Coordination of Pension Systems When Technologies are Different

This article presents a simple condition for optimal coordination of social security policies in the union of two open economies employing different production functions and within which capital and labour are fully mobile. We find that if both countries run fully funded pension schemes, the allocation of mobile production factors may not be optimal when the countries have different technologies. To remove this distortion, at least one country must run a pay-as-you-go pension scheme. Policy coordination which takes technological differences into account allows for the removal of static inefficiencies, maximizing the welfare of the agents in the steady state.