Crisis and Pension System Design in the EU: International Spillover Effects Via Factor Mobility and Trade
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Crisis and Pension System Design in the EU: International Spillover Effects Via Factor Mobility and Trade Igor Fedotenkov · Lex Meijdam
Published online: 20 April 2013 © Springer Science+Business Media New York 2013
Abstract Many European Union states have adjusted pension benefits or reformed the pension system in reaction to the recent economic crisis, while other member states have postponed this type of adjustments. In this paper we study to what extent countries that responded quickly to the crisis are harmed by the lingering in other member states via international spillover effects caused by factor mobility and trade. We show that this depends crucially on the degree of labour mobility in the short run. In fact, countries with more flexible pensions can benefit from the inflexibility of pensions in other countries if they can temporarily limit immigration. Keywords
Crisis · Spillovers · Social security · International trade · Factor mobility
1 Introduction The world economic crisis has affected all countries in the European Union (EU). As the response to the crisis is not coordinated in the EU, member states reacted differently. Some countries responded swiftly by reducing pension benefits. For example, in Lithuania the pensions were reduced using “solidarity withholdings”, a similar pension cut took place in Latvia. In Germany pensions are linked to last year’s wage rates, so the pensions should be automatically reduced with a one year delay when wages decrease. However, this was not the case. The German government changed
I. Fedotenkov (B) Department of Economics, Verona University, Via dell’Artigliere 19, 37129 Verona, Italy e-mail: [email protected] L. Meijdam Department of Economics, CentER, and Netspar, Tilburg University, PO Box 90153, 5000 LE Tilburg, The Netherlands e-mail: [email protected]
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the formula for pension adjustments in such a way that pensions have not decreased during the crisis, but, in a future period with higher economic growth pension benefits will increase at a slower rate. Several other countries even increased pension benefits. Greece and the UK, for example, have initially increased old-age payments as a part of an economic stimulus package and Norway and Ireland used public pension reserves for crisis mitigation. Such a policy mitigates the effect of the crisis for the currently retired, but shifts part of the burden to the current young and future generations. Within the EU, restrictions on the mobility of production factors and goods across borders have been removed. This increasing openness also implies that countries have become more sensitive to developments in other countries. It is therefore likely that differences in the reactions to the crisis lead to international spillover effects. That is, the recovery path in countries that respond quickly to a crisis is affected by the postponed policy reaction in other countries, and vice versa. An interesting question is how the various responses to the crisis affect the economies i
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