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Spanish Cabinet clears raising retirement age

Spaniards were given another bitter dose of austerity on Friday when the retirement age was lifted by another two years to 67 under a reform aimed at reassuring jittery markets that the country can manage its heavy public borrowings.

world Updated: Jan 28, 2011 21:27 IST

Spaniards were given another bitter dose of austerity on Friday when the retirement age was lifted by another two years to 67 under a reform aimed at reassuring jittery markets that the country can manage its heavy public borrowings. With the debt crisis still festering and international investors watching, Spain, like many European countries, has little option but to cut costs. The once-booming nation is struggling to crawl out of recession after its property market collapsed and its unemployment rate is above 20%, a eurozone high.

The proposal, cleared in a Cabinet meeting, was negotiated with and is backed by labor unions - a victory for Spain's Socialist government. Unions held a general strike in September and had threatened another if they did not like the government's pension changes, part of a broad drive for belt-tightening and structural overhaul.

The deal means a bit of breathing space for Prime Minister Jose Luis Rodriguez Zapatero as he presides over a struggling economy and trails conservatives in the polls with general elections just over a year away and local and regional elections in May. The plan still needs approval by Parliament, although Zapatero's Socialists have lined up support up from small regional parties to pass the measure.

The reform is complex, includes a number of sweeteners to win over union support and will be phased in very gradually starting in 2013, rather than take effect right away.

But it essentially boils down to this: once the retirement age has been increased to 67 in the year 2027, Spaniards will find themselves working two years longer for a full pension that will in general be smaller than what they get now.

Spain's retirement pension system is now solvent, albeit barely, but the government has warned that that will no longer be the case in a few decades' time because of rising life expectancy and a very low birth rate - meaning a shrinking number of workers will support more retirees.

With the reform, Spain joins France and Germany in forcing people to work more years before claiming retirement benefits. France did so late in 2010 - raising the minimum retirement age from 60 to 62 despite a series of angry street protests - while Germany lifted its retirement age from 65 to 67 in 2007.

Under the current system, Spaniards can retire with full benefits at 65 if they have paid into the social security system for 35 years. Under the new plan, for most people, the numbers go up to 67 and 37, respectively.

The new system would also change the number of years of a person's working life that are used to calculate their retirement pension - raising it from the last 15 years of their career, when presumably they earn more, to the last 25. That means, on average, a lower pension.

As a concession to unions, people will still be able to retire at 65 but only if they have chipped in to the system for 38.5 years. Unions say about half the people retiring these days fit that bill. But those people are from generations that had much less trouble finding work than people do today, particularly first-time jobseekers.

The jobless rate among Spaniards aged 16 to 30 is a staggering 40 percent. It is particularly difficult, meanwhile, for a person over age 50 to get another job if laid off.

"Things are pretty tough. One of the questions I ask myself is that if you can't find a job until you are 25 years old and it is difficult to find work after 50, I mean, who's going to be able to work 38 years? I've got a son at home who is 24 and has yet to find full-time work," said civil servant Carmen Foz, 55. Deputy Prime Minister Alfredo Perez Rubalcaba said Friday the pension reform plan came out of three-way talks that included Spain's main business federation. He said the plan tries to help right an economy that was booming until just a few years ago but collapsed with the bursting of a real estate bubble and is now lagging behind as much of Europe recovers.

This should please both Spaniards and investors worried that debt-laden Spain might be the next EU country after Greece and Ireland to need an international bailout, Perez Rubalcaba said. "It boosts confidence among Spaniards in general and towards our economy outside the country," he told a news conference. At Friday's news conference, Labor Minister Valeriano Gomez acknowledged that if Spain's economy stays as sick as it is, young people will have a hard time putting in enough years of work to qualify for a full pension.

Ramon Castro, a 44-year-old luxury car salesman, said that could not bode well for Spain. "Where are we headed if a generation is adrift?"