Order Code RL30496
CRS Report for Congress
Received through the CRS Web
Pension Issues: Lump-Sum Distributions and
Retirement Income Security
March 27, 2000
Patrick J. Purcell
Specialist in Social Legislation
Domestic Social Policy Division
Congressional Research Service ˜ The Library of Congress

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ABSTRACT
This report discusses the disposition of pre-retirement lump-sum distributions from pension
plans and presents estimates of the potential losses in retirement wealth that can occur when
these distributions are spent rather than saved. It summarizes previous research findings and
presents the results of a Congressional Research Service (CRS) analysis of data from the
Survey of Income and Program Participation. Policy implications are discussed in the context
of the Tax Reform Act of 1986 and the Unemployment Compensation Amendments of 1992,
both of which changed the tax treatment of early distributions from pensions.

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Pension Issues: Lump-Sum Distributions and Retirement
Income Security
Summary
About half of all workers age 25 and older participate in an employer-sponsored
pension or retirement savings plan, but not all of these employees will receive a
pension or retirement annuity from the jobs they now hold. Many will receive “lump-
sum distributions” from their retirement plans when they change jobs. A typical 25-
year-old today will work for seven or more employers before reaching age 65, and
thus could receive several such distributions before reaching retirement age.
Lump-sum distributions promote “portability” of retirement assets for workers
who change jobs. Portability allows workers to invest their retirement assets so that
they will continue to grow until retirement. However, lump-sum distributions can
result in “leakage” of retirement assets if the recipient uses some of the distribution
for current consumption rather than placing it in another retirement plan. To
encourage individuals to “roll over” these distributions into other retirement plans,
Congress in 1986 enacted a 10% excise tax on pre-retirement pension distributions
that are not rolled over. In 1992, Congress required employers to withhold 20% of
distributions that are paid to recipients rather than rolled into another retirement plan.
According to data collected by the Bureau of the Census, 43.6 million workers
age 25 or older were included in retirement plans in 1995 that offered lump-sum
distributions as a payment option. This represents 82% of the 53.5 million workers
who were covered by a pension, profit-sharing, or retirement savings plan in 1995.
Approximately 13.6 million people reported that they had received at least one lump-
sum distribution since 1975. Expressed in 1995 dollars, the mean value of these
distributions was $13,200 and the median value was $5,500. The average recipient
was between 37 and 40 years old at the time of the most recent distribution. Thus,
most recipients of lump sums were more than 20 years away from retirement age.
Of those who reported that they had received at least one lump-sum distribution
since 1975, 33% said that they had rolled over the entire amount of the most recent
distribution into another retirement plan, accounting for 48% of the dollars distributed
as lump sums. Another 35% of recipients said that they had saved at least part of the
distribution in some other way. Of those who reported receiving a distribution since
1990, 39% said that they had rolled over the entire amount into another plan,
accounting for 56% of the dollars distributed as lump-sums. Another 30% of this
group said that they had saved at least part of the distribution.
Retirement assets lost through lump-sum distributions that are not rolled into
other retirement accounts are potentially large. If a recipient of the average age in the
Census sample had rolled over a distribution equal to the mean value ($10,300 in
1995 dollars) into an account that grew at the same historical rate as the New York
Stock Exchange Index and at 10% in the future, it would reach $81,000 by age 65.
A distribution equal to the median value ($4,200 in 1995 dollars) would grow to
$32,000. If a distribution of the mean value had been rolled over into an account that
paid the same rate of return as U.S. Treasury bonds, it would grow to $41,000 by the
age of 65. A distribution of the median value would grow to $16,400.

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Contents
Overview: Pension Coverage and Tax Policy . . . . . . . . . . . . . . . . . . . . . . 1
Pension Portability, Asset Preservation, and Lump-Sum Distributions
2
Bills in the 106th Congress . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
Trends in Lump-sum Distributions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
How Many Workers Are Eligible for Lump-Sum Distributions? . . . . . . . . . 7
How Many People Have Received Lump-Sum Distributions? . . . . . . . . . . . 9
How Did Recipients Use Their Lump-Sum Distributions? . . . . . . . . . . . . 11
How Much Retirement Wealth Was Lost from Lump-Sums that Were
Spent Rather than Saved? . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
What Would these Amounts have been Worth at Retirement? . . . . . . . . . 15
What Factors Influence the Rollover Decision? . . . . . . . . . . . . . . . . . . . . 16
Implications for Public Policy Toward Lump-Sum Distributions . . . . . . . . 23
Appendix: Sources of Data on Lump-Sum Distributions . . . . . . . . . . . . . . . . . 25
Additional Reading . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27
List of Tables
Table 1. Participation in Employer-Sponsored Pension and Retirement
Savings Plans, 1995 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
Table 2. Percentage of Workers Covered By Retirement Plans that Offered
a Lump-Sum Payment Option in 1995 . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
Table 3. Characteristics of Individuals Who Reported Receiving One or More
Lump-Sum Distributions since 1975
. . . . . . . . . . . . . . . . . . . . . . . . . . 9
Table 4. Percentage of Workers Who Have Received at Least One
Lump-Sum Distribution from a Retirement Plan since 1975 . . . . . . . . . . . 10
Table 5. Percentage of Lump-Sum Distribution Recipients Who Rolled
Over the Entire Amount into Another Retirement Plan . . . . . . . . . . . . . . . 12
Table 6. Percentage of Lump-Sum Distribution Recipients Who Saved All or
Part of the Distribution . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
Table 7. Disposition of Lump-Sum Distributions Received since 1975 . . . . . . 21
Table 8. Disposition of Lump-Sum Distributions Received since 1987 . . . . . . 22

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Pension Issues: Lump-Sum Distributions and
Retirement Income Security
Overview: Pension Coverage and Tax Policy
In the United States, about half of all workers age 25 and older participate in an
employer-sponsored pension or retirement savings plan.1 (Table 1) Not all of these
employees, however, will receive a pension or retirement annuity from the jobs they
now hold. Some workers will not participate in their employer’s retirement plan long
enough to earn the right to a pension – a process called “vesting.” Others will receive
a “lump-sum distribution” from the plan when they retire or when they change jobs.
Considering that the typical 25-year-old today will work for seven or more employers
before reaching age 65,2 most workers can expect to receive at least one such
distribution before they reach retirement age. What an individual does with a lump-
sum pension distribution – even a relatively small one – can have a significant impact
on his or her wealth and income during retirement. Lump-sum distributions that are
spent on current consumption rather than saved for retirement obviously will not be
available to augment a worker’s retirement income.
Today, most retirees rely on Social Security for the majority of their income. In
1998, nearly two-thirds (63%) of the program’s beneficiaries received more than half
of their annual income from Social Security, and Social Security was the only source
of income for nearly one in five (18%) beneficiaries.3 Workers whose employer
sponsors a pension or retirement saving plan have the opportunity to achieve higher
standards of living and greater financial independence in retirement than those who
must rely on Social Security alone. To the extent that workers spend lump-sum
distributions from employer-sponsored plans rather than save them, they may be
undermining their future financial security.
Congress has provided incentives for workers to prepare for retirement by
granting favorable tax treatment to private pensions and savings plans that meet
certain requirements as to eligibility, benefits, and funding. Employers are permitted
to deduct from income amounts they contribute to employee pension plans. These
pension contributions are not taxed as income to participating employees until they
begin receiving distributions from the plan. Employers who sponsor pensions or
1 This figure includes full-time and part-time workers in both the public and private sectors.
Among private-sector workers ages 25 to 54 who worked year-round, full-time in 1998, 57%
were included in a pension or retirement savings plan.
2 Estimated by the Congressional Research Service, from data published by the U.S.
Department of Labor.
3 Social Security Administration, Fast Facts and Figures about Social Security, 1998.

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CRS-2
retirement savings plans do so voluntarily. However, an employer who chooses to
sponsor a retirement plan must comply with both the Employee Retirement Income
Security Act of 1974 (P.L. 93-406), popularly known as “ERISA,” and the Internal
Revenue Code. A plan that fails to meet the standards set forth in federal law may be
denied the status of a “tax-qualified” plan.
The tax revenue forgone by the federal government as a result of the deductions
and exclusions granted to qualified pension plans is substantial. According to the
congressional Joint Committee on Taxation, the net exclusion for employer pension
plan contributions and earnings will result in $416 billion in forgone tax revenue over
the 5 years from FY2000 to FY2004.4 This item has been the largest so-called “tax-
expenditure” in the federal budget for many years.
Pension Portability, Asset Preservation, and Lump-Sum Distributions.
Pension plans and retirement savings plans such as the popular “401(k)” promote
financial security in retirement by setting aside income during employees’ working
years.5 This pool of assets is invested in securities that earn interest, dividends, and
capital gains. In retirement, these assets can be used to purchase an “annuity” – a
lifetime stream of monthly income – or, alternatively, the retiree can spend the
accumulated assets over the course of his or her retirement. Sometimes, however,
pension assets are distributed before retirement. This can happen in the event that a
plan is terminated or, more commonly, when a worker moves from one job to
another. In such cases, the current value of the benefit that the employee has earned
to date – his or her “accrued benefit” – is typically paid out in a single lump-sum
distribution from the plan. In the case of a 401(k)-type plan, the distribution would
be equal to the balance in the employee’s account: employee contributions, earnings
on those contributions, and the part of employer contributions and earnings to which
the employee has earned a legal right through length of service (a process called
vesting).6 In the case of a traditional pension, the lump-sum would be equal to the
present value of the employee’s accrued benefit. The present value calculation
discounts the stream of benefits that would be paid in the future to an amount that
could, if invested by the recipient, pay an equivalent income at retirement.
Lump-sum distributions promote “portability” of retirement assets for workers
who change jobs. Portability allows workers to invest their retirement assets so that
4 Pension-Related Exclusion Again Tops List of Estimated Federal Tax Expenditures. Daily
Tax Report. Bureau of National Affairs. Washington, December 23, 1999.
5 “401(k)” refers to the section of the Internal Revenue Code (IRC) that excludes from taxable
income amounts contributed to, and earnings on, these plans. 401(k) plans are authorized for
private, for-profit employers. A similar arrangement for non-profit employers is authorized
by Section 403(b). (Employees of state and local governments can participate in deferred
compensation arrangements authorized under IRC Section 457).
6 ERISA allows plan sponsors to choose between two methods of vesting plan participants in
their pension rights. Under “cliff” vesting, a participant is 100% vested after 5 years of
participation, but has no vested rights to a benefit under the plan before that time. Under
“graded” vesting, a participant is 20% vested after 3 years, 40% vested after 4 years, 60%
vested after 5 years, 80% vested after 6 years, and fully vested after 7 years. Employers can,
if they choose, vest participants in their accrued benefits immediately.

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CRS-3
they will continue to grow until retirement. For workers who are leaving a retirement
plan with limited investment choices, portability of retirement assets can result in more
investment options for the participant. A transfer of assets from one tax-qualified
retirement plan to another is referred to as a “rollover” of assets into another plan.
A pre-retirement distribution that is not rolled over into another retirement plan is said
to have “leaked” from the pool of retirement assets.
Lump-sum distributions can result in leakage of retirement assets if the recipient
uses some of the distribution for current consumption rather than rolling over the full
amount into another retirement plan. To discourage such leakage, Congress has
amended the Internal Revenue Code to provide incentives for individuals to “roll
over” these distributions into other retirement plans. The Tax Reform Act of 1986
(P.L. 99-514) established a 10% excise tax – in addition to ordinary income taxes –
on lump-sum distributions received before the age of 59½ that are not rolled over into
an Individual Retirement Account (IRA) or another employer’s tax-qualified
retirement plan.7 The Unemployment Compensation Amendments of 1992 (P.L. 102-
318) required employers who sponsor retirement plans to give departing employees
the option to have lump-sum distributions directly transferred to an IRA or to another
employer’s plan. If the participant chooses to receive the lump-sum distribution
directly, the employer is required to withhold 20%, which is to be applied to any taxes
due on the distribution. If the participant does not deposit the distribution into an
IRA or another tax-qualified plan within 60 days, he or she will owe both regular
income taxes and the 10% excise tax on the entire amount of the distribution.8
Obviously, there are times when the recipient of a lump-sum distribution may
face short-term expenses that are more pressing than concerns about retirement. This
is especially so when the recipient is in a period of unemployment or must pay for the
care of a relative who is ill or disabled. Previous research has shown that the event
precipitating a lump-sum distribution (losing one’s job, for example), is a key
determinant of whether the distribution is rolled over into another retirement plan,
saved in some other way, or spent on current consumption. Surveys of employers and
employees indicate that the availability of lump-sum distributions has a positive effect
on employee participation retirement plans. Consequently, Congress has sought to
encourage recipients to roll over pre-retirement distributions, rather than require that
such distributions be rolled over into an IRA or another retirement plan. Allowing
lump-sum distributions but placing an excise tax on amounts that are not rolled over
represents a compromise among several policy objectives: preserving assets until
retirement, promoting pension participation, providing access to assets in time of
need, and assuring that revenue losses do not exceed the minimum necessary to
encourage employer sponsorship and employee participation.
7 The 10% penalty is waived if the distribution is part of a pension plan’s early retirement
provisions and the recipient is age 55 or older. It also is waived if the participant dies,
becomes disabled, or has medical expenses that exceed 7.5% of adjusted gross income.
8 If the distribution is not rolled over within 60 days, the 20% withheld is applied to the taxes
owed on the distribution. If the distribution is rolled over within the 60-day limit, the 20%
withheld is credited toward the individual’s total income tax owed for the year. Note that to
roll over the full amount after receiving a lump-sum distribution, the recipient must have
access to other funds that are at least equal to the amount withheld.

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CRS-4
Table 1. Participation in Employer-Sponsored Pension and Retirement
Savings Plans, 1995
(all workers age 25 and older)
Participate in a
Persons
Retirement Plan?
Yes
No
(thousands)
Age
25 to 34
43.8%
56.2%
32,990
35 to 44
53.2%
46.8%
35,050
45 to 54
56.8%
43.2%
24,870
55 or older
42.2%
57.8%
14,850
Race
White
49.4%
50.6%
92,160
Black
54.6%
45.4%
11,350
Other
42.1%
57.9%
4,250
Gender
Male
50.6%
49.4%
58,530
Female
48.5%
51.5%
49,220
Marital Status
Married
51.2%
48.8%
72,490
Not Married
46.4%
53.6%
35,260
Education
HS or less
42.7%
57.3%
48,230
Some college
50.8%
49.2%
27,270
College graduate
59.0%
41.0%
32,250
Earnings in 1995
Under $20,000
30.8%
69.2%
46,250
$20,000-$40,000
61.2%
38.8%
40,170
More than $40,000
68.8%
31.2%
21,340
Establishment Size*
Under 10 people
26.5%
73.5%
19,200
10 to 24 people
38.6%
61.4%
13,950
25 to 99 people
58.0%
42.0%
22,520
100 or more people
75.0%
25.0%
39,950
Total
49.6%
50.4%
107,800
Source: CRS analysis of the Survey of Income and Program Participation.
* Establishment size was missing on 11.8% of records representing 12.1 million workers.

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CRS-5
Bills in the 106th Congress
Several bills introduced in the 106th Congress would speed up the vesting process
through which participants become legally entitled to benefits. Some would allow
penalty-free distributions from plans in the event of a merger or acquisition. Several
would make it easier to roll over retirement assets from one plan to another.
H.R. 833 (Gekas), the Bankruptcy Reform Act of 2000, was passed by the
House of Representatives on May 5, 1999. On February 2, 2000, the Senate passed
H.R. 833, into which it had substituted the language of S. 625 (Grassley). As passed
by the Senate, H.R. 833 contains several provisions that would affect pre-retirement
distributions from employer-sponsored retirement plans. The Senate-passed bill, for
example, would shorten the time it takes for an employee to vest in employer
matching contributions to a retirement plan, thus making larger lump-sums available
to employees who depart after a relatively short period of service. It would make it
easier to roll over funds among the three most common employer-sponsored
retirement savings plans: 401(k) plans in the private-sector, 403(b) plans of non-
profit organizations, and the 457 plans of state and local governments. It also would
allow rollovers from IRAs into employment-based plans, and allow rollovers of after-
tax contributions. The bill would ease restrictions on pension distributions made in
the event of a merger or acquisition (the so-called “same-desk” rule). The Senate
version of the Bankruptcy Act also would modify the current-law requirement that an
employer must secure a departing employee’s written permission to distribute as a
lump sum a benefit with a present value of $5,000 or more. It would allow employers
to disregard amounts that had been rolled over into the plan when they are
determining if the employee’s accrued benefit exceeds the $5,000 limit. Many of the
provisions of the Senate-passed H.R. 833 are included in other bills introduced in the
106th Congress, such as S. 8 (Daschle), H.R. 1590 (Gejdenson), H.R. 1213 (Neal),
H.R. 739 (Pomeroy), and S. 1357 (Jeffords).9
H.R. 1102 (Portman), like S. 625, would make it easier for workers who
change jobs to roll over retirement funds among 401(k), 403(b), and 457 plans, and
would permit rollovers from IRAs into employment-based plans. It, too, would
shorten the maximum vesting period and repeal the same-desk rule to allow
distributions in the case of certain mergers or acquisitions. H.R.1102 also would
allow employers to disregard amounts that had been rolled into the plan when
determining whether the employee’s accrued benefit exceeds $5,000. In addition, it
would index the $5,000 limit on distributions that can be made without the
employee’s written consent to inflation by increasing it in $500 increments based on
the cumulative year-to-year changes in the Consumer Price Index (CPI).
S. 476 (Schumer) would treat loans from retirement plans as distributions
except for specific uses, such as to purchase a home, to pay medical or educational
expenses, or to pay expenses while unemployed. This bill also would increase the
excise tax on early withdrawals from qualified retirement plans from 10% to 100%.
9 For more information, see CRS Issue Brief IB10028, Pension Plans Offered by Private
Employers: Legislative Issues in the 106th Congress, by James R. Storey.

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CRS-6
Trends in Lump-sum Distributions
There is no single data set that combines complete and accurate information
about lump-sum distributions with the economic and demographic characteristics of
the recipients. Most research has relied on one or more of the following sources:
! information reported to the IRS on the Form 1040 and the Form
1099R,
! proprietary data collected by firms that provide management or
consulting services to other businesses, and
! data collected through household surveys, such as the Current
Population Survey (CPS), and the Health and Retirement Study
(HRS).
Each of these sources has its particular strengths and weaknesses.10 The most
comprehensive – although still incomplete – picture of trends in the frequency and
amount of lump-sum distributions can be constructed by examining data from all of
the available sources.
Estimates of the number and size of lump-sum distributions from retirement
plans vary, in some cases by quite a lot. By any measure, however, both the number
of lump-sum distributions and the amount of money distributed are large. According
to a recent analysis of data reported to the Internal Revenue Service, 10 million tax-
filers reported receiving a lump-sum distribution in 1995, and 5.6 million of these
represented full distributions in which a retirement account was liquidated.11 The total
sum distributed amounted to $131 billion, of which $87 billion represented full
distributions from liquidated accounts. Pension distributions of all kinds in 1995
totaled $328 billion. Lump-sum distributions, therefore, comprised between 26% and
40% of all pension distributions, depending on whether one considers only full
distributions or includes partial distributions as well. Of the $131 billion in lump-sum
distributions in 1995, approximately $91 billion (70% of the total) were rolled over
into IRAs or other tax-deferred retirement plans.
The average amount of a full distribution reported to the IRS in 1995 was
$15,600. The average amount of full and partial distributions together was $13,100.
These averages are somewhat misleading, however, because they represent the
arithmetic means of the distributions, which are biased upward by a small number of
large distributions. A better measure of the “typical” lump-sum distribution is the
median, which is found by ordering the individual amounts from largest to smallest
and then locating the one at the mid-point. The median lump-sum distribution in 1995
was $2,300. In other words, half of all distributions were amounts less than $2,300
and half were amounts of $2,300 or more.
10 For a more detailed description of each source, see the Appendix to this report.
11 John Sabelhaus and David Weiner. Disposition of Lump-Sum Pension Distributions:
Evidence from Tax Returns. National Tax Journal, v. 52, no. 3, September 1999.

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CRS-7
How Many Workers Are Eligible for Lump-Sum Distributions?
Many employers pay departing employees their accrued pension benefits as a
lump-sum, rather than requiring them to wait until reaching the plan’s normal
retirement age to claim their benefits. Consequently, many workers receive lump-sum
distributions long before reaching retirement age. Federal law requires the plan
sponsor to secure the employee’s written consent before making a lump-sum
distribution of $5,000 or more. An accrued benefit of less than $5,000 can be paid
as a lump-sum without asking for the employee’s permission.12 Congress allows
employers to “cash out” these relatively small pension benefits for departing
employees to relieve them of the administrative expenses they would otherwise incur
to maintain records for former employees who had earned only a small pension
benefit. In the case of defined benefit plans, cashing out the benefit also relieves the
sponsor of the obligation to pay monthly premiums to the Pension Benefit Guaranty
Corporation (PBGC). Because PBGC premiums are assessed on a per capita basis,
they are disproportionately large for those whose accrued benefit is relatively small.13
Between October 1995 and January 1996, participants in the Survey of Income
and Program Participation (SIPP), conducted by the Bureau of the Census, were
asked a series of questions on retirement expectations and pension plan coverage.
According to this survey, 43.6 million workers age 25 or older were included in
retirement plans that offered a lump-sum distribution as a payment option. (Table 2)
This represents 81.5% of the 53.5 million full-time and part-time workers who were
covered by a pension, profit-sharing, or retirement savings plan in 1995.14
The number of firms that offer a lump-sum payment option is almost certain to
have increased recently as a result of the conversion of several hundred large defined
benefit pension plans to “cash balance plans.” These are hybrid pensions that have
some of the characteristics of defined contribution plans – most significantly in that
a participant’s accrued benefit is reported as an “account balance” – while still being
funded on a group basis, and considered to be defined benefit plans under the Internal
Revenue Code. Virtually all cash balance plans offer a lump-sum distribution option
to departing employees who are vested in their benefits.15
12 The $5,000 limit was established by the Taxpayer Relief Act of 1997 (P.L. 105-34). The
amount had been set at $3,500 by Retirement Equity Act of 1984. It was originally established
at $1,750 by ERISA in 1974.
13 Cashing Out Terminated Participants’ Vested Benefits Simplifies Plan Administration,
Reduces PBGC Premiums. Spencer’s Research Reports. Charles D. Spencer and Associates,
Inc. Chicago, IL. October 3, 1997.
14 CRS classified plans as offering a lump-sum payment option if the employee reported that
such an option was available or if the plan was a defined contribution plan such as a 401(k).
Among 41.8 million employees who had vested in their retirement benefits, 34.3 million
(82.0%) reported that their retirement plan offered a lump-sum distribution option.
15 Portable Accounts Reward Productivity of Mobile Workers, Business Insurance, May 17,
1999; Many Mobile Workers Fail to Reap Promise of New-Style Pensions, The Wall Street
Journal, December 16, 1999; Cash Balance Conversions, Journal of Accountancy, v 189, no.
2, February 2000.

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CRS-8
Table 2. Percentage of Workers Covered By Retirement Plans that
Offered a Lump-Sum Payment Option in 1995
(workers 25 and older who participate in an employer-sponsored
retirement plan)
Does plan have a
Persons
lump-sum option?
Yes
No
(thousands)
Age
25 to 34
85.4%
14.6%
14,460
35 to 44
82.2%
17.8%
18,650
45 to 54
79.5%
20.5%
14,120
55 or older
74.7%
25.3%
6,270
Race
White
82.3%
17.7%
45,500
Black
74.7%
25.3%
6,190
Other
84.1%
15.9%
1,790
Gender
Male
81.0%
19.0%
29,600
Female
82.1%
17.9%
23,890
Marital Status
Married
81.4%
18.6%
37,120
Not Married
81.7%
18.3%
16,370
Education
HS or less
79.1%
20.9%
20,610
Some college
80.6%
19.4%
13,850
College graduate
84.7%
15.3%
19,030
Earnings in 1995
Under $20,000
79.4%
20.6%
14,240
$20,000-$40,000
80.6%
19.4%
24,570
More than $40,000
84.9%
15.1%
14,680
Establishment Size
Under 10 people
20.8%
79.2%
5,090
10 to 24 people
13.0%
87.0%
5,390
25 to 99 people
16.7%
83.3%
13,050
100 or more people
80.1%
19.9%
29,960
Total
81.5%
18.5%
53,490
Source: CRS analysis of the Survey of Income and Program Participation.

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CRS-9
How Many People Have Received Lump-Sum Distributions?
Among individuals age 25 or older who responded to the SIPP questions on
pension coverage, 8.2% reported that they had received one or more lump-sum
distributions at age 25 or older since 1975.16 (Table 4) This represents approximately
13.6 million people who received at least one lump-sum distribution during that time.
Expressed in 1995 dollars, the average (mean) value of these distributions was
$13,200.17 (Table 3) As was noted earlier, however, the mean value of lump-sum
distributions is skewed upward by a few large distributions. The “typical” distribution
is more accurately portrayed by the median, which adjusted to1995 dollars, was
$5,500. The average recipient was between the ages of 37 and 40 at the time of the
most recently received lump-sum distribution. Thus, most people who received these
distributions were more than 20 years away from retirement age.
Table 3. Characteristics of Individuals Who Reported Receiving One
or More Lump-Sum Distributions since 1975
Recipient age and amount of distribution:
Mean
Median
All recipients of lump-sum distributions:
Age when lump sum received
40
37
Amount of lump-sum distribution ( in 1995 $)
$13,200
$5,500
Recipients who rolled over full amount:
Age when lump sum received
42
39
Amount of lump-sum distribution (in 1995 $)
$19,200
$10,200
Recipients who did not roll over full amount:
Age when lump sum received
40
36
Amount of lump-sum distribution (in 1995 $)
$10,300
$4,200
Source: CRS analysis of the Survey of Income and Program Participation.
16 CRS restricted the sample to lump-sum distributions that had occurred since 1975 to reduce
the number of cases where difficulty in recalling long-past events was most likely to be a
problem. (Also, prior to 1975 there were no IRAs). We limited the sample to those who had
received a distribution at age 25 or later to exclude those who were least likely to have given
much thought to saving for retirement.
17 CRS adjusted the dollar amount of all lump-sum distributions reported on the SIPP to
constant 1995 dollars, based on the Personal Consumption Expenditure Index of the National
Income and Product Accounts (NIPA).

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CRS-10
Table 4. Percentage of Workers Who Have Received at Least One
Lump-Sum Distribution from a Retirement Plan since 1975
(all workers age 25 and older)
Ever Received a
Lump-Sum
Persons
Distribution?
Yes
No
(thousands)
Age
25 to 34
5.2%
94.8%
32,990
35 to 44
11.9%
88.1%
35,050
45 to 54
11.9%
88.1%
24,870
55 or older
10.1%
89.9%
14,850
Race
White
10.2%
89.8%
92,160
Black
6.2%
93.8%
11,350
Other
7.2%
92.8%
4,250
Gender
Male
9.3%
90.7%
58,530
Female
10.0%
90.0%
49,220
Marital Status
Married
10.1%
89.9%
72,490
Not Married
8.6%
91.4%
35,260
Education
HS or less
7.0%
93.0%
48,230
Some college
9.3%
90.7%
27,270
College graduate
13.8%
86.2%
32,250
Earnings in 1995
Under $20,000
7.7%
92.3%
46,250
$20,000-$40,000
10.2%
89.8%
40,170
More than $40,000
12.8%
87.2%
21,340
Establishment Size*
Under 10 people
9.1%
90.9%
19,200
10 to 24 people
10.4%
89.6%
13,950
25 to 99 people
9.7%
90.3%
22,520
100 or more people
10.3%
89.7%
39,950
Total
9.6%
90.4%
107,800
Source: CRS analysis of the Survey of Income and Program Participation.
* Establishment size was missing on 11.8% of records representing 12.1 million workers.

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CRS-11
How Did Recipients Use Their Lump-Sum Distributions?
Research into lump-sum distributions has consistently found that the majority of
distributions are not rolled over into other qualified retirement savings plans, but that
the majority of dollars are rolled over. In other words, small distributions are less
likely to be rolled over, but large distributions – which account for most of the money
distributed – are more likely to be rolled over. Researchers also have found however,
that most recipients of lump-sums have saved at least part of the distribution, even if
none of the money was rolled into another retirement plan.
Of those who reported on the SIPP that they had received at least one lump-sum
distribution since 1975, one-third (32.8%) said that they had rolled over the entire
amount of the most recent distribution into another tax-qualified plan, such as an
IRA.18 (Table 5) These transactions accounted for 47.6% of the dollars distributed
as lump sums. (Not shown in table.) Of those who reported receiving a distribution
in 1990 or later, 38.9% said that they had rolled over the entire amount into another
plan. Among this group, the amount rolled over accounted for 55.8% of the dollars
distributed as lump-sums.
Rolling over a lump-sum distribution into another tax-qualified retirement plan
is the most efficient way to preserve these assets for retirement, because direct
rollovers are not subject to taxes, tax penalties, or employer withholding.
Nevertheless, it is not the only way to save a lump-sum distribution. Participants in
the SIPP who reported that they had neither rolled over the entire amount of a lump-
sum distribution nor left it in their previous employer’s plan were asked what they did
with the money. Eleven options were listed, and respondents could indicate more
than one if they used the money for more than one purpose. (Survey participants
were asked only how they used the money, not how much was used for each purpose).
Four of the categories listed – purchasing a home/paying off a mortgage, putting it
into a savings account, investing in stocks or other assets, and starting or purchasing
a business – fit the standard economic definition of “saving” in that they lead to (or
are expected to lead to) an increase in a household’s net worth.19
Among those who reported that they had received a lump-sum distribution since
1975, 67.3% said that they had saved at least some of the most recent distribution.
(Table 6) In addition to the 32.8% who had rolled over the entire amount into
another tax-retirement plan, another 34.5% had saved at least part of the distribution
in one of the four other ways listed above. Of those who had received their most
recent lump-sum distribution since 1990, 69.1% said that they had saved at least part
of the distribution. Among this group, 38.9% rolled over the entire amount into
another plan, and 30.2% saved at least part of the distribution in some other way.
18 Employees who are vested in their retirement benefits and leave them with their former
employer when they change jobs can claim their benefits when they reach retirement age. The
SIPP includes those who left their accrued benefits in the previous employer’s retirement plan
with those who rolled over their retirement funds into another plan.
19 The other categories listed on the survey are: used for children’s education; used for a
period of unemployment; paid loans or bills or spent on other items; bought a car or boat; paid
medical or dental expenses; used for general everyday expenses; and other.

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CRS-12
Table 5. Percentage of Lump-Sum Distribution Recipients Who Rolled
Over the Entire Amount into Another Retirement Plan
(all recipients of lump-sum distributions, age 25 or older)
Was the entire lump
Persons
sum rolled over?
Yes
No
(thousands)
Age When Received
25 to 34
27.1%
72.9%
5,759
35 to 44
36.1%
63.9%
3,764
45 to 54
41.8%
58.2%
1,933
55 or older
34.3%
65.7%
2,185
Race
White
34.1%
65.9%
12,420
Black
12.7%
87.3%
846
Other
36.1%
63.9%
376
Gender
Male
36.5%
63.5%
6,633
Female
29.4%
70.6%
7,007
Marital Status
Married
34.7%
65.3%
9,625
Not married
28.5%
71.5%
4,015
Children Present
No Children
34.4%
65.6%
8,194
One child or more
30.5%
69.5%
5,446
Education
HS or less
28.1%
71.9%
5,101
Some college
27.7%
72.3%
3,226
College graduate
40.5%
59.5%
5,313
Home ownership
Home owner
35.9%
64.1%
10,430
Not a home owner
22.8%
77.2%
3,210
Earnings in 1995
Under $20,000
27.6%
72.4%
6,827
$20,000-$40,000
30.9%
69.1%
4,090
More than $40,000
49.0%
51.0%
2,723
Amount of LSD*
Less than $3,500
21.7%
78.3%
5,498
$3,500 to $9,999
30.6%
69.4%
3,538
$10,000 to $19,999
46.8%
53.2%
2,000
$20,000 or more
48.8%
51.2%
2,604
Total
32.8%
67.2%
13,640
Source: CRS analysis of the Survey of Income and Program Participation.
* Amount of the lump-sum distribution, adjusted to 1995 dollars.

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CRS-13
Table 6. Percentage of Lump-Sum Distribution Recipients Who Saved
All or Part of the Distribution
(all recipients of lump-sum distributions, age 25 and older)
Was any part of the
Persons
distribution saved?
Yes
No
(thousands)
Age When Received
25 to 34
60.2%
39.8%
5,759
35 to 44
65.3%
34.7%
3,764
45 to 54
74.0%
26.0%
1,933
55 or older
84.0%
16.0%
2,185
Race
White
69.3%
30.7%
12,420
Black
34.3%
65.7%
846
Other
78.5%
21.5%
376
Gender
Male
70.5%
29.5%
6,633
Female
64.4%
35.6%
7,007
Marital Status
Married
70.1%
29.9%
9,625
Not married
60.9%
39.1%
4,015
Children Present
No Children
69.7%
30.3%
8,194
One child or more
63.9%
36.1%
5,446
Education
HS or less
65.4%
34.6%
5,101
Some college
61.5%
38.5%
3,226
College graduate
72.8%
27.2%
5,313
Home ownership
Home owner
72.7%
27.3%
10,430
Not a home owner
50.0%
50.0%
3,210
Earnings in 1995
Under $20,000
68.6%
31.4%
6,827
$20,000-$40,000
59.2%
40.8%
4,090
More than $40,000
76.6%
23.4%
2,723
Amount of LSD*
Less than $3,500
56.2%
43.8%
5,498
$3,500 to $9,999
68.8%
31.2%
3,538
$10,000 to $19,999
77.0%
23.0%
2,000
$20,000 or more
81.8%
18.2%
2,604
Total
67.4%
32.6%
13,640
Source: CRS analysis of the Survey of Income and Program Participation.
* Amount of the lump-sum distribution, adjusted to 1995 dollars.

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CRS-14
How Much Retirement Wealth Was Lost from Lump-Sums that
Were Spent Rather than Saved?
Much of the money distributed from pension plans as lump-sum distributions is
received by workers who are moving from one job to another and are many years
from retirement. According to tax data analyzed by Sabelhaus and Weiner (1999),
of $131 billion paid out as lump-sum distributions from pension plans in 1995, 44%
– approximately $57 billion – was distributed to persons under age 55. An estimated
21% of the total ($27 billion) was distributed to people under age 45.
Research into lump-sum distributions has consistently found that up to about age
55, older workers are more likely than their younger colleagues to roll over a lump-
sum distribution of any given size into an IRA or other retirement plan.20 For
example, according to the SIPP, among workers who received a distribution between
the ages of 25 and 34, only 27% rolled over the entire amount into an IRA or other
retirement plan. Of those who received a distribution between the ages of 45 and 54,
42% rolled over the entire amount. Younger workers, however, are more likely to
receive relatively small lump-sum distributions because they generally have fewer
years of service and have lower annual earnings than older workers. Tax data for
1995 show that the average (mean) lump-sum received by individuals of all ages that
year was $13,100. The average distribution received by those under age 35 was
approximately $4,000, while the average distribution received by individuals ages 45
to 54 was $15,750.
Among participants in the SIPP who had received at least one lump-sum
distribution, the average (mean) value of the most recent distribution (adjusted to
1995 dollars) was $13,200. Average values differed sharply for amounts that were
rolled over versus those that were not. Among recipients who had rolled over the
entire amount, the average distribution was $19,160. Those who had not rolled over
the entire distribution received lump-sums worth only about half as much, with a mean
value of $10,300.
Although younger workers often receive relatively small lump-sum distributions,
substantial amounts of retirement wealth can be lost by spending rather than saving
even a small sum, especially in the case of workers who are many years from
retirement. To gauge the size of the potential loss in retirement wealth among people
who reported on the SIPP that they had not rolled over their most recent lump-sum
distribution, CRS calculated the amounts that these individuals could have
accumulated if they had rolled over their entire lump sums into other retirement plans.
For each individual who had not rolled over the most recent lump-sum distribution,
CRS calculated the amount that would have been accumulated by 1995 (the date of
the survey) if the entire lump-sum had been rolled over in the year it was received.
The estimated value that the lump sum would have reached in 1995 was based on
three possible rates of return:
20 Because some workers can take early retirement at age 55, a significant proportion of lump-
sum distributions received at this age or older are used for everyday expenses. According to
information reported on the SIPP, the likelihood of rolling over a lump-sum distribution falls
from 47% for workers ages 50-54 to 33% for workers ages 55 to 59.

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CRS-15
! the annual interest rate paid by 3-month U.S. Treasury bills in each
year since the year the distribution was received;
! the annual interest rate paid by 30- year U.S. Treasury bonds in each
year since the year the distribution was received; and
! the annual percentage change in the New York Stock Exchange
(NYSE) index in each year since the year the distribution was
received.
In each case, CRS multiplied the nominal value of the recipient’s most recent lump-
sum distribution by the change in the appropriate index in every year between the year
of the distribution and 1995.
If all of the respondents who reported on the SIPP that they had not rolled over
their most recent lump-sum distribution would have instead rolled over the full
amount into a fund that earned an interest rate equal to that paid by 3-month U.S.
Treasury bills, the distributions would have attained a mean value of $12,400 by 1995.
If all of the distributions had been rolled over into retirement plans that earned the rate
of interest paid by 30-year U.S. Treasury bonds, they would have had a mean value
of $15,200 by 1995. If the lump-sums had been rolled over into investments that
grew at a rate equal to the annual percentage change in NYSE index, the distributions
would have had a mean value of $16,000 by 1995.21
As noted earlier, the mean value of lump-sum distributions is skewed upward by
the effects of a relatively small number of very large distributions. Consequently, the
“typical” distribution is more accurately portrayed by the median. If all of the
distributions that had not been rolled over into another retirement plan had instead
been rolled into a retirement account that earned the rate of return paid by 3-month
U.S. Treasury bills, the median lump sum would have been worth $5,200 by 1995.
If they had been rolled over into retirement plans that earned the rate paid by 30-year
U.S. Treasury bonds, they would had a median value of $6,200 by 1995. If invested
in stocks that matched the rate of growth achieved by the NYSE index, the lump sums
would have grown to a median value of $6,300 by 1995.
What Would these Amounts have been Worth at Retirement?
If we consider age 65 to be retirement age, the typical SIPP respondent who had
received a distribution but did not roll it over into another retirement account was
from 25 to 29 years away from retirement in the year that he or she received the
21 To readers who are familiar with recent stock market returns, the differences among the
three values shown here might appear surprisingly small. Recent rates of return in equity
markets, however, have been unusually high. For the 5 years from 1995 though 1999, the
NYSE index rose by an average rate of 21% per year, while 30-year Treasury bonds paid an
average annual return of 6.4%. Over the 25-year period from 1975 through 1999, the NYSE
index rose at an average rate of 11.4%, while T-bonds paid an average rate of 8.7%. Total
rates of return on equities – including reinvestment of dividends – were higher than the rates
of increase in the NYSE index shown here, which reflect only price changes.

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CRS-16
distribution.22 Their mean age in the year that they received their distributions was
39.7. Their median age in the year of the distribution was 36. In 1995, the mean age
of these individuals was 47.8 and their median age was 45.
As noted above, the mean value of the lump-sum distributions that were not
rolled over would have reached $16,000 by 1995 if they had been invested in a broad-
based stock market index fund. Assuming an average annual rate of return in the
stock market of 10%, a 48-year-old who invests $16,000 for17 years would have a
total of $81,000 by age 65. This would be enough to purchase a life-long annuity that
would provide income of $650 per month.23 The median value of lump-sums that
were not rolled over would have reached $6,300 by 1995 if these distributions had
been invested in stocks. If this amount were invested by a 48-year-old at 10.0% until
age 65, it would grow to $32,000, enough to provide a monthly annuity of $260.
If the lump sums that were not rolled over had been rolled into an account
paying the same rate of return as 30-year Treasury bonds, they would have reached
a mean balance of $15,200 in 1995 and a median value of $6,100. Assuming that
$15,200 was invested at age 48 at an average rate of return of 6.0%, it would grow
to $41,000 by age 65. This would be sufficient capital to purchase a lifetime annuity
that would provide a monthly income of $330. A lump sum of $6,100 invested at
6.0% at age 48 and left untouched until age 65 would grow to $16,400. This amount
could purchase a lifetime annuity providing a monthly income of $130.
What Factors Influence the Rollover Decision?
Older recipients and those who receive larger-than-average lump sums are
relatively more likely to roll over their distributions into an IRA or other tax-qualified
retirement plan. In other words, both the recipient’s age and the amount of the
distribution are positively correlated with the probability that a lump-sum distribution
will be rolled over into another retirement plan. Simple descriptive statistics such as
these, however, can be misleading because they show the relationship between only
two variables; for example, between age and the likelihood of a rollover, or between
the amount of the distribution and the likelihood of a rollover. In fact, there are many
variables that simultaneously affect the rollover decision, and some of them have
strong interaction effects on each other. In other words, the decision to roll over a
lump-sum or to spend it is affected not just by the recipient’s age, and not just by the
size of the distribution, but by both of these factors, and by many others. This
decision, like all economic choices, is made in the context of numerous
considerations.
To study the relationship between the rollover decision and a set of variables
suggested by both economic theory and previous research, CRS developed a
regression model based on the data reported on the SIPP. The dependent, or
response, variable in the model could have two possible values: 1 (true) if the entire
lump-sum distribution was rolled over into another retirement plan, and 2 (false) if any
22 In fact , over half of retired workers who began receiving Social Security in 1998 (57.8%)
elected to receive benefits at age 62. Three-fourths (75.8%) elected benefits before age 65.
23 Annuity estimates are based on a level, single-life annuity purchased at age 65 at 6.375%.

---

CRS-17
of the distribution was used for any other purpose. The independent variables
included the first specification of the model were the individual’s age, race, sex, level
of education, marital status, presence of one or more children in the family, home
ownership, current employment status, monthly earnings, monthly interest income,
and the amount of the lump-sum distribution. The recipient’s sex, marital status,
current employment status, and monthly interest income proved not to be statistically
significant and were dropped from the final specification of the model.
The Tax Reform Act of 1986 placed a 10% excise tax on pension distributions
received before age 59½ that are not rolled over into another retirement plan. To test
for the effects of this change in tax treatment, we included in the model an indicator
for whether the distribution occurred after 1986. Results of this model are shown in
Table 7. The Unemployment Compensation Amendments of 1992 required
employers to offer a direct rollover option to departing employees and to withhold for
income taxes 20% of distributions paid directly to recipients. To test for the effects
of these amendments, we ran another version of the model in which we restricted the
sample to lump-sums received after 1986 and included an indicator for distributions
received after 1992. Results of this model are shown in Table 8.
Interpreting the Regression Results
We used a logistic regression or “logit” for our analysis. This is a form of
multivariate regression that was developed to study relationships in which the
dependent (response) variable can have only a limited number of values, such as yes
(true) or no (false). In this model, the dependent variable indicates whether a lump-
sum distribution was rolled over into another retirement account (1 = yes; 2 = no).
The model measures the likelihood of observing the dependent variable having a value
of 1 (“yes”) when a particular independent variable is changed, given that every other
independent variable is held constant at its mean value. The model estimates a
coefficient (also called a parameter estimate) for each independent variable and
calculates the standard error of the estimate. The standard error measures how
widely the coefficients are likely to vary from one observation to another. In general,
the greater the absolute value of the parameter estimate, the more likely it is to be
statistically significant. Statistical significance is expressed in confidence intervals
that are measured as the .10 level, .05 level and .01 level. If a variable is significant
at the .05 confidence level, for example, there is only a one-in-twenty chance that it
is not related to the dependent variable in the way that the model has predicted.
The model also generates for each independent variable a statistic called the odds
ratio. The odds ratio is a measure of how much more (or less) likely it is for a
specific outcome to be observed when a particular independent variable is “true”
(x=1) than it is when that independent variable is “false” (x=0). For example, in this
model, home ownership is measured as having a value of 1 if the recipient of a lump-
sum distribution was a homeowner and 0 otherwise. In Table 7, this variable is
shown as having an odds ratio of 1.695. This means that the dependent variable is
70% more likely to have a value of 1 (rollover = yes) when the dependent variable
own home has a value of 1 (yes) as when it has a value of 0 (no). In other words,
other things being equal (and measured at their mean values), recipients of lump-sum
distributions who owned or were buying their homes were about twice as likely as
renters to have rolled over the entire lump sum into another retirement plan.

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CRS-18
As had been true of previous studies based on other sources of data, our analysis
of data from the SIPP found that the variable with the strongest relationship to the
likelihood that a lump-sum distribution was rolled over was the amount of the
distribution. In the regression model, lump-sum distributions were divided into four
size categories: less than $3,500; $3,500 to $9,999; $10,000 to $19,999; and $20,000
or more.24 All amounts were adjusted to 1995 dollars. Relative to distributions of
less than $3,500, the probability that a distribution was rolled over was positive and
statistically significant for all larger amounts. Lump sums of $3,500 to $9,999 were
59% more likely to be rolled over than lump sums of less than this amount. Lump-
sum distributions of $10,000 to $19,999 and of $20,000 or more were three times
more likely to be rolled over than were distributions of less than $3,500.
The variable with the second-largest coefficient was the indicator for
distributions that occurred after 1986, when a 10% federal excise tax was first
imposed on early distributions not rolled over into another tax-qualified retirement
plan. Other things being equal, lump-sum distributions received after the Tax Reform
Act of 1986 took effect were more than twice as likely to be rolled over into another
retirement account as were distributions received before 1987.25
Race had the third-largest coefficient among the independent variables. White
recipients of lump-sum distributions were twice as likely as non-white recipients to
have rolled over their distribution into an IRA or other retirement plan. On the one
hand, this result may be seen as troubling because the regression model controls for
the effects of other variables – such as income and education – that correlate with
race. On the other hand, given that access to financial information and advice is partly
dependent on one’s occupation and industry of employment, it may be possible to
influence savings behavior through public policies, such as subsidizing the distribution
of information to workers about the long-term consequences of spending rather than
saving a pre-retirement pension distribution.
Home ownership and the presence of one or more children in the family were
also significantly related to the probability that a lump-sum distribution was rolled
over. Home ownership was positively related to rollovers. The presence of
children in the family had a negative relationship, but it was not as strong
statistically. Homeowners were about 70% more likely to have rolled over their most
recent lump-sum distribution, while people with children under the age of 18 were
about 18% less likely to have rolled over a distribution. Purchasing a home is itself
a form of investment, and – controlling for the effects of income – homeowners have
what economists call a “revealed preference” for saving and investment compared to
renters. The likely reason for the negative impact on rollovers of children in the
family is that people with children face numerous expenses that childless individuals
do not. These additional financial responsibilities could make the preservation of a
lump-sum distribution a lower priority than it otherwise would be.
24 We designated $3,500 as the upper limit for the smallest category, because most of the
distributions in this analysis occurred in years when $3,500 was the largest amount that an
employer could pay to a departing employee without securing written consent.
25 Chang (1996) estimated that the 10% excise tax imposed by the TRA of 1986 significantly
reduced the likelihood that a distribution would be spent rather than saved for retirement.

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CRS-19
Age, education, and average monthly earnings were included in the model in
broadly defined categories, both for simplicity of method and ease of interpretation.
Recipients were grouped into four age categories according to when they received
their most recent distribution: under 35; 35 to 44; 45 to 54; and 55 or older.
Workers aged 35 to 54 were most likely to have rolled over a distribution.
Relative to recipients under age 35, recipients aged 35 to 44 were 34% more likely
to have rolled over their most recent distribution, and recipients aged 45 to 54 were
47% more likely than the youngest group to have rolled over their most recently
received lump sum. Individuals who were age 55 or older when they received their
most recent distribution were marginally less likely than the youngest group to have
rolled it over into another account, but this result was not statistically significant.
Recipients were classified into three groups designating their highest year of
education: up to 12 years of school; 1 to 3 years of college; and 4 or more years of
college. Having completed college bore a significant and positive relationship
to the probability that a lump sum was rolled over. Relative to those with a high
school education or less, recipients with 1 to 3 years of college were no more or less
likely to have rolled over their distribution into an IRA or other retirement plan.
College graduates, however, were 47% more likely than those with just a high school
education to have rolled over their most recent lump-sum distribution. This result
could be considered encouraging to the prospect that savings behavior can be
influenced by efforts to educate workers about the importance of saving pension
distributions for their needs during retirement.
The SIPP collected information about respondents’ current earnings, but not
their earnings in the year they received their most recent lump-sum distribution.
Current earnings were entered into the regression model as a proxy for income in the
year the distribution was received. This seemed to be a reasonable assumption, given
that 45% of the distributions in the sample had occurred since 1990. Three measures
of income were tested – average monthly family income, average monthly personal
income, and average monthly earnings – and all three measures yielded substantially
similar results. The final specification of the model included the respondents’ average
monthly earnings, which were grouped into three categories: under $1,500; $1,500
to $3,000; and more than $3,000. On an annualized basis, these groupings
correspond to yearly earnings of under $18,000, $18,000 to $36,000, and more than
$36,000, respectively.
Relative to recipients with monthly earnings of less than $1,500, those who had
earnings from $1,500 to $3,000 were neither more nor less likely to have rolled over
their most recent lump-sum distribution into an IRA or other retirement account.
(The sign for this variable was negative, but the coefficient was not statistically
significant). Monthly earnings of more than $3,000 were significantly and
positively related to the likelihood that a distribution was rolled over. Individuals
with monthly earnings of more than $3,000 were twice as likely to have rolled over
their most recent lump sum. The coefficient for this variable was strongly significant
(at the .01 level).
The second model was similar to the first except that the sample was restricted
to people who had received their most recent distribution after 1986, and it included
an indicator for distributions that occurred after 1992. Amendments to the Internal

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CRS-20
Revenue Code enacted in 1992 require employers to withhold for income tax 20% of
lump sums paid directly to plan participants and to establish means by which such
distributions can be transferred directly to an IRA or another employer’s plan. The
indicator variable for distributions received after 1992 had a positive and
statistically significant relationship to the probability that a lump-sum
distribution was rolled over into another retirement plan. Other things being
equal, lump sums received in 1993 were 35% more likely to be rolled over than those
received between 1987 and 1992. This result offers some encouragement about the
effectiveness of these amendments on savings behavior. More recent data on pension
coverage and retirement savings were collected as part of the SIPP in 1998, but are
not yet available for analysis. These newer data will be especially useful in studying
the disposition of lump-sum distributions that occurred after the 1992 amendments
took effect.

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CRS-21
Table 7. Disposition of Lump-Sum Distributions Received since 1975
(logistic regression results)
Response Variable: Full distribution was rolled over into an IRA or other
retirement account
Weighted
Parameter
Standard
Odds
Analysis variable
mean
estimate
error
ratio
Intercept
––-
-3.3581 ***
0.2516
––-
Race (1 = white)
0.9104
0.7330 ***
0.1847
2.081
Children in family (1 = yes)
0.3993
-0.1979 *
0.1066
0.820
Own home (1 = yes)
0.7645
0.5279 ***
0.1193
1.695
Age = 35 to 44
0.2759
0.2892 **
0.1152
1.335
Age = 45 to 54
0.1417
0.3863 **
0.1538
1.471
Age = 55 or older
0.1602
-0.0373
0.1707
0.963
Education: some college
0.2365
-0.0105
0.1258
0.990
Education: 4+ years college
0.3895
0.3848 ***
0.1115
1.469
Monthly earn: $1,500-$2,999
0.2960
0.0819
0.1185
1.085
Monthly earnings: $3,000+
0.2377
0.7017 ***
0.1269
2.017
Lump sum: $3,500 - $9,999
0.2594
0.4626 ***
0.1210
1.588
Lump sum: $10,000-$19,999
0.1466
1.1279 ***
0.1378
3.089
Lump sum: $20,000 or more
0.1909
1.0750 ***
0.1355
2.930
Received after 1986 (1= yes)
0.6666
0.8724 ***
0.1056
2.393
Source:
CRS analysis of the Survey of Income and Program Participation.
Notes:
Lump-sum distributions have been adjusted to 1995 dollars.
Earnings are annualized average monthly earnings in 1995.
The “odds ratio” is a measure of how much more (or less) likely it is for a specific
outcome to be observed when a particular independent variable is “true” (x
= 1) than it is when that independent variable is “false”(x = 0).
n = 2,482 records
* significant at >= .10
** significant at >= .05
*** significant at >= .01
Association of Predicted Probabilities and Observed Responses
Concordant = 71.5%, Discordant = 28.0%, Tied = 0.5%

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CRS-22
Table 8. Disposition of Lump-Sum Distributions Received since 1987
(logistic regression results)
Response Variable: Full distribution was rolled over into an IRA or other
retirement account
Weighted
Parameter
Standard
Odds
Analysis Variable
Mean
Estimate
Error
Ratio
Intercept
––-
-2.6380 ***
0.2749
––-
Race (1 = white)
0.9052
0.7658 ***
0.2120
2.151
Children in family (1 = yes)
0.4311
-0.2347 *
0.1266
0.791
Own home (1 = yes)
0.7346
0.6474 ***
0.1370
1.911
Age = 35 to 44
0.2816
0.3205 **
0.1374
1.378
Age = 45 to 54
0.1381
0.3124 *
0.1861
1.367
Age = 55 or older
0.1729
-0.1308
0.2006
0.877
Education: some college
0.2454
-0.0583
0.1479
0.943
Education: 4+ years college
0.3753
0.5419 ***
0.1342
1.719
Monthly earn: $1,500-$2,999
0.3150
-0.1250
0.1393
0.882
Monthly earnings: $3,000+
0.2338
0.4283 ***
0.1542
1.535
Lump sum: $3,500 - $9,999
0.2312
0.6514 ***
0.1451
1.918
Lump sum: $10,000-$19,999
0.1521
1.2541 ***
0.1650
3.505
Lump sum: $20,000 or more
0.1968
1.2007 ***
0.1646
3.322
Received after 1992 (1= yes)
0.1588
0.2980 **
0.1511
1.347
Source:
CRS analysis of the Survey of Income and Program Participation.
Notes:
Lump-sum distributions have been adjusted to 1995 dollars.
Earnings are annualized average monthly earnings in 1995.
The “odds ratio” is a measure of how much more (or less) likely it is for a specific
outcome to be observed when a particular independent variable is “true” (x
= 1) than it is when that independent variable is “false”(x = 0).
n = 1,643 records
* significant at >= .10
** significant at >= .05
*** significant at >= .01
Association of Predicted Probabilities and Observed Responses
Concordant = 71.1%, Discordant = 28.3%, Tied = 0.6%

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CRS-23
Implications for Public Policy Toward Lump-Sum Distributions
The results of this analysis are consistent in most respects with the findings of
previous research into the disposition of pre-retirement lump-sum distributions. There
is both good news and bad news in these results for the retirement income security of
current workers. While fewer than half of lump-sum distributions are rolled over into
IRAs or other retirement plans, more than half of the dollars distributed since 1990
as pre-retirement lump sums have been rolled over. There has been an encouraging
trend in recent years of an increasing proportion of recipients rolling over their entire
lump-sum distribution into another retirement plan. Increases in the proportion of
distributions that are rolled over followed both the imposition of an excise tax on non-
rollovers by the Tax Reform Act of 1986 and the tax withholding and institutional
rollover mechanisms mandated by the Unemployment Compensation Amendments of
1992.26
Responses to the Survey of Income and Program Participation indicate that many
of the recipients of lump-sums who did not roll over their distributions into an IRA
or other retirement plan saved at least some of the money in another way. Although
only one-third of recipients rolled over the entire amount, another one-third used at
least part of their lump-sum to purchase a home or business, invest in stocks or bonds,
or to make a deposit to a savings account. Thus, two-thirds of all recipients saved at
least part of their lump-sum distribution. Furthermore, this finding is not unique to
the data analyzed for this report. Examining data from the 1993 CPS pension
supplement, Burman, Coe, and Gale (1999) found that, while only 23% of recipients
under age 60 reported that they rolled over their entire distribution or used it to
purchase an annuity, another 48% reported that they used the money to purchase a
home or business, invested it in some other way, or used it to pay off debts.27
Likewise, Engelhardt (1999) analyzing data from the Health and Retirement Study
(which included only people who were over age 50 at the time of the survey) found
that only 29% of recipients rolled over their lump-sum distributions, but another 24%
either invested the money in other ways or used it to reduce debt.
Both the growing proportion of recipients who roll over their lump-sum
distributions into other retirement accounts and the already large percentage of dollars
being rolled over are encouraging signs that many workers realize the importance of
preserving these assets until retirement. Nevertheless, it appears that through the
mid-1990s a majority of recipients were not rolling over their lump-sum distributions
into other retirement plans. While the lump-sum distributions that were not rolled
over tended to be relatively small – with a median value of $4,200 in 1995 dollars,
compared to a median value of $10,200 for lump-sums that were rolled over – most
were received by workers who were more than 20 years away from retirement.
Consequently, many of these distributions could have grown to substantial amounts
26 Further investigation into the effects of the 1992 amendments will be possible when SIPP
data on pension coverage collected in 1998 are made available by the Census Bureau.
27 Note that the 20% of recipients who reported a full rollover in the CPS does not include
those who left the distribution in their previous employer’s retirement plan. In the SIPP,
money left with the previous employer’s plan is counted as having been rolled over (i.e.,
preserved for retirement), provided that it remains in a tax-deferred retirement plan.

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CRS-24
had they been preserved in IRAs or other retirement plans. Among the sample
examined in this report, those who did not roll over their most recent lump sum
distributions gave up retirement wealth with an estimated mean value at age 65 of
$81,000 if invested in stocks, or $41,000 if invested in bonds. The estimated value
at age 65 of the median distribution if invested in stocks was $32,000, and the
estimated value of the median distribution if invested in bonds was $16,000.
The tax policies that Congress has adopted toward early distributions from
pensions and retirement savings plans represent a compromise among several
competing objectives, including:
! encouraging participation among employers and employees in these
plans,
! promoting the preservation of retirement assets,
! allowing participants to have access to their retirement savings when
they would otherwise face substantial economic hardship, and
! assuring that the tax preferences granted to pensions and retirement
plans are not used for purposes other than to fund workers’ future
financial security.
If any one of these objectives were paramount, devising the most effective policy
would be a relatively straightforward undertaking. If preserving retirement assets
were the only important consideration, Congress could require all distributions from
pension plans to be rolled over into another account and held there until the individual
reaches retirement age. Stricter limits on access to retirement funds before retirement,
however, could inhibit employee participation in retirement savings plans. This, in
turn, could result in more people being unprepared for retirement than currently
results from some pre-retirement distributions being spent rather than saved.
Likewise, allowing easier access to retirement savings could help people meet other
important expenses, like buying a home or paying for their children’s education, but
at the expense of less financial security in retirement.
Given the competing demands that Congress faces in devising tax policy for pre-
retirement distributions from pensions and retirement savings plans, the most likely
outcome is that these policies will continue to represent a compromise among
competing objectives. Policy analysts who have studied the effects of federal tax
laws on the disposition of lump-sum distributions have suggested several options for
consideration, including: changing the tax rate or the withholding rate on lump-sum
distributions that are not rolled over; having the tax rate vary with the age of the
recipient or with the size of the distribution; requiring at least part of the distribution
to be rolled over directly into another retirement plan; and encouraging plan sponsors
to educate recipients about the importance of preserving these distributions so that
the funds will be available to provide for their financial security during retirement.

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CRS-25
Appendix: Sources of Data on Lump-Sum Distributions
Tax forms submitted to the Internal Revenue Service (IRS) are probably the
most reliable source of data on the number and dollar value of lump-sum distributions
each year. Sabelhaus and Weiner (1999) conducted an analysis of lump-sum
distributions based on an examination of IRS Forms 1040 and 1099 submitted for
1995.28 The authors noted that even tax data are subject to some error as a result of
noncompliance and inaccurate reporting. In some cases, for example, data reported
on the two forms were inconsistent. Moreover, some categories of transaction
reported on these forms may or may not represent lump-sum distributions from
pension plans. Classifying such transactions depends on the judgment of the
individual analyst.
Even if there were full compliance and accurate reporting, however, tax data on
lump-sum distributions would have some limitations. First, the data are limited to
people who received lump-sum distributions. They provide no information about
people who were eligible for such distributions but did not receive them. Second,
information available from tax forms is limited to the recipient’s age, filings status,
and income. Most geographic information is suppressed for confidentiality reasons.
Lack of detailed demographic data limits the possibilities for analyzing the personal
characteristics that may influence a recipient’s decision to save or spend a lump-sum
distribution. Third, data reported on tax forms do not show the ultimate disposition
of all distributions. They indicate whether a lump-sum distribution was rolled over
into another retirement plan or was paid out directly to the participant. For amounts
paid out directly to recipients, they can reveal whether the distribution was
subsequently deposited into another retirement account (based on whether the
distribution was reported as taxable income.) Tax data, however, cannot tell us
whether a lump-sum distribution paid directly to a recipient was saved or invested
after taxes were paid on it, nor do they reveal how distributions that were not saved
were spent. Furthermore, unlike some household surveys, the information reported
to the IRS does not include the reason for the distribution.
Trends in lump-sum distributions also can be studied with proprietary data
compiled by firms that provide benefits administration or management consulting
services. The Employee Benefits Research Institute, for example, has periodically
published reports based on data collected by Hewitt Associates from its clients, which
are predominantly medium and large firms and are concentrated in particular
industries.29 For researchers, data collected by consulting firms in the course of their
business present three difficulties. First, the firms’ clients may not be a representative
sample of employers. Proprietary data represent neither the entire universe of
distributions, as tax returns do, nor a random sample of distributions, such as one
would obtain from a nationally representative sample of businesses or households.
28 Form 1099R must be completed by the plan sponsor whenever a participant receives a
distribution from a pension, annuity, profit-sharing plan, insurance contract, or IRA.
29 See, for example, EBRI Issue Brief Number 188 (August 1997), Large Plan Lump-sums:
Rollovers and Cashouts, by Paul Yakaboski.

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CRS-26
Consequently, the conclusions that one might draw from analyzing these data may not
be applicable to other employers. Second, the data collected by consulting firms from
their clients are proprietary. Such data often are not publicly available to other
researchers, as are the tax data published by the Treasury Department in the Statistics
of Income and the public-use files of government-sponsored household surveys.
Third, while previous research has established that certain characteristics of plan
participants are strongly associated with the likelihood that a lump-sum distribution
will be saved rather than spent, demographic information in these kinds of data sets
is sometimes sparse. This limits their usefulness for policy analysis.
A third source of data for analyzing lump-sum distributions comes from surveys
of nationally representative samples of U.S. households conducted by or on behalf of
government agencies. Two such surveys – the Current Population Survey (CPS) and
the Health and Retirement Study (HRS) – have been the basis for several recent
studies of lump-sum distributions from pension plans. This CRS report adds to the
findings of previous research by analyzing information collected in the Census
Bureau’s Survey of Income and Program Participation (SIPP).30 These three surveys
are especially useful for public policy analysis because they contain a wealth of
economic and demographic data. Information on individual and family characteristics
can be used to construct econometric models that can identify the factors that have
strong statistical relationships to particular economic events – such as the disposition
of a lump-sum distribution from a pension plan. Even a carefully designed survey
questionnaire, however, can address only some of the variables that may influence the
decision to save or spend a lump-sum distribution. Nevertheless, when processed
through the appropriate statistical model, these data represent a potentially powerful
means of identifying policy options that will promote retirement saving and
preservation of retirement assets.
Data collected through surveys like the CPS, HRS, and SIPP have some
shortcomings, most notably that questions about income and assets are susceptible to
recall errors and misreporting by survey participants. For example, the 1993 benefits
supplement to the CPS indicated that there were approximately 1.5 million lump-sum
distributions in 1992 with an average value of $13,900. This yields an estimated total
of about $21 billion in lump-sum distributions. According to information reported in
the 1993 panel of the SIPP, there were 1.67 million lump-sum distributions in 1992
with an average value of $12,000. This yields an estimated total of about $20 billion
in distributions. While the survey data are generally consistent with one another –
allowing for differences in both sampling error and non-sampling error – they differ
sharply with the information reported on tax returns. Data reported to the IRS for
1995 show a far greater number of lump-sum distributions from pension plans (about
10 million), although the average value of these distributions ($13,100) closely
approximates the average value of the distributions reported on the CPS and the
SIPP.
30 The SIPP is conducted by the U.S. Bureau of the Census to collect economic and
demographic information about the U.S. population. It differs from the Current Population
Survey (CPS) in that SIPP is a longitudinal survey in which the participants are interviewed
at intervals over a long period (2½ years). This allows analysts to study things such as
changes in income and employment over time.

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CRS-27
Why is there such a large discrepancy between the survey data and the
information reported to the IRS? The difference in years – 1992 for the survey data
and 1995 for the tax data – would, of course, have some effect, but probably not very
much. Tax data for years since the late1980s show more than10 million lump-sum
distributions in each year. Part of the difference may be due to differences in how
people construe the meaning of the term “lump-sum distribution” in the context of a
survey as opposed to when they are reporting income to the IRS. As much previous
research has shown, all sources of income have historically been under-reported in the
CPS, SIPP, HRS and other surveys. Another, less significant, reason why the total
value of distributions is under-represented on the CPS and SIPP is due to “top-
coding” of the data. While the full value of a lump-sum distribution would be
reported to the IRS (assuming full compliance with the law), surveys usually adopt
a specific maximum (typically $100,000), and all income and assets above that amount
are recorded at this value. Tax returns for 1995, however, show that only 2.4% of
all lump-sum distributions that year were greater than $100,000. Two-thirds of all
lump-sum distributions in 1995 were in amounts less than $5,000. Top-coding can
therefore explain only a small part of the difference between the survey data and the
information reported on tax returns.
Additional Reading
Bassett, W. F., M. J. Fleming, and A. P. Rodrigues. How Workers Use 401(k) Plans:
The Participation, Contribution, and Withdrawal Decisions. National Tax
Journal, v. 51, no. 2, June 1998.
Bergen, Kathy. Survey Finds Workers Cashing Out of 401(k)s. The Chicago
Tribune. October 17, 1999.
Burman, L. E., N.B. Coe, and W.G. Gale. Lump Sum Distributions from Pension
Plans: Recent Evidence and Issues for Policy and Research. National Tax
Journal, v. 52, no. 3, September 1999.
Chang, Angela. Tax Policy, Lump-Sum Pension Distributions, and Household Saving.
National Tax Journal, v. 49, no. 2, 1996.
Engelhardt, Gary V. Pre-Retirement Lump-Sum Pension Distributions and
Retirement Income Security: Evidence from the Health and Retirement Study.
Mimeo. Center for Policy Research, Syracuse University. December 1999.
Hosmer, D.W. and S. Lemeshow. Applied Logistic Regression. John Wiley and
Sons. New York. 1989.
Hurd, M., L. Lillard, and C. Panis. An Analysis of the Choice to Cash Out Pension
Rights at Job Change or Retirement. The RAND Corporation, Santa Monica,
CA. October 1998.
No author listed. Cashing Out Terminated Participants’ Vested Benefits Simplifies
Plan Administration, Reduces PBGC Premiums. Spencer’s Research Reports.
Charles D. Spencer and Associates, Inc. Chicago, IL. October 3, 1997.

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CRS-28
Poterba, J. M., S. F. Venti, and D. A. Wise. Lump-Sum Distributions from
Retirement Savings Plans: Receipt and Utilization. Inquiries in the Economics
of Aging. Edited by David A. Wise. University of Chicago Press. 1998.
Sabelhaus, J., and D. Weiner. Disposition of Lump-Sum Pension Distributions:
Evidence from Tax Returns. National Tax Journal, v. 52, no. 3, September
1999.
Scott, J. S., and John B. Shoven. Lump-Sum Distributions: Fulfilling the Portability
Promise or Eroding Retirement Security? Issue Brief 178. Employee Benefits
Research Institute. Washington, October 1996.
Sundén, Annika, and Martha Starr-McCluer. Workers’ Knowledge of their Pension
Coverage: A Reevaluation. Board of Governors of the Federal Reserve System.
Washington, April 1998.
U.S. Dept. of Labor. Pension and Welfare Benefits Administration. Advisory
Council on Employee Welfare and Pension Benefits. Report of the Working
Group on Retirement Plan Leakage: Are We Cashing Out Our Future?
Washington, November 1998.
U.S. Dept. of Labor. Bureau of Labor Statistics. Employee Benefits in Medium and
Large Private Establishments, 1997. Bulletin 2517. September 1999.
U.S. Dept. of Labor. Bureau of Labor Statistics. Employee Benefits in Small Private
Establishments, 1996. Bulletin 2507. April 1999.
Yakoboski, Paul. Debunking the Retirement Policy Myth: Lifetime Jobs Never
Existed for Most Workers. Issue Brief 197. Employee Benefits Research
Institute. Washington, May 1998.
Yakoboski, Paul. Large Plan Lump-Sums: Rollovers and Cashouts. Issue Brief 188.
Employee Benefits Research Institute. Washington, August 1997.

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