UPDATE 3-Spain passes pension reform with union backing

Fri Jan 28, 2011 10:36am EST

Related Topics

* Retirement age to rise to 67 with some exceptions

* Seen as key structural reform by PM Zapatero

(Updates with approval, deputy PM's comments)

By Nigel Davies

MADRID, Jan 28 (Reuters) - Spain's cabinet approved a pension reform on Friday to raise the retirement age to one of the highest in Europe as part of efforts to convince markets it can turn its economy around and cut its deficit.

The law, which will go into effect with or without approval by parliament, got the stamp of approval from unions this week after months of tense negotiations.

Most Spaniards will retire at 67 instead of the current 65 under the reform, to be phased in over 14 years starting in 2013. [ID:nLDE70Q258]

The pension pact could lead to further accords between the government, the unions and business representatives in sensitive areas such as collective wage bargaining and reforms in the energy and research and development sectors.

Deputy Prime Minister 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 said during a news conference after the cabinet meeting.

The reform will not have an effect on the government's budget before 2015, but marks progress in overhauling an economy with weak growth prospects and the EU's highest unemployment rate.

Data on Friday showed unemployment at 20.3 percent in the fourth quarter of 2010, its highest in over 13 years. [ID:nLDE70Q2CW]

Prime Minister Jose Luis Rodriguez Zapatero is under pressure to show he is committed to structural reforms and to cutting a public deficit of just over 9 percent of gross domestic product in 2010, to avoid being forced into a bailout like Ireland and Greece.

During negotiations unions won the concession that workers who have paid into the pension system for 38.5 years will be allowed to retire at 65, amongst others.

Unions had previously warned they would call the second general strike in less than a year if the government forged ahead with the proposal to raise the retirement age.

The government had said it would raise the retirement age to 67 with or without union backing.

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The Organisation for Economic Co-operation and Development welcomed the reform as a step towards improving the long-term sustainability of public spending, and aiding progress on strengthening the link between contributions and entitlements.

Some economists expressed doubts, however, 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."

Markets showed little reaction 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 could account for 14 percent of Spain's public expenditure by 2040-2050, compared with about 9 percent in 2010, according to economy ministry data. Last year was the first that Spain's pension system did not run a surplus. (Additional reporting by Paul Day; writing by Elisabeth O'Leary; editing by Andrew Roche)

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