International Welfare Spillovers of National Pension Schemes

By James and Olena Staveley-O’Carroll

http://d.repec.org/n?u=RePEc:hcx:wpaper:1903&r=dge

We employ a two-country overlapping-generations model to explore the international dimension of household portfolio choices induced by the asymmetric provision of government-run pensions. We study the resulting patterns of risk-sharing and the corresponding welfare effects on both home and foreign agents. Introducing the defined benefits pay-as-you-go system at home increases the welfare of all other agents at the expense of the home workers and improves the degree of intergenerational risk sharing abroad. Conversely, a defined contributions system leads to welfare losses of both home cohorts accompanied by gains abroad, but does increase the extent of intergenerational risk sharing at home.

This papers brings an interesting perspective the welfare analysis of pension schemes: they are excessively home-biased, and thus those who can overcompensate. This can leads to welfare losses. One avenue could be to get rid of that home bias, but good luck with making it happen.