National and international privatisation of pensions

The paper analyses the switch from pay-as-you-go to funded pensions - pensi ons privatisation - in a world with many small open economies. It contrasts go-it-alone privatisation in one country with world-wide privatisation. In the go-it-alone case at least one generation necessarily loses. In the wor ld-wide case the long-run gains are substantially larger and - depending on the nature of production technology - an intergenerational Pareto improvem ent is possible. This generates a potential isolation paradox: each country may individually reject privatisation because some people will lose, but t his need not happen if all privatised simultaneously. This problem occurs b ecause the adoption of PAYG pensions in any one country imposes internation al externalities on other countries via the impact on world interest rates. (C) 2000 Elsevier Science B.V. All rights reserved. JEL classification: E6 0; H55; D91; F42.