Publication detail

European Pension Systems and the EU Enlargement

Author(s): doc. Ing. Ondřej Schneider MPhil., Ph.D.,
Type: IES Working Papers
Year: 2003
Number: 0
ISSN / ISBN:
Published in: Working Paper 26/2003, IES FSV UK
Publishing place: Prague
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Abstract: The paper analyzes the effects of the unification of public pension systems financed on the PAYG basis. It focuses on a potentially inefficient allocation of labour, which may be caused by allowing households to choose repeatedly between public pension systems. The model examines perfect and imperfect labour mobility cases. Under perfect labour mobility, it is possible to achieve both the inter-temporal and inter-regional efficient allocation of labour only if the level of social security payments is identical and fixed in time in all countries and if the population growth is the same in all of the countries. If we either allow countries to differ in their level of social security payments or, if we allow them to change this level in time, the only level of social security payments which satisfies the efficiency conditions is zero.
First, we argue that under perfect labour mobility, it is possible to achieve both the inter-temporal and inter-regional efficient allocation of labour only if the level of social security payments is identical and fixed in time in all countries and if the population growth is the same in all of the countries. If we allow countries to differ in their level of social security payments or, if we allow them to change this level in time, the only level of social security payments which satisfies the efficiency conditions is zero.
Second, we provn that if we assume that fertility rates are observable before households decide upon their relocation, then harmonisation of two PAYG systems is not a sufficient condition for the effective allocation of labour even in the case of imperfect labour mobility.Further, even if we relaxe our assumption of observable fertility rates, we show extreme complications with the harmonisation of different PAYG systems. If the countries in question experience very low population growths, it is impossible to merge their pensions systems without detrimental effects on the efficiency of labour. Third, we argue that labour mobility tends to limit the government's freedom to maintain an independent social security system without causing an inefficient allocation of labour.
The main result of our analysis can be summarised as follows: the higher the level of divergence of social protection in countries embarking on unification, the greater the possibility that the mere co-ordination of social policies will not secure an efficient allocation of labour. It has been shown that PAYG pension systems could avert labour from an efficient allocation.
A recommendation would be two-fold. First, creating one unified social security system over all member-countries can solve these problems. Another option is to give greater weight to the funded systems within individual countries, for these systems cause no problems for co-ordinating the social security systems. It is also probably the best response to the fiscal problems of all European social security systems that are under great strain due to the persistent ageing of the European population.
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