OECD urges tough line on pension reform

The Organization for Cooperation and Economic Development (OECD), which represents 34 industrialized economies, has applauded the Spanish government's steps to deal with the economic downturn, including fiscal consolidation and labor reform, but feels that Spain still needs to "broaden and deepen" reforms to truly emerge from a crisis that hit government finances and employment much harder than in other member countries.

The report proposes deep reform of Spain's pension system, apparently far deeper than the Socialist government would be willing to go as it tries to negotiate an extension to the retirement age with other political parties, reluctant to share in the responsibility for the painful measure.

The OECD suggests extending the retirement age on the basis of increased life expectancy

In its annual Economic Survey of Spain, published on Monday, the international agency - whose stated goal is to "help governments foster prosperity and fight poverty through economic growth and financial stability" - sets out a list of strict measures that Spain should undertake on all fronts, from taxes and pensions to the job market.

As for pension reform, which the Socialist government is poised to address after enacting fiscal and labor reforms earlier this year, the OECD endorses the government's plan to extend the legal retirement age to 67, up from 65. But it feels this is still not enough.

Instead, the organization suggests extending the retirement age a little every year until it reaches 67 in 2025, then automatically extending it again on the basis of life expectancy. For instance, if life expectancy grew three years by 2050, that year the retirement age would be 70. The government of Prime Minister José Luis Rodríguez Zapatero is committed to passing a reform early next year, but has promised "flexibility" on the exact terms of the bill.

The sliding retirement age is just one of several ideas voiced by the OECD that, were they to be adopted, would result in a much more radical reform of the pension system than the one the Spanish government is preparing, or than the cross-party committee known as the Toledo Pact included in its most recent report.

While Spanish political parties proposed extending the period used to calculate an individual's pension to 20 or 25 years (currently, the Social Security contributions of the last 15 years are taken into account), the OECD says the entire working life should be taken into account, and that workers should pay Social Security dues for more than "just 35 years" in order to be eligible for a full pension. The state's outlays on retired people could be further reduced with tighter rules for widow's pensions, the report says.

The OECD posits that Spain needs to "reduce the generosity" of entitlements, as it is a country with one of the highest rates for new pensions in relation to what the individual contributed to the system.

Besides pensions, the OECD warns that Spain will also have to adopt more stringent labor reform measures in order to reduce the 20-percent unemployment rate, which is still expected to hover around 17.4 percent two years from now. The report states that "Spain should ensure that excessive severance pay for workers in permanent contracts is reduced substantially, at least for all new hiring. To bring the unemployed back to work, Spain should also consider abolishing the legal extension of collective bargaining outcomes to all businesses." The OECD also notes that vocational training should be nurtured, and regional employment services' efficiency improved.

Further ideas for pulling Spain out of the hole include raising value-added tax. "The tax system could be reformed to be more growth friendly by switching the tax burden from labor to consumption and property taxes," the report reads.

While not binding, the report's overall endorsement of even deeper economic reforms in Spain adds pressure to a Socialist government that is stuck between the need to assuage the international markets and internal criticism of its austerity measures, which led to a general strike against its labor reforms in the fall. Unions have warned that more unrest will follow if the government ignores the Toledo Pact and goes ahead with more severe pension reform.

Labor Minister Valeriano Gómez on Monday confirmed that despite the lack of consensus, the legal retirement age will be pushed back to 67, with some exceptions. People who have worked for a long time, such as a 36- or 37-year period, will still be able to retire at 65, he said. Those who have worked in physically demanding jobs will also be considered an exception.

The minister added that the government will make "the maximum effort" to make its plans compatible with the Toledo Pact's positions, but warned that negotiations would not be allowed to interrupt "the calendar of reforms" and that, agreement or no agreement, the executive will act.