Americans banking on a comfortable retirement got a rude reminder this month that generous traditional pensions are vanishing, a shock that added to such worries as stagnant wages and rising health costs.

In the early days of 2006, International Business Machines Corp. (IBM), Sprint Nextel Corp. (IBM) and Alcoa Inc. (AA) froze long-standing defined benefit pension plans, affecting thousands of American workers and probably prompting millions more to reexamine their retirement finances.

Pension concerns may be the last straw for free-spending U.S. households that have been a mainstay of the economy since the 2001 recession, particularly with wages refusing to budge, costly health care and a cooling housing market.

"There is no question that these are trends that are going to add to people's anxiety and the process has already started," said David Rosenberg, chief North American economist at Merrill Lynch in New York.

Experts expect other firms, facing baby boomer retirees and heavy pension costs, will follow suit.

Defined benefit plans that guarantee a set amount at retirement are being replaced with less generous defined contribution plans and 401(k) tax-deferred savings plans that hand employees the risk of investing for their golden years.

The Pension Benefit Guaranty Corp., a quasi-government agency that insures corporate pension plans, said late last month that one in ten of all defined benefit pension plans in the country had now been frozen.

All this could spell the end to fat retirement benefits once taken for granted by U.S. workers and may act as a wake-up call to spendthrift consumers -- forcing them to start saving, with serious implications for growth.

"I think it has left people worried. For many years, people didn't appreciate the positive aspects of defined benefit plans. Now that they might lose them, people are concerned," said Ann Combs, Assistant Secretary of the Labor Department's Employee Benefits Security Administration.

"People are saving, but most are nowhere near where they need to be in saving for their retirement," she said. "The challenge is to encourage people to save more, start young, join employer pension plans and make saving a habit."

If people start to question their prospects for a secure retirement, they may curb their consumption.

"There is no question that, over time, this would lead to an increase in savings and a little less average growth," said Mickey Levy, chief economist at Bank of American, although he doubted this would suddenly knock the economy off the rails.

That said, few households taking a closer look at their finances will like what they find. The U.S. saving rate went negative in the third quarter of 2005, amid heavy mortgage refinancing to support current spending.

LAST STRAW

Merrill Lynch's Rosenberg says the typical baby-boomer is far from ready for retirement. "The first of the boomers turn 60 this year. They are about to retire, and they have been spending as if they were 30, for the last 30 years."

Defined benefit pensions are increasingly rare in the United States but they remain the retirement cornerstone for some 44 million Americans, according to the Labor Department.

"With IBM gone, it won't be long before a lot of other companies follow suit," said Edward Wolff, an economics professor at New York University and co-author of a study on retirement income published last month by the Economic Policy Institute, a Washington-based think tank.

He estimates 45 percent of Americans aged 47 to 64 -- or around 15 million people -- are in defined benefit plans.

"Things are not looking good for retirees with the collapse of the defined benefit plans. It was the piece of the puzzle that was keeping retirees afloat," he said. "In 20 years, the only people with these plans will be government employees."

Working out how much money ensures a comfortable retirement is tricky. Experts say households need around 75 percent of pre-retirement income to maintain living standards, either from pension plans, social security or another income source.

Only about half of America's families have socked away enough to meet this threshold, according to Wolff.

Experts say a worker must put 12 percent of earnings into a defined contribution plan to match the yield of an average defined benefit plan. Most defined contribution systems operate on an annual contribution of just 6 percent, split between employer and employee.

"It would be very unusual for workers to make up for the shortfall and it might certainly be a good way to shock people into saving more -- tell them they now have to put aside 12 percent of the earnings," said Wolff.

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