Crisis and Pension System Design in the EU: Intergenerational Redistribution and International Spillover Effects Via Factor Mobility

Many EU states have adjusted pension benefits or reformed the pension system in reaction to the recent economic crisis, while other member states have postponed this type of adjustments. In this paper we analyse the welfare effects of these different reactions to the crisis in an economic union. We show that flexible pension schemes spread the burden of the crisis more evenly over various generations. As production factors are mobile within an economic union, differences in pension adjustments lead to international spillover effects. In particular, countries that respond quickly to the crisis may be harmed by the lingering in other member states. We show that the extent to which this is the case depends crucially on the degree of labour mobility in the short run.