Coordination of Pension Systems if Technologies are Di fferent

This paper presents a simple condition for optimal coordination of social security policies in case where countries employ different production functions and capital and labour are fully mobile. We find that if both countries run fully funded pension schemes, an allocation of labour and capital is not optimal when output elasticities of capital in the countries are different. In order to remove static distortions, at least one country must run a pay-as-you-go (PAYG) pension scheme. Policy coordination, which takes technological differences into account, allows for the removal of static inefficiencies, maximizing total production in the union