Removing an automatic annual inflation adjustment for state pensions and speeding up the phasing in of a higher retirement age are long-standing European Union demands that Spain must meet in order to tap international aid to bring down borrowing costs and fix its stricken economy. The government is also considering removing the annual inflation-linked pension hike or, at least, applying conditions so that pensions do not rise when the economy is in recession or when the public deficit exceeds a certain level.
"The idea is to introduce more flexibility into the system. For instance, by making it possible not to adjust pension payments in the case of a recession or a deficit, or when you have liquidity tensions", the senior government source said.
One of the Spanish officials said the government was keen to make structural reforms to the pension system as it had become clear over recent years that it was not sustainable.
Spain is by no means alone among European countries struggling to overhaul pension systems that have become unsustainable due to higher life expectancies. But Spain's public pension system is particularly vulnerable because the country has the highest unemployment rate in the European Union at 25 per cent, meaning fewer workers are making tax contributions to maintain it.
The reform plan is also a long-standing demand from the European Union. The International Monetary Fund and European Central Bank are also pushing Spain to sever the link between pensions and inflation.
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