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European pensions hold back reform

Tuesday, October 02 08:59:07

Pensions are a critical element of Europe's adjustment to the real financial world however Ireland is not alone in being unwilling to tackle this growing problem as a greater proportion of it's citizens reach retirement age. In the case of Greece, under last-chance pressure from its international creditors, the governing coalition tentatively agreed on an austerity package that includes some of the most severe cuts in public pensions ever imposed in a developed country. Pension payouts to retirees would be trimmed by as much as 10 percent.

And then there was Spain, where last Thursday the government of Prime Minister Mariano Rajoy introduced one of the most draconian budgets in the country's history. It was intended to reassure international investors and demonstrate the fiscal discipline that the euro zone was demanding of Madrid.

The markets need reassuring: Spain has a stubbornly high budget deficit, its banks require tens of billions of euros in rescue loans and the government may soon have little choice but to request European aid. Nevertheless, Mr. Rajoy declined to cut pensions or even to freeze them. Instead, his budget would actually increase payouts 1 percent next year on pensions for former public employees as well as on the social security payments that go to all retired Spaniards. Politically, it is understandable that Mr. Rajoy would want to put a protective bubble around the country's 10 million retirees at a time when people are marching in the streets and the economically crucial region of Catalonia is threatening to secede.

But pension expenditures represent the single biggest line item in the Spanish government's budget, at nearly 40 percent of public spending and 9 percent of Spanish gross domestic product. That 9 percent still trails France (15 percent) and Italy (13 percent). But given Spain's rapidly aging population - 30 percent of Spaniards are expected to be older than 65 by 2050 - the portion of government spending on pensions seems certain to rise in the future. The fact that Spanish public pensions are being enhanced is a reminder of one reason European debt and deficit problems have proved so difficult to resolve. Only Greece, under duress and at a point where the move may be coming too late to salvage the government's finances, seems prepared to risk the consequences of severe pension cuts. By contrast, France, under its new president, Francois Hollande, has lowered its retirement age to 60 from 62 for certain categories of workers. To be sure, the French budget outlook is not as dire as that of Spain.

But over the longer term, the deficit-reduction plan Mr. Hollande's government announced with much fanfare on Friday could have a limited effect because it left pensions largely untouched. Portugal, under pressure from a fresh wave of street protests, is likely to rescind a bold plan that would have required workers to increase their personal contributions to pension plans. And in Britain, the coalition government of Prime Minister David Cameron continues to resist any pension changes that would come down hard on older conservative voters.