(Reuters) — Bulgaria will gradually raise its retirement age and social payment contributions, the government said on Tuesday, as the European Union's poorest country struggles to fund pensions for a shrinking and aging population.

The overhaul aims to tighten controls over disability pensions and limit provisions, which mean Bulgarians take a state pension at an average age of just over 57 — one of the lowest in the European Union.

"The current model is not sustainable," Labor Minister Ivailo Kalfin told reporters.

The overhaul is an early test for Prime Minister Boiko Borisov's government, which came to office in November pledging to uproot corruption and revamp inefficient public sectors, such as health and energy.

Under the plan the retirement age will increase by two to three months a year until it reaches 65 years for both men and women, in 2029 and 2037 respectively — a much slower pace than the business lobby wanted, but in line with trade union proposals.

The government is expected to approve the changes by May, after more talks with unions and business leaders.

Bulgaria also plans to gradually raise pension and unemployment contributions by a total 4.5 percentage points, to reach 22.3% of gross salary in 12 years, Mr. Kalfin said.

It plans to limit early retirement for police and army officers, who can currently draw a state pension as early as in their late 40s, and gradually increase the retirement age for other hazardous jobs.

The business lobby had sought a steeper increase in the retirement age and further steps to plug a pension system deficit that it says could threaten Bulgaria's finances and its currency peg to the euro.

Bulgaria's population has shrunk by a fifth since 1990 to 7.25 million. A 2013 World Bank report estimates just one in two Bulgarians will be of working age in 2050

The exodus of young Bulgarians since Communism fell in 1989 means Bulgaria's pension system swallows 37.5% of the central government's budget, up from 12.8% in 2003.

The government re-confirmed its commitment to end mandatory payments to private pension funds, a move it says gives workers more choice and which business and coalition allies panned as a savings grab.

The government also plans to cancel an overall 2 percentage point increase in contributions allocated to private pension funds that should have come into effect as of 2017.