The spillover effects of pension reform with labour and capital mobility

This paper studies the spillover eects of pension reform in a a two-country two-overlapping-generations model with capital and labour mobility. A stable equilibrium is achieved assuming the presence of an immobile production factor.The long-run effects of pension reform are derived analytically, and the short run dynamics is simulated. It is shown that in general, without international redistribution, benefits and losses caused by a switch from a PAYG to a more funded pension scheme in one country are shared by the neighbouring country.Introducing a central government in the union, which redistributes benefits and losses of the reform both intergenerationally and internationally allows for a globally welfare improving reform if countries a asymmetric, i.e., when the size of the PAYG scheme in one country is larger than in the other.