Spain govt to back pension reform after union deal

MADRID: Spain's cabinet is due to approve pension reforms on Friday that will raise the retirement age to one of the highest in Europe, measures the government hopes will ease pressure on the country from financial markets.

The government announced on Thursday it had reached a deal in principle with unions under which most Spaniards will retire at 67 rather than 65 at present.

While the reforms will have no effect on the budget before 2015, they mark a further step as the government tries to restructure an economy with the highest unemployment rate in the euro zone and weak growth prospects.

Analysts say Prime Minister Jose Luis Rodriguez Zapatero needs to show investors the government is serious about such structural changes to avoid being forced into an international bailout, like those taken last year by the smaller euro zone economies of Ireland and Greece.

"We need to see whether the pension reform convinces the markets that it goes far enough. It is not as urgent as other reforms, but still is important for market credibility," said an economist in Madrid, who asked not to be named.

After cabinet approval the reform bill will go to parliament, where union backing is likely ensure it a relatively smooth ride.

The main concession the unions won after months of negotiations was that workers who have paid into the pension system for 38.5 years will be allowed to retire at age 65.

The government had promised it would raise retirement age to 67 with or without the backing of unions, and sources suggest the reform would start to take effect from 2013.

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.

Analysts say the deal with unions may give a lead for other reforms, such as making collective bargaining less rigid.