PENSION FUNDING IN A UNIONIZED ECONOMY

This paper analyzes the effects of pension funding for a small open economy in which wages are subject to bargaining. Using an overlapping‐generations framework, we show that a reform away from a Pay‐As‐You‐Go towards a funded pension system will be Pareto improving only if the reform results in a reduction in the steady‐state unemployment rate. However, the reduction in the unemployment rate is by no means warranted: although for pension systems which involve a limited amount of intra‐generational redistribution this is likely, for systems displaying a high degree of intra‐generational redistribution the unemployment rate may well rise thus preventing the realization of welfare gains.