The political economy of pension systems under free labor mobility

This paper analyzes the impact of labor mobility on old-age pension systems. We develop a dynamic model, in a OLG setting, with national pay-as-you-go (PAYG) social security systems and two types of workers. The countries may differ in their Bismarckian or Beveridgean nature, i.e., the intragenerational redistribution level. The native population chooses a tax rate to finance the PAYG system by majority voting. After the voting decision has taken place, the low- skilled may migrate. Pensions are paid by the country where one works in the first period of life. We characterize the outcome of the voting game and show under which conditions (one or two) social security systems arise in equilibrium. The low-skilled always migrate from the less to the more intragenerational redistributive country. We analyze the welfare implications of mobility and show that the mobile population may loose, and the immobile may gain, from mobility. Finally, we show that the political equilibrium is generally inefficient