We consider a model with a population consisting of earners and retired persons; elderly care is publicly provided. There is one big city, where congestion effects and agglomeration forces are at work, and a number of small villages. We show how the externalities related to population-mobility lead to an inefficient spatial distribution of earners and retirees, and we characterize the second best solution. Decentralization of this solution, in a fiscal federalism structure, requires the use of taxes and subsidies proportional to the number of earners and retired persons living in the city and the villages.