Order Code RL30496
CRS Report for Congress
Received through the CRS Web
Pension Issues: Lump-Sum Distributions and
Retirement Income Security
Updated June 30, 2003
Patrick J. Purcell
Specialist in Social Legislation
Domestic Social Policy Division
Congressional Research Service ˜ The Library of Congress

---

Pension Issues: Lump-Sum Distributions and
Retirement Income Security
Summary
About half of all workers age 21 and older participate in an employer-sponsored
retirement plan, but not all of these workers will receive a pension or retirement
annuity from the jobs they now hold. Many will receive a “lump-sum distribution”
from their retirement plan 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 allow workers to re-invest their retirement assets so that
they will continue to grow until retirement. However, many recipients of lump-sum
distributions use all or part of the distribution for current consumption rather than
placing it in another retirement plan. To encourage individuals to “roll over” these
distributions into another retirement plan, 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 for income tax payment 20% of distributions that are
paid to recipients rather than rolled into another retirement plan. In 2001, Congress
required that, unless the plan sponsor is otherwise directed by the participant, it must
deposit distributions of $1,000 or more into an individual retirement account
According to data collected by the Bureau of the Census in 1998, 39.5 million
workers age 21 or older participated in retirement plans that offered a lump-sum
distribution as a payment option. This represented 74.2% of the 53.3 million workers
who were covered by a pension, profit-sharing, or retirement savings plan in 1998.
Approximately 14.3 million people reported that they had received at least one lump-
sum distribution at some time in their lives. The average (mean) value of these
distributions was $15,400 and the median value was $5,000. The typical recipient
was between 36 and 39 years old at the time of the most recent distribution. Thus,
most recipients of lump sums were more than 20 years away from retirement.
Of those who reported that they had received at least one lump-sum distribution,
36% said that they had rolled over the entire amount of the most recent distribution
into another retirement plan, accounting for 59% of the dollars distributed as lump
sums. Another 48% of recipients said that they had saved at least part of the
distribution in some other way. Of those who reported receiving a distribution after
1992, 42% said that they had rolled over the entire amount into another plan,
accounting for 70% of the dollars distributed as lump-sums. Another 44% of this
group said that they had saved at least part of the distribution.
Lump-sum distributions that are spent rather than rolled over into another
retirement account can reduce future retirement income.
If the lump-sum
distributions received up to 1998 that were not rolled over had instead been rolled
over into accounts that grew at the same historical rate as the Standard & Poor’s 500
Index, they would have grown to a median value of $12,930 by 2002. If these
distributions had been rolled over into accounts that paid the same historical rates of
return as U.S. Treasury bonds, they would have grown to a median value of $7,980
by 2002.

---

Contents
Overview: Pension Coverage and Tax Policy . . . . . . . . . . . . . . . . . . . . . . . . 1
Pension Portability, Asset Preservation,
and Lump-Sum Distributions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
Calculating lump-sum distribution amounts . . . . . . . . . . . . . . . . . . . . . 4
How Many Workers Are Eligible for Lump-Sum Distributions? . . . . . . . . . 6
How Many People Have Received Lump-Sum Distributions? . . . . . . . . . . . 8
How Did Recipients Use Their Lump-Sum Distributions? . . . . . . . . . . . . . . 9
How Much Retirement Wealth Was Lost from
Lump-Sums that Were Spent Rather than Saved? . . . . . . . . . . . . . . . . 13
What Would these Amounts have been Worth at Retirement? . . . . . . . . . . 14
What Factors Influence the Rollover Decision? . . . . . . . . . . . . . . . . . . . . . 15
Implications for Public Policy . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21
Additional Reading . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23
List of Tables
Table 1. Participation in Employer-Sponsored Retirement Plans, 2001 . . . . . . . . 5
Table 2. Percentage of Workers Whose Retirement Plan
Offered a Lump-Sum Payment Option, 1998 . . . . . . . . . . . . . . . . . . . . 7
Table 3. Characteristics of Individuals Who Reported Ever
Having Received One or More Lump-Sum Distributions
. . . . . . . . 8
Table 4. Percentage of Lump-Sum Distribution Recipients Who
Rolled Over the Entire Amount into Another Retirement Plan . . . . . . 11
Table 5. Percentage of Lump-Sum Distribution Recipients Who
Saved All or Part of the Distribution . . . . . . . . . . . . . . . . . . . . . . . . . . 12
Table 6. Disposition of Lump-Sum Distributions . . . . . . . . . . . . . . . . . . . . . . . . 19
Table 7. Disposition of Lump-Sum Distributions . . . . . . . . . . . . . . . . . . . . . . . . 20

---

Pension Issues: Lump-Sum Distributions
and Retirement Income Security
Overview: Pension Coverage and Tax Policy
About half of all workers age 21 and older in the United States participate in an
employer-sponsored retirement plan.1 (Table 1) Not all of these workers, however,
will receive a pension or retirement annuity from their current jobs. 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. A typical 25-
year-old today will work for seven or more employers before reaching age 65.2 Thus,
most workers can expect to receive one or more distributions from a retirement plan
before reaching retirement age.
What an individual does with a lump-sum
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 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 2001, nearly two-thirds (65%) 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 one in five (20%) beneficiaries.3 Workers whose employer
sponsors a retirement 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 retirement plans that meet certain requirements
as to eligibility, benefits, and funding. Employers are permitted to deduct from
income amounts they contribute to employee retirement plans. These employer
contributions are not taxed as income to participating employees until they begin
receiving distributions from the plan. Employers who sponsor retirement plans do
1 This figure includes full-time and part-time workers in both the public and private sectors.
A “retirement plan” may be either a traditional defined benefit pension plan or a retirement
savings plan, such as those authorized under Internal Revenue Code §401(k).
2 Estimated by CRS, from data published by the U.S. Census Bureau
3 Social Security Administration, Office of Policy, Income of the Aged Chartbook, 2001.

---

CRS-2
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 retirement plans is substantial. According to the
congressional Joint Committee on Taxation, the net exclusion for employer pension
plan contributions and earnings will result in $493 billion in forgone tax revenue over
the 5 fiscal years from 2003 through 2007.4 This is the largest so-called “tax-
expenditure” in the federal budget.
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, retirement plan 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 present 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 is 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 must
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 re-invest their retirement assets so
4 Joint Committee on Taxation, (JCS-5-02) December 19, 2002.
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 sponsors of defined benefit plans to choose between two methods of
vesting. 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 faster than these schedules.

---

CRS-3
that they will continue to grow until retirement. 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
and is instead spent on current consumption 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
!
I.R.C. §411(a)(11) allows a plan sponsor to distribute to a departing employee
his or her accrued benefit under a retirement plan without the participant’s
consent if the present value of the benefit is less than $5,000.9 The Economic
Growth and Tax Relief Reconciliation Act of 2001 (P.L. 107-16) required that,
if a plan makes such a distribution and the present value of the benefit is at least
$1,000, the plan must deposit the distribution into an individual retirement
account unless otherwise instructed by the participant.
Obviously, there may be times when the recipient of a lump-sum distribution
faces 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
7 The 10% penalty is waived if the distribution is made in a series of “substantially equal
periodic payments” based on the recipient’s life expectancy or if the recipient has retired
from the plan sponsor at age 55 or older. For more information, see CRS Report RL31770,
Retirement Savings Accounts: Early Withdrawals and Required Distributions.
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.
9 Distributions of $5,000 or more require the participant’s written consent.

---

CRS-4
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
requiring 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: promoting
pension participation, preserving assets until retirement, 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.
Calculating lump-sum distribution amounts.
When a lump-sum
distribution is paid from a defined contribution plan, such as a 401(k) plan, the
amount distributed is simply the account balance. In paying a lump-sum distribution
from a defined benefit plan, however, the plan sponsor must calculate the present
value of the benefit that would be payable to the plan participant when he or she
reaches the plan’s normal retirement age. In calculating this amount, the plan must
use the interest rate that is specified in the Internal Revenue Code. I.R.C. §417(e)
specifies the interest rate on 30-year U.S. Treasury Bonds as the discount rate to be
used by plan sponsors when calculating the present value of a plan participant’s
accrued benefit. Because the Treasury no longer issues 30-year bonds, Congress is
considering alternative interest rates that could be used to calculate the present value
of accrued benefits under defined benefit plans. H.R. 1776 (Portman/Cardin) of the
108th Congress would replace the interest rate on 30-year Treasury Bonds as the rate
for calculating lump-sum distributions with an interest rate based on an index of
high-quality, long-term corporate bonds. The corporate bond rate would be phased
in over 4 years beginning in 2006.10
10 For a detailed discussion of the factors to be considered in selecting a discount rate, see
GAO Report GAO-03-313, Private Pensions: Process Needed to Monitor the Mandated
Interest Rate for Pension Calculations, (February 2003) at [http://www.gao.gov].

---

CRS-5
Table 1. Participation in Employer-Sponsored
Retirement Plans, 2001
(all workers age 21 and older)
Participate in a
Persons
Retirement Plan?
Yes
No
(thousands)
Age
21 to 24
20.7%
59.3%
12,220
25 to 34
43.6%
56.4%
31,818
35 to 44
54.3%
45.7%
35,540
45 to 54
59.9%
40.1%
30,437
55 to 64
56.5%
43.5%
15,456
65 or older
27.1%
72.9%
4,635
Race
White
50.1%
49.9%
107,733
Black
45.3%
54.7%
15,076
Other
43.0%
57.0%
7,297
Sex
Male
51.2%
48.8%
68,231
Female
46.9%
53.1%
61,875
Marital Status
Married
54.8%
45.2%
78,629
Not Married
40.5%
59.5%
51,478
Education
HS or less
38.7%
61.3%
53,578
Some college
48.7%
51.3%
37,616
College graduate
64.0%
36.0%
38,913
Earnings in 2000
Under $20,000
20.5%
79.5%
42,422
$20,000-$40,000
53.9%
46.1%
45,367
More than $40,000
72.7%
27.3%
42,317
Establishment Size
Under 25 people
21.5%
78.5%
31,609
25 to 99 people
40.9%
59.1%
17,509
100 or more people
61.7%
38.3%
80,989
Full-time/Part-time
Worked full-time
58.1%
41.9%
92,576
Worked part-time
27.2%
72.8%
37,531
Total
49.1%
50.9%
130,107
Source: CRS analysis of the March 2002 Current Population Survey.

---

CRS-6
How Many Workers Are Eligible for Lump-Sum Distributions?
Employers often 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.11 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 insurance 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.12
During the first six months of 1998, the Census Bureau asked participants in the
Survey of Income and Program Participation (SIPP) a series of questions on
retirement expectations and pension plan coverage. According to this survey, 82%
of the 53.3 millions workers age 21 or older who were included in a retirement plan
at work participated in a plan that offered a lump-sum distribution as a payment
option.13 (Table 2)
Almost all defined contribution plans offer a lump-sum payment option. The
proportion of defined benefit plans offering lump-sum distributions has been rising
in recent years due to the conversion of several hundred large defined benefit pension
plans to “cash balance plans.”14 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.” Nevertheless, cash balance plans
are funded on a group basis and are treated as 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.
11 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.
12 The current base premium – which is set by Congress – is $19 per participant per year.
13
This includes all participants in defined contribution plans as well as participants in
defined benefit plans who reported that the plan offered a lump-sum distribution option.
14 For more information see Allan P. Blostin, “Distribution of Retirement Income Benefits,”
Monthly Labor Review, April 2003, Vol. 126, No. 4.

---

CRS-7
Table 2. Percentage of Workers Whose Retirement Plan Offered
a Lump-Sum Payment Option, 1998
(Workers 21 and older who participated in an employer-sponsored
retirement plan)
Does plan have a lump-
Persons
sum option?
Yes
No
(thousands)
Age
21 to 24
81.4%
18.6%
1,507
25 to 34
83.2%
16.8%
12,860
35 to 44
81.8%
18.2%
17,241
45 to 54
81.3%
18.7%
14,996
55 to 64
81.2%
18.8%
5,954
65 or older
88.9%
11.2%
710
Race
White
82.6%
17.4%
45,717
Black
75.8%
24.2%
5,527
Other
86.0%
14.0%
2,024
Sex
Male
82.4%
17.6%
29,810
Female
81.6%
18.4%
23,458
Marital Status
Married
81.9%
18.1%
36,111
Not Married
82.3%
17.7%
17,157
Education
HS or less
80.1%
19.9%
17,664
Some college
81.9%
18.1%
16,728
College graduate
84.0%
16.0%
18,876
Income in 1998
Under $20,000
80.4%
19.6%
10,937
$20,000-$40,000
81.4%
18.6%
22,746
More than $40,000
83.6%
16.4%
19,585
Establishment Size
Not reported
89.4%
10.6%
1,335
Under 25people
84.0%
16.0%
10,098
25 to 99 people
83.3%
16.7%
12,556
100 or more people
80.5%
19.5%
29,280
Total
82.0%
18.0%
53,268
Source: CRS analysis of the 1996 Panel of the Survey of Income and Program Participation.

---

CRS-8
How Many People Have Received Lump-Sum Distributions?
According to the information reported on the Survey of Income and Program
Participation in 1998, an estimated 14.3 million individuals age 21 or older had
received at least one lump-sum distribution from a retirement plan at some point
during their lives. The average (mean) value of these distributions in nominal dollars
was $15,391. Expressed in constant 1998 dollars, the mean value of the distributions
was $18,497.15 (Table 3) As was noted earlier, however, the mean value of lump-
sum distributions is skewed upward by a relatively small number of large
distributions. The “typical” distribution is more accurately portrayed by the median,
which in nominal dollars was $5,000.
Adjusted to 1998 dollars, the median
distribution was $5,490. The average recipient was between the ages of 36 and 39
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 Ever
Having Received One or More Lump-Sum Distributions
Recipient age and amount of distribution:
Mean
Median
All recipients of lump-sum distributions:
Age when lump sum received
39
36
Amount of lump-sum distribution in nominal dollars
$15,391
$5,000
Amount of lump-sum distribution in constant 1998 $
$18,497
$5,490
Rolled over the distribution to another account :
Age when lump sum received
43
41
Amount of lump-sum distribution in nominal dollars
$26,159
$10,000
Amount of lump-sum distribution in constant 1998 $
$30,574
$12,030
Did not roll over the distribution to another account:
Age when lump sum received
37
34
Amount of lump-sum distribution in nominal dollars
$9,360
$3,000
Amount of lump-sum distribution in constant 1998 $
$11,732
$3,708
Source: CRS analysis of the 1996 panel of the Survey of Income and Program Participation.
15
We adjusted the dollar amount of all lump-sum distributions reported on the SIPP to
constant 1998 dollars, based on the Personal Consumption Expenditure Index of the
National Income and Product Accounts (NIPA).

---

CRS-9
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 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, 36% said that they had rolled over the entire amount of the most recent
distribution into another tax-qualified plan, such as an IRA. (Table 4) These
transactions accounted for 59% of the dollars distributed as lump sums. (Not shown
in table.) Of those who reported receiving a distribution after 1992, 42% said that
they had rolled over the entire amount into another plan, accounting for 70% 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 not rolled over the entire amount of a lump-sum
distribution were asked what they did with the money. Eighteen 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). Nine of the categories listed 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.16 These were:
! invested in an IRA, annuity, or other retirement program,
! put into a savings account or certificate of deposit,
! invested in stocks, mutual funds, bonds, or money market funds,
! invested in land or other real property,
! invested in family business or farm,
! used to purchase a home, pay off mortgage, or make home improvements,
! used to pay bills or to pay off loans or other debts,
! saved for retirement expenses, and
! saved or invested in other ways.
Among those who reported that they had received at least one lump-sum
distribution, 83.9% said that they had saved at least some of the most recent
distribution. (Table 5) In addition to the 35.9% who had rolled over the entire
16
The other categories listed on the survey were: bought a car, boat, furniture or other
consumer items; used for vacation, travel, or recreation; paid expenses while laid off; used
for moving or relocation expenses; used for medical or dental expenses; paid or saved for
education; used for general or everyday expenses; gave to family members or charity; paid
taxes; and spent in other ways.

---

CRS-10
amount into another tax-deferred retirement plan, another 48.0% had saved at least
part of the distribution in one of the other ways listed above. Of those who had
received their most recent lump-sum distribution after 1992, 86% said that they had
saved at least part of the distribution. Of this group, 42.4% rolled over the entire
amount into another plan, and 43.6% saved part of the distribution in another way.

---

CRS-11
Table 4. Percentage of Lump-Sum Distribution Recipients Who
Rolled Over the Entire Amount into Another Retirement Plan
(All recipients of lump-sum distributions)
Entire lump-sum
Persons
rolled over?
Yes
No
(thousands)
Age When Received
21 to 24
12.4%
87.6%
1,269
25 to 34
29.6%
70.4%
5,068
35 to 44
39.2%
60.8%
3,568
45 to 54
45.3%
54.7%
2,052
55 to 64
51.1%
48.9%
1,759
65 or older
42.8%
57.4%
599
Race
White
37.1%
62.9%
13,042
Black
20.5%
79.5%
893
Other
31.2%
68.8%
380
Sex
Male
39.7%
60.3%
6,684
Female
32.6%
67.5%
7,631
Marital Status
Married
39.9%
60.1%
9,240
Not married
28.6%
71.4%
5,075
Children Present
No Children
37.4%
62.6%
9,052
One child or more
33.3%
66.7%
5,263
Education
HS or less
29.7%
70.3%
4,354
Some college
31.3%
68.7%
4,681
College graduate
45.1%
54.9%
5,279
Home ownership
Home owner
40.3%
59.7%
11,036
Not a home owner
21.2%
78.8%
3,278
Income in 1998
Under $20,000
30.4%
69.6%
5,677
$20,000-$40,000
33.1%
66.9%
4,951
More than $40,000
48.1%
51.9%
3,686
Amount of distribution*
Less than $3,500
21.8%
78.2%
5,632
$3,500 to $9,999
33.3%
66.7%
3,359
$10,000 to $19,999
41.3%
58.7%
2,093
$20,000 or more
59.6%
40.4%
3,230
Year distribution received
Before 1987
24.2%
75.8%
3,384
1987 to 1992
33.8%
66.2%
3,662
After 1992
42.4%
57.6%
7,269
Total
35.9%
64.1%
14,315
Source: CRS analysis of the1996 panel of the Survey of Income and Program Participation.
* Amount of the lump-sum distribution, adjusted to 1998 dollars.

---

CRS-12
Table 5. Percentage of Lump-Sum Distribution Recipients Who
Saved All or Part of the Distribution
(All recipients of lump-sum distributions)
Was any part of the
Persons
distribution saved?
Yes
No
(thousands)
Age When Received
21 to 24
67.6%
32.4%
1,269
25 to 34
82.3%
17.7%
5,068
35 to 44
86.4%
13.6%
3,568
45 to 54
86.9%
13.1%
2,052
55 to 64
90.9%
9.1%
1,759
65 or older
87.2%
12.8%
599
Race
White
83.9%
16.1%
13,042
Black
86.2%
13.8%
893
Other
79.3%
20.7%
380
Sex
Male
86.8%
13.2%
6,684
Female
81.5%
18.5%
7,631
Marital Status
Married
85.8%
14.2%
9,240
Not married
80.6%
19.4%
5,075
Children Present
No Children
84.2%
15.8%
9,052
One child or more
83.5%
16.5%
5,263
Education
HS or less
85.3%
14.7%
4,354
Some college
80.9%
19.1%
4,681
College graduate
85.5%
14.5%
5,279
Home ownership
Home owner
85.1%
14.5%
11,036
Not a home owner
79.9%
20.1%
3,278
Income in 1998
Under $20,000
82.1%
17.9%
5,677
$20,000-$40,000
83.4%
16.6%
4,951
More than $40,000
87.6%
12.4%
3,686
Amount of distribution*
Less than $3,500
75.7%
24.3%
5,632
$3,500 to $9,999
83.5%
16.5%
3,359
$10,000 to $19,999
90.2%
9.8%
2,093
$20,000 or more
94.7%
5.3%
3,230
Year distribution received
Before 1987
79.4%
20.6%
3,384
1987 to 1992
84.0%
16.0%
3,662
After 1992
86.0%
14.0%
7,269
Total
83.9%
16.1%
14,315
Source: CRS analysis of the 1996 panel of the Survey of Income and Program Participation.
* Amount of the lump-sum distribution, adjusted to 1998 dollars.

---

CRS-13
How Much Retirement Wealth Was Lost from Lump-Sums
that Were Spent Rather than Saved?
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. For example,
according to the SIPP, among workers who received a distribution between the ages
of 25 and 34, only 29.6% 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,
45.3% 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.
Among participants in the SIPP who had received at least one lump-sum
distribution, the average (mean) value of the most recent distribution was $15,391.
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 $26,159. Those who had not rolled over the entire distribution
received lump-sums with a mean value of $9,360. (See Table 3.)
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 2002
if the entire lump-sum had been rolled over in the year it was received. The estimates
were based on two possible rates of return:
! the annual interest rate paid by 30-year U.S. Treasury bonds in each
year since the year the distribution was received; and
! the total annual rate of return of the Standard & Poor’s 500 (S&P
500) index in each year since 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 year-end 2002.
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 30-year U.S.
Treasury bonds, the distributions would have attained a mean value of $34,700 by
year-end 2002. If the lump-sums had been rolled over into investments that grew
at a rate equal to the total annual return of S&P 500 index, the distributions would
have had a mean value of $64,390 by the end of 2002.

---

CRS-14
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 was invested in stocks that matched the
total annual rate of return achieved by the S&P 500 index, the lump sums would have
grown to a median value of $12,930 by 2002. If invested in bonds that earned the
rate of return paid by 30-year U.S. Treasury bonds, the median lump sum would
have been worth $7,980 by 2002.
What Would these Amounts have been Worth at Retirement?
If we consider age 65 to be retirement age, the typical individual who had
received a distribution but did not roll it over into another retirement account was
from 28 to 31 years away from retirement in the year that he or she received the
distribution. Their mean age in the year that they received their distributions was 37.
Their median age in the year of the distribution was 34. In 1998 – the year of the
survey – the mean age of these individuals was 46 and their median age was 44.
As noted above, the median value of the lump-sum distributions that were not
rolled over would have reached $12,930 by 2002 if they had been invested in a
broad-based stock market index fund. Assuming a future average annual rate of
return in the stock market of 8%, $12,930 invested for 15 years would grow to
$41,000 by age 65.17 This would be enough to purchase a life-long annuity that
would provide income of $290 per month.18
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 median value of $7,980 in 2002. Assuming that $7,980 was invested in bonds for
15 years at an average rate of return of 5.0%, it would grow to $16,590.19 This would
be sufficient capital to purchase a lifetime annuity that would provide a monthly
income of $117.
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
17 In 2002, a person who was 46 in 1998 would have reached age 50.
18
Annuity estimates are based on a level, single-life annuity purchased at age 65 at
3.875%.
19
The long-run nominal interest rate assumed in the 2003 annual report of the Board of
Trustees of the Social Security System was 6.0%.

---

CRS-15
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 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 in which the dependent, or response, variable 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 of the distribution was used for any other
purpose. The independent variables we tested were the individual’s age in the year
the distribution was received, race, sex, marital status, level of education, presence
of one or more children in the family, home ownership, monthly income, the amount
of the lump-sum distribution, and the year the distribution was received.
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. 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 changes
in law, we included in the model a variable indicating for whether the distribution
occurred before1987, between 1987 and 1992, or after 1992. Results of this model
are shown in Table 6. We also tested another version of the model in which we
restricted the sample to lump-sums received after 1986 by people under age 60 in the
year of the distribution. Results of this model are shown in Table 7.

---

CRS-16
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 6, this variable is
shown as having an odds ratio of 1.917. This means that the dependent variable is
92% 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), a recipient of a lump-
sum distribution who owned or was buying a home was about twice as likely as a
renter to have rolled over the entire lump sum into another retirement plan.
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.20 All amounts were adjusted to 1998 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 distribution
amounts. Lump sums of $3,500 to $9,999 were 73% more likely to be rolled over
than lump sums of less than this amount. Lump-sum distributions of $10,000 to
$19,999 were 134% more likely to be rolled over than lump sums of less than $3,500.
Distributions of $20,000 or more were 300% more likely to be rolled over than were
distributions of less than $3,500.
20 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.

---

CRS-17
The variable with the second-largest coefficient was the indicator for the year
the distribution was received. Relative to distributions received between 1987 and
1992, distributions that were received before 1987 were 44% less likely to have been
rolled over into another tax-qualified retirement plan. Other things being equal,
lump-sum distributions received after 1992 were 79% more likely to be rolled over
into another retirement account than distributions received between 1987 and 1992.
Race had the third-largest coefficient among the independent variables. White
recipients of lump-sum distributions were 73% more likely than 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 being married were positively and significantly related
to the probability that a lump-sum distribution was rolled over. Homeowners were
about 90% more likely to have rolled over their most recent lump-sum 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. Other things being equal, married individuals
were 53% more likely than unmarried persons to have rolled over lump-sum
distribution into a retirement plan. The presence of children in the family, however,
had a negative relationship to the probability of rolling over a distribution. People
with children under age 18 were 23% less likely to have rolled over a distribution
compared to people with no children. 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.
Age in the year of the distribution, education, and average monthly income
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 55 and older were most likely to have rolled
over a distribution. Relative to recipients under age 35, recipients aged 55 and older
were 75% more likely to have rolled over their most recent distribution, and
recipients aged 45 to 54 were 54% more likely than the youngest group to have rolled
over their most recently received lump sum. Individuals who were 35 to 44 years old
when they received their most recent distribution were 25% more likely than the
youngest group to have rolled it over into another.
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

---

CRS-18
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 92% 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. The respondents’ average monthly income in
1998 was grouped into three categories: under $1,500; $1,500 to $2,999; 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 positive, but the coefficient was not statistically significant).
Having monthly income of more than $3,000 was significantly and positively related
to the likelihood that a distribution was rolled over. Individuals with monthly income
of more than $3,000 were 46% more likely to have rolled over their most recent lump
sum. The variable indicating the recipient’s sex was not statistically significant and
was dropped from the model.
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 were under
age 60 in the year the distribution was received. An amendment to the Internal
Revenue Code enacted in 1992 requires 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 or later were 91% more likely to have been rolled over than those received
between 1987 and 1992.
This result offers some encouragement about the
effectiveness of these amendments on savings behavior. Also, in this model the
variable indicating the recipient’s sex was statistically significant. Other things being
equal, men were 20% less likely than women to have rolled over a distribution into
another retirement plan.

---

CRS-19
Table 6. Disposition of Lump-Sum Distributions
(All recipients of lump-sum distributions)
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
––-
-3.258 ***
0.197
––-
Race (1 = white)
0.911
0.547 ***
0.140
1.728
Marital status (1 = married)
0.646
0.426 ***
0.085
1.531
Children in family (1 = yes)
0.368
-0.259 **
0.090
0.772
Own home (1 = yes)
0.771
0.651 ***
0.099
1.917
Age = 35 to 44
0.249
0.221 **
0.093
1.247
Age = 45 to 54
0.143
0.432 ***
0.116
1.540
Age = 55 or older
0.165
0.558 ***
0.120
1.747
Education: some college
0.327
0.137
0.095
1.147
Education: 4+ years college
0.369
0.655 ***
0.095
1.924
Monthly inc.: $1,500-$2,999
0.332
0.117
0.090
1.124
Monthly inc.: $3,000+
0.317
0.377 ***
0.093
1.457
Lump sum: $3,500 - $9,999
0.235
0.547 ***
0.096
1.728
Lump sum: $10,000-$19,999
0.147
0.849 ***
0.109
2.338
Lump sum: $20,000 or more
0.226
1.406 ***
0.102
4.081
Received before 1987
0.236
-0.587 ***
0.109
0.556
Received in 1993 or later
0.508
0.579 ***
0.088
1.785
Source:
CRS analysis of the 1996 panel of the Survey of Income and Program Participation.
Notes:
Lump-sum distributions have been adjusted to 1998 dollars.
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 = 4,100 records
*
significant at >= .10
** significant at >= .05
*** significant at >= .01
Association of Predicted Probabilities and Observed Responses
Concordant = 75.1%, Discordant = 24.6%, Tied = 0.3%

---

CRS-20
Table 7. Disposition of Lump-Sum Distributions
(Lump-sums received after 1986 by persons under age 60)
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
––-
-3.414 ***
0.231
––-
Race (1 = white)
0.903
0.549 ***
0.162
1.731
Sex (1 = male)
0.473
-0.220 **
0.093
0.803
Marital status (1 = married)
0.653
0.460 ***
0.107
1.585
Children in family (1 = yes)
0.447
-0.430 ***
0.105
0.650
Own home (1 = yes)
0.729
0.758 ***
0.114
2.135
Age = 35 to 44
0.293
0.134
0.105
1.143
Age = 45 to 54
0.167
0.282 **
0.132
1.326
Age = 55 or older
0.069
0.362 *
0.188
1.436
Education: some college
0.352
0.216 *
0.116
1.241
Education: 4+ years college
0.370
0.872 ***
0.116
2.391
Monthly inc.: $1,500-$2,999
0.341
0.220 **
0.111
1.246
Monthly income: $3,000+
0.333
0.689 ***
0.117
1.992
Lump sum: $3,500 - $9,999
0.244
0.660 ***
0.112
1.935
Lump sum: $10,000-$19,999
0.143
0.795 ***
0.132
2.215
Lump sum: $20,000 or more
0.192
1.317 ***
0.129
3.731
Received after 1992 (1= yes)
0.664
0.649 ***
0.095
1.913
Source:
CRS analysis of the1996 panel of the Survey of Income and Program Participation.
Notes:
Lump-sum distributions have been adjusted to 1998 dollars.
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 = 2,757 records
*
significant at >= .10
** significant at >= .05
*** significant at >= .01
Association of Predicted Probabilities and Observed Responses
Concordant = 75.4%, Discordant = 24.2%, Tied =
0.4%

---

CRS-21
Implications for Public Policy
The results of this analysis indicate that while fewer than half of lump-sum
distributions are rolled over into IRAs or other retirement plans, more than half of the
dollars distributed as lump sums have been rolled over. The trend in recent years has
been that an increasing proportion of recipients have rolled 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.
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. While
36% of recipients rolled over the entire amount, another 48% 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, 84% of all recipients saved at least part of their
lump-sum distribution. Both the growing proportion of recipients who roll over their
lump-sum distributions into other retirement accounts and the larger percentage of
dollars being rolled over are encouraging signs that many workers realize the
importance of preserving these assets until retirement. Nevertheless, many recipients
do not roll 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 $3,000, compared to a median value of $10,000 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 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 median
value of $41,000 at age 65 if invested in stocks, or $16,600 if invested in bonds.
The tax policies that Congress has adopted toward early distributions from
retirement 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

---

CRS-22
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.

---

CRS-23
Additional Reading
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.
Copeland, Craig. “Lump-Sum Distributions: An Update.” EBRI Notes. Vol. 23, No.
7. Employee Benefit Research Institute. July 2002.
Moore, James H. and Leslie A. Muller. “An Analysis of Lump-Sum Pension
Distribution Recipients.” Monthly Labor Review. Vol. 125, No. 5. May 2002.
Sabelhaus, J., and D. Weiner. “Disposition of Lump-Sum Pension Distributions:
Evidence from Tax Returns.” National Tax Journal, v. 52, no. 3, September
1999.
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 Private
Industry, 2000. Bulletin 2555. January 2003.

---