* Pension system faces 160 billion euros in added costs

* Some 900,000 workers soon eligible to retire at age 63

* Ex-chancellor Schroeder sees risk of German hypocrisy

BERLIN, Jan 29 (Reuters) - Germany’s coalition government presented a pension reform plan on Wednesday that will cost 160 billion euros to 2030 by letting some workers retire earlier, loosening the purse strings at home when Berlin has demanded austerity from its euro zone partners.

Despite criticism from industry and the pro-business wing of Chancellor Angela Merkel’s party, the cabinet endorsed what is likely to be the most expensive single measure of the legislative period when it moves through parliament in May.

An additional 900,000 workers will be able to retire earlier than expected aged 63 over the next two years provided they have worked for 45 years. Some mothers will get pension increases.

The reform, to take effect July 1, partially undermines a decision by the last right-left “grand coalition” to raise the retirement age from 65 to 67 to make the pension system fiscally sustainable in the face of a rapidly ageing population.

Critics warn the reform, which will take effect from July 1 and cost about 11 billion a year by 2030, will unintentionally give firms an incentive to sack higher-paid workers with 45 years’ experience at age 61.

Merkel’s last grand coalition government, which ruled from 2005 to 2009, raised the pension age in steps over several years to 67 to reflect demographics change. There are more pensioners per active employee than ever before and analysts say that problem will worsen in the decades ahead.

But this time her Social Democrat (SPD) allies, who lost millions of voters after pension ages got raised, were eager to make changes to win back working-class voters. SPD Labour Minister Andrea Nahles and her party insisted on the pension at age 63 despite misgivings in Merkel’s party and industry.

“I actually allowed myself a brief moment to be proud when I signed this draft,” said Nahles when asked if she felt queasy signing off on a measure that will cost so much money.

German industry clearly had those staggering costs in mind when it condemned the reform.

“We need to make work attractive for seniors instead of creating a new subsidy for early retirement,” said Hans Peter Wollseifer, president of the German Craftsmen Association. “This is a giant step backwards.”

The reform was also criticised former SPD chancellor Gerhard Schroeder, whose “Agenda 2010” reforms cost his party support but also put Germany on a course for solid economic growth.

“It’s absolutely the wrong signal, especially in view of our European partners, from whom we’ve rightly been demanding structural reforms,” Schroeder wrote in a new book, an excerpt of which was published in Bild newspaper on Wednesday.

The extra cost to the pension system will mean employee and employer pension contributions will have to be raised in a few years, he said, adding: “There are simply not enough workers who can finance the growing group of pensioners.” (Reporting by Erik Kirschbaum and Monica Raymunt; Editing by Stephen Brown and Tom Heneghan)