Competition between Unfunded Systems: A European Union challenge

Most European countries have set up a mandatory unfunded pension scheme, often called first pillar, financed through contributions levied on wages. Although this common characteristic is crucial, the systems significantly differ in many aspects. Most importantly they differ in the level of the contribution rate and in the benefit rule that determines the redistribution performed by the system, ranging from ”Bismarckian” system to ”Beveridgean” one. Currently the minimal contributing period necessary to give pension rights is long, thereby limiting the ”portability” of the systems. This limitation constitutes a barrier to workers’mobility, which may slow down labor integration, a major objective of the European Union. There are various ways to diminish the impact of such barriers. One is harmonization. Given the current differences in the systems and the problems of transition, agreement on a common system or even on steps toward convergence can only be slow. Another somewhat indirect but potentially powerful way to influence social security systems is ”free choice”. By free choice, I mean to let any EU citizen to choose the system of any EU country without moving. Owing to the differences in the social security taxes and the benefit rules, free choice could trigger a drastic change in the allocation of individuals between the various systems.Would all systems survive ? What would be the impact on efficiency, redistribution, and ultimately on citizens welfare ? This paper aims to discuss these questions.