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Cabinet and unions finalise pension reform agreement

Sat 29th Jan 2011

Yesterday the Spanish cabinet agreed a reform of the country's pension laws to increase the retirement age from 65 to 67 in an attempt to boost the struggling economy/

The reform, which will take effect regardless of parliamentry approval, was agreed to by the two major unions this week after several rounds of negotiations.

Retirement age is set to change from the current 65 to 67 years old, to be phased in over 14 years as from 2015.

This agreement could lead to further pacts between the government, the unions and the private sector on issues such as collective wage bargaining and reforms in the energy and research and development industries.

The deputy PM, Alfredo Perez Rubalcaba, referred to it as a "partial agreement" in that it will be part of a wide ranging social and economic pact. "Although there are still things to do, the government is satisfied with the agreement," he stated at a press conference following the cabinet meeting.

The changes will not have any effect on the government's budget before 2015, but shows progress is being made in overhauling the struggling economy. Statistics released on Friday reported how unemployment now stands at 20.3% - the highest in 13 years.

The Prime Minister is under pressure to show his commitment to making reforms and to cutting Spain's public deficit of just over 9% of gross domestic product in 2010, to avoid the need for a bailout similar to seen in other European countries.

One issue that the unions were successful in finding agreement to, was for those who have paid into the pension system for 38.5 years to be able to retire at 65. Unions had previously threatened to call a further general strike in if the government forged ahead moved forward with the propsal to raise the retirement age. For their part the government had previously stated how it would raise the retirement age to 67 regardless of union backing.

The Organisation for Economic Co-operation and Development (OECD) called the reform 'a step towards improving the long-term sustainability of public spending, and aiding progress on strengthening the link between contributions and entitlements, however some economists expressed doubts that it went far enough.

"My only worry is that whenever there is a crisis in Spain, there is mass early retirement. This weighs very heavily on the pension system," said Robert Tornabell, Economics Professor at Barcelona University ESADE. "Every sector is firing staff, from banks to the media, and instead of making people unemployed, it forces thousands into early retirement."

The markets remained largely impassive to the news, and the key spread between the yield on Spanish ten-year debt and equivalent German bunds was around 218 basis points, little changed from 217 bps on Thursday.

Spain is the latest European country to tackle pension reform as ageing populations and lower birth rates strain social security systems. Pensions are estimated to account for 14% of Spain's public expenditure by 2040-2050, compared with about 9 % in 2010, according to economy ministry data. Last year was the first that Spain's pension system did not run a surplus.

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