* Gov't mulls restricting future pension rises
* Accelerated later retirement age also under consideration
* Reform was long-standing demand from the European Union
MADRID, Dec 12 (Reuters) - Spain will soon intensify pension
reforms, possibly accelerating an increase in the retirement age
and restricting index-linking of pension payouts to meet
European Union demands to fix the country's troubled public
finances, Spanish officials said.
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.
A senior Spanish government source told Reuters the reform,
aimed at getting a grip on 100 billion euros a year in pension
costs, or 10 percent of gross domestic product, would be
presented to lawmakers in the next few weeks, possibly in early
2013.
The source said the government would propose steps to
accelerate the increase in retirement age to 67 from 65,
currently scheduled to take place over 15 years. Three other
Spanish officials corroborated the plan.
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 four sources cautioned the reform was still being
discussed at cabinet level -- although talks are at an advanced
stage -- and that the only firm agreement so far was on a set of
new rules to make early retirement more difficult, already
flagged by the government in September.
The Socialist opposition is not expected to block the new
set of rules, the sources said. Rajoy can in any case count on a
strong majority in parliament to pass the law.
"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.
"We also want to introduce a more automatic link between
higher life expectancy and changes in the retirement age," the
source said.
Prime Minister Mariano Rajoy is considering when to request
European aid that would trigger a European Central Bank
bond-buying programme to bring down borrowing costs that have
soared in the euro zone debt crisis.
In order to meet tough EU-agreed deficit goals, Rajoy was
forced last month to cancel the annual inflation adjustment for
pensions, a move with a high political cost in a country where
20 percent of the population, or 9 million people, is retired.
Breaking a campaign pledge he opted to instead raise
pensions by 1 percent in 2013, or 2 percent for the very lowest
pensions. This way, the government saved around 3.8 billion
euros that it would have had to spend to raise pensions in line
with inflation of about 2.9 percent.
Discussions now centre on breaking the principle of an
inflation link more permanently by building in legislative
caveats, rather than looking at it on an ad hoc basis.
UNSUSTAINABLE
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.
"Cutting the link between inflation and pensions is being
discussed. It is the third year in a row we've had to take an
'extraordinary' decision (not to raise pensions) and the rule
does not make much sense any more," the official said on
condition of anonymity.
Rajoy performed especially well among pensioners when he was
elected in a landslide last year and his first move after taking
office was to hike pensions after his predecessor Jose Luis
Rodriguez Zapatero froze them in May 2010 when Spain entered the
euro zone debt storm.
Zapatero also passed a law to add two years to the
retirement age by 2027. Rajoy's People's Party, then in
opposition, voted against the change.
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 percent, meaning fewer workers are making
tax contributions to maintain it.
As the number of people contributing to the state pension
system has fallen to its lowest level in a decade - more than 2
million Spaniards have lost their jobs and stopped paying into
the system - Rajoy has been left with little choice.
The government tapped 4.4 billion euros from an insurance
fund to make July and August payments to pensioners and last
month passed a law to tap the pension reserve fund to ease
liquidity tensions over the next two years.
EU DEMANDS
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.
The four Spanish officials said they were aware of the EU
demands but insisted it was not the main factor that triggered
the new reform.
However, a European official, also speaking on condition of
anonymity, said the European Commission had insisted on the
reform at recent regular meetings with the Spanish authorities.
"We have specific demands on measures to increase the
retirement age. In July, the government announced a series of
steps but it lacked details," the official said.
"We would welcome clear steps and details. For instance,
increasing by one or two months every year the planned rise in
the retirement age, fixing the minimum early retirement age at
63 instead of 61, implementing penalties for early retirement or
installing an automatic revision of the retirement age linked to
life expectancy," the official added.
He however said no specific demand had been formulated
recently on delinking inflation and pensions because there were
conflicting voices within the Commission on the issue.
The Commission recommended in a July report that Spain make
its pension system more sustainable without specifying how.
In November, it said Spain had done enough to rein in its
public finances in 2012 and 2013 but asked the country to spell
out new economic reforms for 2014 and beyond by next February.
(Editing by Fiona Ortiz)