Reforms to cut pensions by about a tenth, OECD says

The Organization for Economic Cooperation and Development (OECD) believes the recently agreed reform of Spain's state pensions would reduce spending on the system by the equivalent of 3.5 percent of GDP and cut average benefits by about 9 percent.

In its Pensions at a Glance Report, released Thursday, the Paris-based organization said Spain currently spends about 9 percent of GDP on retirement benefits, slightly above the average in the OECD, but well below that of France and Italy.

The report was released as a group of pensioners in the Basque Country held a demonstration against the reforms approved by the government in January, which gradually raise the retirement age to 67 from 65, and also phase in an increase in the period used to calculate benefits to the last 25 years of a person's working life from 15 years at present. To receive a full pension retirees now must make contributions for 37 years, up from 35 years previously. The Basque pensioners want the previous system restored.

The OECD said the disposable income of those aged over 65 years is 79 percent of the working population as a whole, slightly below the OECD average of 82 percent.

The projected so-called pension replacement rate, which measures benefits relative to wages earned during a full working life, stood at 81.2 percent in 2008, well above the OECD average of 57.3 percent. However, the changes to the way the final pensions are calculated will reduce this rate in the case of Spain to 73.9 percent. "The reform will reinforce the link between contributions and benefits compared with the current system," the report said. It added that the makeover of the system would most affect those with "interrupted careers," such as the case of women who leave the labor force to have children.

The report said recent reforms in the OECD as a whole were a "step in the right direction" in reining in spending on pensions, but warned of the risk of an increase in poverty levels among the aged. "Further reforms are needed that are both fiscally and socially responsible," the OECD's secretary-general, Ángel Gurría, said. "We cannot risk a resurgence of old-age poverty in the future. This risk is heightened by growing earnings inequality in many countries, which will feed through into greater inequality in retirement."

The OECD said that in the mid-2000s, 23 percent of those aged over 65 years in Spain were classified as poor, compared with the average for the OECD of 14 percent, and a rate for the Spanish population as a whole of also 14 percent.

However, it said the minimum pension in Spain was greatly increased in the period 2004-2008, helping to reduce poverty levels. Poverty is also lessened by the fact that four-fifths of Spanish households own their own homes, with mortgages mostly paid off by retirement.