1. Banyár József Dr. Banyár József 19. September, 2014.
Consequences of cross-border human capital transfers on national PAYG systems
Dr. Banyár József
19. September, 2014.
Consequences of cross-border human capital...

2. Pension systems had by EU member countries
Banyár József
Pension systems had by EU member countries
In the EU, the most typical national pension system is pay-as-you-go (PAYG) type
Exceptions: only Denmark, Ireland and the Netherlands
Philosophy: a social contract amongst generations
Consequences of cross-border human capital...

3. Implicit assumptions behind PAYG systems
Banyár József
Implicit assumptions behind PAYG systems
Important ones from our theme’s perspective:
There are always enough children – the population is continuously increasing
Closed economy: everybody will be a contribution payer and a pensioner when he/she has grown up/finishes work
None of these is true any more - and it is causing problems.
Consequences of cross-border human capital...

4. There are always enough children
Banyár József
There are always enough children
Previously, this seemed self-evident because:
Living within a family was the rule, and living alone (not as a widow) was rare
There was no contraception (or it was extremely hard to get, dangerous and even illegal)
There was no PAYG pension system. This proved an incentive to persons’ having children
Consequences of cross-border human capital...

5. The PAYG system as a reverse incentive
Banyár József
The PAYG system as a reverse incentive
The PAYG system ”nationalized” children, or rather the economic gains they enabled = their ability to make contributions (after childhood)
While distributing these gains amongst the pension-age generation (who had ”produced” the contribution payers), the costs of ”producing” children was disregarded - these costs remained as (mainly) private ones →
→ There is a quite high incentive not to have/raise children
Consequences of cross-border human capital...

6. Source: Eurostat Banyár József
Consequences of cross-border human capital...

7. Source: Eurostat Banyár József
Consequences of cross-border human capital...

8. Assuming a closed economy
Banyár József
Assuming a closed economy
Closed economy: people basically do not migrate between countries – they are born, raised, work (become contribution payers) and retire in the place where they were born
The basis of the pension policy of the EU: assuming a closed economy ↔ pensions are within individual member states’ competencies
This concept is (partly) obsolete, because the (meta) assumptions are obsolete
Consequences of cross-border human capital...

9. Problems caused by the PAYG system
Banyár József
Problems caused by the PAYG system
Summing up: PAYG → incentive not to have children→ decreasing fertility → aging → decreasing inverse aged dependency ratio→ problems in financing
These problems worsen with the retirement of persons making up the baby boom generation, yet the situation will be especially bad after retirement of the baby boom echo generation in approximately two decades
Consequences of cross-border human capital...

10. Source: Eurostat Banyár József
Consequences of cross-border human capital...

11. Banyár József
The role of migrants
With non-EU migrants, any escalation of this problem happens later
But: integration problems - there is a fierce competition with the USA for high-value migrants (USA stands to win)
There are no integration issues concerning migrants from other countries of the EU: it is expected that migration from less developed/relatively poor countries of the EU into the developed/rich countries will intensify
This phenomena is helped by how the EU itself is constructed - the built-in ”freedoms” (fundamental rights), especially the free movement of workers
Consequences of cross-border human capital...

12. Banyár József
The migration pump
Free movement of workers : helping as a kind of ”migration pump” is the idea of putting off to a later time any escalation of financial problems coming with the PAYG systems of the rich EU countries
By anticipating escalation of the financial problems pertaining to the PAYG systems of less rich EU countries
Consequences of cross-border human capital...

13. Banyár József
The migration pump
This process is now just starting, but in the future it is expected to speed up because:
With the gradual retirement of the baby boom generation, youth unemployment in the rich countries will go down – it is now an important obstacle to the movement of workers
Positive feedback: with the emigration of actives from the less rich countries, the contribution rate will increase – and this will give a plus incentive to emigration
Consequences of cross-border human capital...

14. Banyár József
Hungarian immigrants into some countries (lower estimation from different sources)
Type of data
Country
2008
2009
2010
2011
2012
2013
Stock
Germany
60,000
61,400
68,900
82,800
107,400
135,600
Switzerland
5,200
5,8 00
6,600
8,100
9,900
Sweden
14,600
15,100
15,300
15,400
15,700
16,000
Flow
Austria
2,000
1,900
2,200
3,900
8,500
Great-Britain
14,700
13,800
14,200
17,900
4,700*
*only in Q1
Source: Bodnár-Szabó [2014], MNB
Consequences of cross-border human capital...

15. Banyár József
Possible solutions
The origin of the problem is how the EU is constructed → the solution should also be European
Possibilities:
1. If we hold onto the logic of present pension systems: migrants from countries inside the EU should keep paying their contributions into their original countries – and get their pensions from these countries
Consequences of cross-border human capital...

16. Banyár József
Possible solutions
2. A more general solution, though inside the pension system: think through again whether pensions are solely and strictly within individual member states’ competences? If the labour base is common, then the pensions which are built on this – at least partially – should be also common → European pension. (Example: from age 80 European pension, between age 70 and 80 national pension, before age 70 private pension)
Consequences of cross-border human capital...

17. Banyár József
Possible solutions
3. A solution outside the pension system: reducing the significance of a pension by redistributing working possibilities. In other words: significantly decreasing the annual working time for actives but increasing the retirement age to well above the age of 70. (A solution proposed by Carlos Slim in Paraguay)
Consequences of cross-border human capital...

18. Possible objections Emigration also has benefits:
Banyár József
Possible objections
Emigration also has benefits:
If the involved person is unemployed it is good for them, and not a loss to the country he/she is leaving
Remittances are profit for the family of the emigrant (i.e. who remain at home) - and for the whole country
If the emigration is temporary, returning emigrants bring their savings with them along with know-how, working culture etc. from a more developed environment
Consequences of cross-border human capital...

19. Banyár József
Possible objections
A further logical objection - that in the EU, the relationship between rich and less rich countries is in reality asymmetrical; but it is in precisely the opposite direction (as noted above) – the less rich countries get a lot of transfer from the rich countries:
Structural funds: the balance of contributions and outpayments is advantageous for less developed countries
Capital investments from rich country companies into the less rich ones, and the job-creation effect going along with this, in general:
Technology and know-how transfer.
Yet the question: are these generally helping the pension systems of less developed countries?
Consequences of cross-border human capital...

20. Thank you for your attention!
Banyár József
Thank you for your attention!
Consequences of cross-border human capital...