Croatia's government will accept "all the demands" of a union-led petition against raising the retirement age, Prime Minister Andrej Plenkovic said in a surprise announcement at the beginning of government's regular session on Thursday.

“We heard the message sent by Croatian citizens, and the government has decided to accept in full the demands of the referendum initiative, and will table a new pension law bill to the Parliament… The bill will change the existing pension law in a few key points,” Plenkovic said.

The referendum initiative, which had collected more than 700,000 signatures over two weeks in late April and early May, was organised by Croatia’s three major union alliances in response to changes to the pension system passed by parliament in December, which formally came into force in January 2019.

These changes included raising the retirement age from 65 to 67 and penalties for early retirement, as well as provisions which allowed retired people to work part-time jobs without losing the right to a state pension.

On Thursday, Plenkovic said that although the petition’s demands, which include lowering back the retirement age and abolishing early retirement penalties, would be met, the government would also look into changing the labour law to enable people over 65 to continue working legally, should they wish to do so.

The government had defended the plan, saying that the pension system is becoming increasingly strained due to depopulation and ageing work force, while unions and opposition Social Democrats were vocally against it.

Due to low birthrates, Croatia has one of Europe’s oldest populations, a problem compounded mass emigration after Croatia had joined the EU in 2013. According to recent estimates by the state statistics bureau, population of Croatia has dropped to barely 4 million in mid-2018, and the figure includes about 1.2 million pensioners and 1.5 million employed people.

Although mandatory contributions towards the national pension fund, paid out of gross salaries of everybody employed, should in theory cover the entire cost of pensions, the low ratio of pensioners vs employees means only about half of the cost of pensions is financed by the fund, with the state budget topping up the difference every year.

At the same time, the total cost of pensions keeps increasing and is expected to reach a record-high 41 billion kuna (€5.5 billion) in 2019, or around 10 percent of the country’s GDP.

In October last year, Labour Minister in Plenkovic’s cabinet, Marko Pavic, said that the system produces a deficit of some 17 billion kuna (€2.3 billion) every year, making the cost of topping up the pension fund a sizeable chunk of the government’s own budget, which totalled 136 billion kuna (€18.4 billion) in 2019.

Later on Thursday, union leaders said that although government agreeing to their demands was good news, they would still demand a referendum to be held.

“By signing the petition, citizens sent a message that they want a referendum to changes existing pension laws, that they want to be the ones deciding on the sort of laws they want… If the government wishes to pass a new law, it is their right to do so, but we will not take part in any new talks on this new law… In our view, we still need to hold a referendum,” head of the SSSH union alliance, Mladen Novosel, told state agency Hina.  

Leader of the NHS union alliance, Kresimir Sever, also said that a referendum should be held anyway.

“We are a bit surprised by this announcement… All three union aliances now need to sit down and see which direction they want to take this, this needs to be something agreed by all of us,” Sever told Hina.