The Harmonization of Public Pension Schemes: Perfect and Imperfect Labour Mobility Cases

Abstract

The paper shows that adding social security based on a pay-as-you-go principle (PAYG) prevents countries from successfully harmonizing their individual social security systems. As claimed in the paper, the PAYG systems are extremely complicated to harmonize when the labour force is mobile among jurisdictions. PAYG systems' revenues depend not only on the level of taxes but also on fertility rates and migration flows. In the paper we argue that if agents take into account differences in fertility rates across different countries they may exacerbate the gap in the population growth rates between the individual countries by migration, and thereby cause the PAYG system to collapse in some countries.The paper shows that even if we relax the assumption of perfect labour mobility, some of the problems countries face during their attempts to harmonize their PAYG based social security systems have no evident solution. We claim that the higher the mobility, the less scope there is left for a government to pursue an independent social policy. In addition, the higher the share of funded social security, the less complications arise from harmonization.