Spanish business and unions back rise in retirement age

Spaniards were hit with another bitter dose of austerity yesterday as the cabinet approved raising the retirement age from 65 to 67 to reassure jittery markets that the country can handle its heavy debt burden.

With the European sovereign debt crisis festering and international investors wary, 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 per cent, a eurozone high.

The deal gave prime minister Jose Luis Rodriguez Zapatero some breathing space as he presides over a struggling economy and trails conservatives in the polls, with a general election just over a year away and local and regional elections in May.

The proposal was negotiated with unions and backed by them - a victory for Mr Zapatero's Socialist government.

"Hats off to the Spanish. They are setting an example," Angel Gurria, the head of the Organisation for Economic Co-operation and Development, said on the sidelines of the World Economic Forum in Davos, Switzerland. "(The deal] shows great leadership, great awareness by the Spanish about the needs, and the political courage to do it." The plan needs parliament's approval, although Mr Zapatero's Socialists have support from small regional parties to pass the measure.

The reform is complex, includes a number of sweeteners to win over unions and will be phased in starting in 2013. However, once the retirement age has been increased to 67 in 2027,

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 because of rising life expectancy and a very low birth rate.

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 years respectively.

The new system would also change the number of working years used to calculate a retirement pension - raising it from the last 15 years of a person's 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 contributed to the system for 38.5 years.Unions say about half the people retiring these days fit that bill.

Deputy prime minister Alfredo Perez Rubalcaba said 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 a burst real estate bubble.

"It boosts confidence among Spaniards in general and towards our economy outside the country," he said.