The age profile of European society is rising, and labour mobility is increasing within the context of European economic integration. These two facts form the base of Discussion Paper No. 1022, in which Research Fellow Jürgen von Hagen and Uwe Walz analyse the implications for European social security systems.

If social security systems are organized on a national basis, as they currently are, migration provides the younger generation with an option to escape excessive taxation by moving to a country with lower social security tax rates. The potential migration equilibria are found to be indeterminate, however. This implies that social security systems can survive for long periods of time even in the presence of strong incentives for migration. Once the uncertainty about the equilibrium is resolved, migration occurs in large, disruptive flows. Of course, once migration does take place, it is too late for reform.

The model shows that there is an incentive for pensioners to tie their pensions to a level that prevents the younger generation from migrating. The existence of an equilibrium depends crucially on the choice between retirement incomes or tax rates as policy parameters. Coordinating social security policies of national systems among European countries is viable only when retirement incomes are chosen as policy parameters. The benefits from coordination are thus limited and coordination is unlikely to yield efficient outcomes.

Social Security and Migration in an Ageing Europe
Jürgen von Hagen and Uwe Walz

Discussion Paper No. 1022, September 1994 (HR/IM)