Int Tax Public Finan (2006) 13:587–599 DOI 10.1007/s10797-006-6079-3 PAYG pension systems with capital mobility Pierre Pestieau · Gwana¨ el Piaser · Motohiro Sato C  Springer Science + Business Media, LLC 2006 Abstract This paper studies the design of an optimal pension scheme in an OLG and open economy model. The pension scheme provides a flat rate benefit and is based on the PAYG principle. It thus combines inter- and intra-generational redistribution. In this setting a number of symmetric economies are connected by an open and perfect capital market. When this number is very large, we have the small open economy case; when it is reduced to one, we have the case of autarky or perfect coordination. As the number of countries increases, there is more intragenerational redistribution, but less capital accumulation. Keywords Pay-as-you-go pension · Tax competition · Capital mobility JEL Code H55 . H87 1 Introduction In a recent paper, Lazear (2005) recalls the raisons d’ˆ etre for social security: it forces saving, it provides insurance and it redistributes income. This last function is the one that interests us in this paper. The question of why redistribution is often implemented through social security and not income taxation, for example, is puzzling. It is generally explained by considerations of political economy. Accordingly the social willingness to redistribute tends to focus on old age. Hence the approach we take in this paper. P. Pestieau CREPP, Universit´ e de Li´ ege, CORE, PSE and CEPR e-mail: p.pestieau@ulg.ac.be G. Piaser CORE, Universit´ e Catholique de Louvain and Universita C´ a Foscari Venezia e-mail: piaser@gmail.com M. Sato Hitotsubashi University e-mail: satom@econ.hit-u.ac.jp Springer