circles to innovative tools to boost financial product usage among Hispanics. But by and large, mainstream products and programs are still rarely designed for undocumented immigrants, or offered to this group, despite the fact that these immigrants can legally open bank accounts.
This represents a missed opportunity. Remittances to Latin America set new highs in 2014 when they exceeded $65 billion, according to the Inter-American Development Bank. After analyzing the expenditure patterns of those families receiving remittances, USAID officials estimate that between 15 and 30 percent of remittances are earmarked for long-term capital formation and asset building. That would equate to between $10 and $20 billion set aside annually for old age – an attractive potential market for financial services providers.
The challenge in providing private-sector solutions lies in reaching the appropriate level of scale. To that end, three trends could play an important role: the advent of online education, low-cost exchange traded funds, and robo-advisors. A combination of these tools could allow providers to create products and services that entice immigrants to save, and that offer the diversification, easy access and low-cost of both investments and administration that’s needed to reach undocumented immigrants with products that safeguard their retirement. But the secret sauce in this concoction is making the experience culturally-relevant.
Beyond that, for those who will not have the time to accumulate wealth, or do not have strong family networks to support them, charity or public policy will also be needed. The Hispanic retirement time bomb can still be defused if the public and private sectors recognize the crisis – and the significant opportunity it represents.
Manuel Carvallo is President at Hispanic Wealth, LLC.