The political economy of pension systems with low‑skilled labor mobility: a crossss‑country analysis

Abstract

This paper analyzes the impact of international low‑skilled labor mobility on the majority support for a pension system in individual countries and on the welfare of the different agents. The two countries considered differ in the amount of redistribution from the high to the low‑skilled population embedded in their pay‑as‑you‑go social security systems, whose size (tax rate) is decided by majority voting, anticipating the impact on mobility. We show that labor mobility can create the conditions for a majority to favor pensions in a Bismarckian country, due to the ageing of the population caused by the departure of the young mobile. In a Beveridgean country, mobility does not necessarily undermine the support for the system, but may make the conditions for its existence more stringent, even if no individual migrates in equilibrium. Finally, we show that while labor mobility is always politically sustainable in the non‑redistributive country, its political feasibility is at stake in the country performing income redistribution through the pension system whenever the interest rate is not sufficiently large.