Pension Issues: Lump-Sum Distributions and Retirement Income Security

CRS Report for Congress
Pension Issues: Lump-Sum Distributions and
Retirement Income Security
Updated August 3, 2005
Patrick 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
Slightly fewer than half of all workers age 21 and older participated in an
employer-sponsored retirement plan in 2003, 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
could receive several 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
depositing the funds into an individual retirement account (IRA) or 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 over into another retirement plan. In 2001, Congress
required that, unless directed otherwise by the participant, the plan sponsor must
deposit distributions of $1,000 or more into an individual retirement account.
According to data collected by the Census Bureau, 51.8 million workers age 21
or older participated in retirement plans that offered a lump-sum distribution as a
payment option in 2003. This represented 84.8% of the 61.1 million workers who
were covered by a pension, profit-sharing, or retirement savings plan in 2003.
Approximately 16.0 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 $21,900 and the median value was $6,000. The typical recipient
was between 37 and 40 years old at the time of the distribution. Thus, most
recipients of lump-sum distributions were more than 20 years away from retirement.
Of survey respondents who reported that they had received at least one lump-
sum distribution, 44% said that they had rolled over the entire amount of the most
recent distribution into an IRA or other retirement plan, accounting for 67.2% of the
dollars distributed as lump sums. Another 40% 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, 47% said that they had rolled over the entire amount into
another plan, accounting for 72% of the dollars distributed as lump-sums. Another

38% of this group said that they had saved at least part of the distribution.

Lump-sum distributions that are spent rather saved can reduce future retirement
income. If the lump-sum distributions received through 2002 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 had a median value of $7,214
by 2003. For the typical recipient, if this amount were to remain invested, it would
grow to an estimated value of $31,100 by age 65, which would be sufficient to
purchase a level, single-life annuity that would pay $225 in monthly income.

Contents
Overview: Pension Coverage and Tax Policy........................1
Asset Preservation and Lump-Sum Distributions.................3
Calculating Lump-Sum Distribution Amounts...................5
Interest Rates and Lump-Sum Distributions.....................5
Lump-Sum Distributions and Pension Plan Funding...............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?..............9
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?.....................15
Implications for Public Policy...................................20
List of Tables
Table 1. Participation in Employer-Sponsored
Retirement Plans, 2003.........................................2
Table 2. Percentage of Workers Whose Retirement Plan Offered a
Lump-Sum Payment Option, 2003................................8
Table 3. Characteristics of Individuals Who Reported Ever Having
Received One or More Lump-Sum Distributions....................9
Table 4. Percentage of Lump-Sum Distribution Recipients Who Rolled
Over the Entire Amount into Another Retirement Plan................12
Table 5. Percentage of Lump-Sum Distribution Recipients Who Saved
All or Part of the Distribution...................................13
Table 6. Disposition of Lump-Sum Distributions........................19

Pension Issues: Lump-Sum Distributions
and Retirement Income Security
Overview: Pension Coverage and Tax Policy
Slightly fewer than half of all workers age 21 and older in the United States
participated in an employer-sponsored retirement plan in 2003.¹ (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 2003, more than two-thirds (68.3%) of Social Security beneficiaries age 65 or
older received more than half of their annual income from Social Security, and Social
Security was the only source of income for nearly one out of four (24%) beneficiaries
over the age of 65.³ The median monthly Social Security retired worker benefit in
2003 was $925 per month, or $11,100 annually. 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. However, to the extent that workers spend lump-sum distributions
from employer-sponsored retirement 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

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 the Congressional Research Service (CRS) from data published by the U.S.
Bureau of Labor Statistics, “Employee Tenure in 2004,” BLS News Release, USDL 04-

1829, Sept. 21, 2004.

³ CRS analysis of the Census Bureau’s Mar. 2004 Current Population Survey.

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.
Table 1. Participation in Employer-Sponsored
Retirement Plans, 2003
(all wage and salary workers age 21 and older)
Participate in aYesNo Total Persons
Retirement Plan?(in percent) (in percent) (in thousands)
^Ag^e
^{21 t}^o²⁴^18.9^81.1^12,646
^{25 t}^o³⁴^41.9^58.1^31,363
^{35 t}^o⁴⁴^52.0^48.0^34,052
^{45 t}^o⁵⁴^59.0^41.0^31,252
^{55 t}^o⁶⁴^56.7^43.3^16,925
^{65 or ol}^der^28.6^71.4⁵^,014
^{Race/ethnicity}
^Whⁱ^t^e^48.7^51.3^107,570
^Bl^ack^44.3^55.7^15,077
^A^sⁱ^aⁿ^/^N^a^tⁱ^v^{e A}^m^eri^can^42.1^57.9⁸^,606
^Sex
^Mal^e^49.1^50.9^68,740
^F^e^m^a^l^e^46.3^53.7^62,513
^Ma^rⁱ^t^a^l^s^t^a^t^u^s
^Marri^ed^53.5^46.5^78,907
^N^o^t^Marri^ed^39.0^61.0^52,346
^Educa^t^ioⁿ
^Hⁱ^g^h^S^c^h^ool^{or l}^e^s^s^37.0^63.0^52,634
^S^o^m^e^col^l^e^g^e^47.7^52.3^38,304
^C^o^l^l^e^g^e^g^r^adu^a^t^e^61.9^38.1^40,315
^E^a^rnⁱⁿ^gsⁱⁿ²⁰⁰³
^Uⁿ^{der $25,000}^23.0^77.0^53,940
^$25,000-^$49,000^59.3^40.7^45,670
^$50,000-^$74,999^73.3^26.7^18,316
^{More t}^h^an^$75,000^73.3^26.7^13,326
^Firm^sⁱ^ze
^Uⁿ^{der 25 peopl}^e^20.7^79.3^33,839
^{25 t}^o^{99 peopl}^e^40.8^59.2^17,901
^{100 or m}^o^{re peopl}^e^60.9^39.1^79,513
^E^m^p^l^oym^en^t
^Y^ear-^r^ouⁿ^d^{, f}^u^l^l^-^tⁱ^m^e^56.9^43.1^93,096
^Part^y^{ear or part}^-^tⁱ^m^e^25.6^74.4^38,157
Total 0.5 0.0 131,253
^So^urce^:^T^h^{e C}^oⁿ^g^r^es^sⁱ^on^al^R^e^s^earch^S^e^rvⁱ^{ce (C}^R^S^{) an}^al^y^sⁱ^s^of^t^h^{e March}²⁰⁰⁴^C^u^r^r^e^nt^Popul^atⁱ^oⁿ
^Sur^vey^.

Employers who sponsor retirement 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 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 $568 billion in forgone tax revenue over
the five fiscal years from 2005 through 2009.⁴ This is the largest so-called tax-
expenditure in the federal budget.
Asset Preservation and Lump-Sum Distributions. Pension plans and
retirement savings plans, such as “401(k)” plans, promote financial security in
retirement by encouraging workers to accumulate assets to pre-fund their retirement⁵
income. Sometimes, however, retirement assets are distributed before the worker
has reached retirement age. 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, investment earnings (or losses) on
those contributions, and the part of employer contributions and earnings in which the⁶
employee has become vested. In defined benefit pension plans, a lump-sum
distribution is required by law to be equal to the present value of the employee’s
accrued benefit. The present value calculation discounts the stream of benefits that

⁴ Joint Committee on Taxation, JCS-1-05, Jan. 12, 2005. Other substantial tax expenditures
are the exclusion of employer payments for health insurance, which is estimated to reduce
federal tax revenue by $494 billion from 2005 to 2009, the home mortgage interest
deduction ($434 billion), the reduced tax rates on dividends and long-term capital gains
($357 billion), and the tax credit for children under age 17 ($232 billion).
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. Similar arrangements for non-profit employers
are authorized by §403(b) and for employees of state and local governments under §457.
⁶ ERISA allows sponsors of retirement plans to choose between two methods of vesting:
“cliff” vesting and “graded” vesting. The maximum permissible vesting period differs
between defined benefit plans and defined contribution plans. Under cliff vesting in a
defined benefit plan, a participant is 100% vested after five years of participation, but has
no vested rights to a benefit under the plan before that time. Under “graded” vesting in a
defined benefit plan, a participant is 20% vested after three years, 40% vested after four
years, 60% vested after five years, 80% vested after six years, and 100% vested after seven
years. In a defined contribution plan, the vesting schedule applicable to an employer’s
matching contributions may not exceed three years under year cliff vesting or six years
under graded vesting. Employers can, if they choose, vest participants in their accrued
benefits faster than these schedules.

would be paid in the future to an amount that could, if invested by the recipient, pay
an equivalent income at retirement.⁷
Lump-sum distributions promote “portability” of retirement assets for workers
who change jobs, allowing them to re-invest their retirement assets so 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.
Pension analysts describe pre-retirement distributions that are spent on current
consumption rather than being rolled over into another retirement plan as “leakages”
from the pool of retirement assets. To discourage leakages from retirement plans,
Congress has amended the Internal Revenue Code to provide incentives for
individuals to roll over pre-retirement 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 age 59½ that are not rolled over into an
Individual Retirement Account (IRA) or another employer’s tax-
qualified retirement plan.⁸
^!The Unemployment Compensation Amendments of 1992 (P.L. 102-
318) required employers to give departing employees the option to
transfer a lump-sum distribution directly to an IRA or to another
employer’s plan. If the participant instead chooses to receive the
distribution directly, the employer is required to withhold 20%,
which is 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.⁹
^!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 $5,000.¹⁰ The Economic Growth and Tax Relief Reconciliation

⁷ Lump-sum distributions from defined benefit plans are discounted both for the time value
of money, based on a specific rate of interest, and also for mortality among plan participants.
⁸ Under I.R.C. §72(t), 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. See CRS Report RL31770,
Retirement Savings Accounts: Early Withdrawals and Required Distributions, by Patrick
J. Purcell.
⁹ 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.
¹⁰ Distributions of $5,000 or more require the participant’s written consent. 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
(continued...)

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 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 in 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 while placing an excise tax on amounts that
are not rolled over represents a compromise among the competing policy objectives
of promoting retirement saving, preserving assets until retirement, providing access
to assets in time of need, and assuring that lost tax revenue does not exceed the
amount 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. When calculating this amount, the plan is
required by law to 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. The U.S. Treasury stopped issuing 30-year bonds in
2001. Congress is now considering alternative interest rates that could be used to
calculate the present value of accrued benefits under defined benefit plans. H.R.^th
2803 (Boehner) of the 109 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 average of the interest rates on high-quality, long-term and short-
term corporate bonds. The corporate bond rate would be phased in over five years
beginning in 2006.
Interest Rates and Lump-Sum Distributions. The amount of a lump-
sum distribution from a defined benefit pension is inversely related to the interest
used to calculate the present value of the benefit that has been accrued under the plan:
the higher the interest rate, the smaller the lump-sum and vice versa. Under current
law, lump-sum distributions are calculated using the average interest rate on 30-year
Treasury bonds. The interest rate on long-term Treasury securities has historically

¹⁰ (...continued)
by ERISA in 1974.

been lower than the average interest rate on long-term investment-grade corporate
bonds because bond markets generally consider U.S. Treasury securities to be free
of the risk of default. Since the Treasury Department stopped issuing the 30-year
bond in 2001, the interest rate on 30-year Treasury bonds that have not yet been
redeemed has fallen as the supply of bonds has shrunk. (Bond prices and interest
rates are inversely related. As bond prices rise, bond yields — interest rates — fall.)
H.R. 2830 would require plan sponsors to calculate lump-sum distributions
using three interest rates based on investment-grade corporate bonds. As a result,
participants of different ages would have their lump sum distributions calculated
using different interest rates. Lump-sum distributions paid to workers nearer to
retirement would be calculated using a short-term interest rate, and distributions paid
to younger workers would be based on a long-term rate. Because short-term rates
are usually lower than long-term rates, all else being equal, an older worker would
receive a larger lump-sum than a similarly situated younger worker.
Assuming that a participant were to take a lump-sum distribution at the plan’s
normal retirement age (typically age 65), a short-term corporate interest rate would
be applied to the annuity payments he or she would have received during the first five
years of retirement. A medium-term interest rate would apply to payments the
participant would have received in years six through 20, and a long-term rate would
apply to payments that would have been paid after 20 years. Because a 65-year-old
can be expected to live about another 20 years, most of the lump-sum would be based
on the medium-term rate. In contrast, a participant who takes a lump-sum
distribution at age 45 would be 20 years away from the plan’s normal retirement age.
All of that person’s lump sum will be discounted at the higher long-term rate. If a
person took a lump sum at, say, age 59, the distribution would be calculated using the
both the medium-term and long-term rates, but not the short-term rate.
Lump-Sum Distributions and Pension Plan Funding. Further increases
in the proportion of plan participants taking lump-sum distributions from defined
benefit pension plans could have important implications for pension plan funding.
The Executive Director of the Pension Benefit Guaranty Corporation (PBGC) has
stated that “plan assets are depleted when seriously underfunded plans allow retiring¹¹
employees to elect lump sums and similar accelerated benefits.” Likewise, the U.S.
Government Accountability Office (GAO) has reported to Congress that:
. . . because many plans allow lump sum distributions, plan participants in an
underfunded plan may have incentives to request such distributions. For
example, where participants believe that the PBGC guarantee may not cover their
full benefits, many eligible participants may elect to retire and take all or part of
their benefits in a lump sum rather than as lifetime annuity payments, in order to
maximize the value of their accrued benefits. In some cases, this may create a
“run on the bank,” exacerbating the possibility of the plan’s insolvency as assets

¹¹ PBGC Director Bradley Belt, statement to the Senate Finance Committee, June 7, 2005.

are liquidated more quickly than expected, potentially leaving fewer assets to pay¹²
benefits for other participants.
How Many Workers Are Eligible for Lump-Sum Distributions?
During the first half of 2003, 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, 85% of the 61.1
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
(See Table 2.)
Almost all defined contribution plans offer a lump-sum payment option. The
proportion of defined benefit plans offering lump-sum distributions has risen in
recent years as many employers have converted traditional 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.” Nevertheless, cash balance plans
are funded on a group basis and are treated as defined benefit plans under the Internal
Revenue Code. Cash balance plans typically offer lump-sum distributions to
departing employees.

¹² U.S. Government Accountability Office, “Pension Benefit Guaranty Corporation:
Structural Problems Limit Agency’s Ability to Protect Itself from Risk,” GAO-05-360T.
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.

Table 2. Percentage of Workers Whose Retirement Plan Offered
a Lump-Sum Payment Option, 2003
(workers 21 and older who participated in an employer-sponsored
retirement plan)
Does Plan Have aYesNo Persons
Lump-sum Option?(percent) (percent) (thousands)
^Ag^e
^{21 t}^o²⁴^78.6^21.4²^,033
^{25 t}^o³⁴^86.1^13.9^13,637
^{35 t}^o⁴⁴^84.7^15.3^18,300
^{45 t}^o⁵⁴^84.5^15.5^17,618
^{55 t}^o⁶⁴^84.7^15.3⁸^,518
^{65 or ol}^der^86.8^13.2⁹⁷⁶
^Ra^ce
^Whⁱ^t^e^85.3^14.7^51,658
^Bl^ack^81.3^18.7⁶^,540
^A^sⁱ^aⁿ^/^N^a^tⁱ^v^{e A}^m^eri^can^84.1^15.9²^,883
^Sex
^Mal^e^85.0^15.0^33,360
^F^e^m^a^l^e^84.6^15.4^27,722
^Ma^rⁱ^t^a^l^s^t^a^t^u^s
^Marri^ed^84.8^15.2^40,528
^N^o^t^Marri^ed^84.6^15.4^20,554
^Educa^t^ioⁿ
^Hⁱ^g^h^S^c^h^ool^{or l}^e^s^s^83.0^17.0^18,495
^S^o^m^e^col^l^e^g^e^85.1^14.9^19,165
^C^o^l^l^e^g^e^g^r^adu^a^t^e^85.9^14.1^23,422
^Iⁿ^com^eⁱⁿ²⁰⁰³
^Uⁿ^{der $25,000}^82.8^17.2^15,007
^$25,000-^$49,999^84.1^15.9^26,401
^{$50,000 or m}^o^re^87.2^12.8^19,674
^E^s^tablis^hm^{ent s}ⁱ^ze
^N^o^t^report^e^d^92.2⁷^.8^1,651
^Uⁿ^{der 25peopl}^e^85.5^14.5^13,058
^{25 t}^o^{99 peopl}^e^84.5^15.5^14,782
^{100 or m}^o^{re peopl}^e^84.2^15.8^31,591
^E^m^p^l^oym^en^t
^F^u^l^l^-^tⁱ^m^e^84.4^15.6^48,606
^Part^-^tⁱ^m^e^86.1^13.9^12,476
Total 84.8 15.2 61,082
^So^urce^:^C^R^S^an^al^y^sⁱ^s^of^t^h^{e 2001 Pan}^e^l^of^t^h^e^Sur^{vey of Income and Pr}^ogr^{am Par}^ticipation⁽^S^I^PP)^.

How Many People Have Received Lump-Sum Distributions?
According to the information reported on the Survey of Income and Program
Participation in 2003, an estimated 16.0 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 $21,895. Expressed in constant 2003 dollars, the mean value of the distributions
was $25,968.¹⁴ (Table 3) Because 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 $6,000. Adjusted to 2003 dollars, the median distribution was $7,581. 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 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 4037
Amount of lump-sum distribution in nominal dollars$21,895$6,000
Amount of lump-sum distribution in 2003 dollars$25,968$7,581
Rolled over the distribution to another account :
Age when lump sum received 4240
Amount of lump-sum distribution in nominal dollars$33,810$12,000
Amount of lump-sum distribution in 2003 dollars$39,400$13,332
Did not roll over the distribution to another account:
Age when lump sum received 3835
Amount of lump-sum distribution in nominal dollars$12,420$4,000
Amount of lump-sum distribution in 2003 dollars$15,288$4,464
^So^urce^:^C^R^S^an^al^y^sⁱ^s^of^t^h^{e 2001 pan}^e^l^of^t^h^e^Sur^{vey of Income and Pr}^ogr^{am Par}^ticipation⁽^SSI^P⁾^.
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

¹⁴ CRS adjusted the dollar amount of all lump-sum distributions reported on the SIPP to
constant 2003 dollars, based on the Personal Consumption Expenditure Index of the
National Income and Product Accounts (NIPA).

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 to the Census Bureau that they had received at least one
lump-sum distribution, 44% said that they had rolled over the entire amount of the
most recent distribution into another tax-qualified plan, such as an IRA. (See Table

4.) These transactions accounted for 67% of the dollars distributed as lump sums.

(Not shown in table.) Of those who reported receiving a distribution after 1992, 47%
said that they had rolled over the entire amount into another plan, accounting for 72%
of the dollars distributed as lump-sums after 1992.
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. Survey
participants 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.¹⁵ 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, 84% said that they had saved at least some of the most recent
distribution they received. (See Table 5.) In addition to the 44% who had rolled
over the entire amount into another tax-deferred retirement plan, another 40% 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, 85% said that they
had saved at least part of the distribution. Of this group, 47% rolled over the entire
amount into another plan, and 38% saved part of the distribution in another way.

¹⁵ 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.

Trend From 1998 to 2003. Prior to 2003, the Census Bureau last collected
information on the disposition of lump-sum distributions from pension plans in 1998.
In the 1998 survey, 35.9% of respondents reported that they had rolled over the entire
amount of the most recent lump-sum distribution they had received into an IRA or
another employer-sponsored retirement plan. The data displayed in Table 4 show
that 44.3% of the respondents to the 2003 survey reported having rolled over their
most recently received lump-sum distribution. While these figures may appear to
represent a substantial increase in the percentage of recipients who chose to roll over
their lump-sum distributions between 1998 and 2003, they primarily reflect changes
in participant behavior that had already occurred by 1998.
In the1998 Census Bureau survey, 35.9% of respondents reported that they had
rolled over their most recent lump-sum distribution into another retirement plan. Of

7.0 million people whose most recent lump-sum distribution occurred before 1993,

only 29.2% reported that they had rolled over the entire amount into an IRA or
another retirement plan. Of 7.3 million people whose most recent lump-sum
distribution occurred between 1993 and 1998, 42.4% reported that they had rolled
over the entire amount into another plan.¹⁶
In the 2003 Census Bureau survey, 44.3% of respondents reported that they had
rolled over their most recently received lump-sum distribution into another retirement
plan. Of 4.7 million people whose most recent lump-sum distribution occurred
before 1993, 38% had rolled over the entire amount into an IRA or another retirement
plan. Of another 4.7 million people whose most recent lump-sum distribution was
received between 1993 and 1998, 49.2% reported that they had rolled over the entire
amount into another plan. Finally, of 6.7 million people whose most recent lump-
sum distribution was received after 1998, 45.2% reported that they had rolled over
the entire amount into another plan.¹⁷
The increase from 35.9% of lump-sum recipients reporting a rollover in the
1998 survey to 44.3% of recipients who reported a rollover in the 2003 survey largely
reflects changes in behavior that had already occurred by 1998. In the 2001 survey,
the percentage of individuals who reported rolling over their most recent lump-sum
distribution was actually lower for distributions received after 1998 or later than it
was for distributions received between 1993 and 1998. When comparing the
disposition of recently received lump-sum distributions in the two surveys, the
percentage of distributions that were rolled over into another plan was only slightly
higher in the 2003 survey than in the 1998 survey. In 1998, 42.4% of respondents
who had received a lump-sum distribution within the last five years reported that they
had rolled over the full amount of the distribution into another retirement plan. In the
2003 survey, the comparable figure was 45.8%, an increase of just 3.4 percentage
points. Thus, the higher overall percentage of recipients who reported having rolled
over their most recent lump-sum distribution in the 2003 survey — 44.3%, as
compared to 35.9% in the 1998 survey — results mainly from the fact that a much
larger proportion of the distributions represented in the 2003 survey occurred after

1992.

¹⁶ The weighted average is calculated as (7.0/14.3*.292)+(7.3/14.3*.424) = .359.
¹⁷ The weighted average is (4.69/16.0*.381)+(4.66/16.0*.492)+(6.65/16.0*.452) = .443.

Table 4. Percentage of Lump-Sum Distribution Recipients Who
Rolled Over the Entire Amount into Another Retirement Plan
^Eⁿ^{tire L}^u^m^p^-Sum^{Rolled Over?}^Yes^(percen^t)^No^(percen^t)^T^o^{tal pers}^ons⁽ⁱ^{n t}^h^o^u^sa^nd^s)
^{Age w}^h^{en received}
^{21 t}^o²⁴^20.1^79.2¹^,303
^{25 t}^o³⁴^39.2^60.8⁵^,281
^{35 t}^o⁴⁴^48.7^51.3⁴^,174
^{45 t}^o⁵⁴^51.6^48.4²^,725
^{55 t}^o⁶⁴^56.4^43.6¹^,855
^{65 or ol}^der^39.2^60.8⁶⁶⁹
^Ra^ce
^Whⁱ^t^e^45.8^54.2^14,452
^Bl^ack^21.9^78.1⁹¹⁶
^O^t^h^e^r^43.1^56.9⁶⁴⁰
^Sex
^Mal^e^47.6^52.4⁷^,575
^F^e^m^a^l^e^41.4^58.6⁸^,432
^Ma^rⁱ^t^a^l^s^t^a^t^u^s
^Marri^ed^47.6^52.4^10,350
^N^o^t^m^a^rri^ed^38.2^61.8⁵^,656
^{Children pres}^ent
^N^o^C^hⁱ^l^d^ren^45.6^54.4^10,207
^Oⁿ^{e ch}ⁱ^l^d^{or m}^o^re^42.0^58.0⁵^,800
^Educa^t^ioⁿ
^Hⁱ^g^h^S^c^h^ool^{or l}^e^s^s^33.8^66.2⁴^,198
^S^o^m^e^col^l^e^g^e^36.8^63.2⁵^,206
^C^o^l^l^e^g^e^g^r^adu^a^t^e^56.9^43.1⁶^,603
^Hom^e^ow^ners^hip
^H^o^m^e^owⁿ^e^r^47.8^52.2^12,931
^N^o^t^{a h}^o^m^e^owⁿ^e^r^29.4^70.6³^,077
^Iⁿ^com^eⁱⁿ²⁰⁰³
^Uⁿ^{der $25,000}^37.8^62.2⁶^,922
^$25,000-^$49,999^41.9^58.1⁵^,247
^{$50,000 or m}^o^re^59.3^40.7³^,838
^Am^o^unt^o^f^dist^ribut^ioⁿ^a
^L^e^s^s^t^h^an^$3,500^28.0^72.0⁵^,460
^{$3,500 t}^o^$9,999^40.8^59.2³^,657
^{$10,000 t}^o^$19,999^46.4^53.6²^,347
^{$20,000 or m}^o^re^65.5^34.5⁴^,544
^{Year dis}^t^{ribution received}
^Bef^o^{re 1993}^38.1^61.9⁴^,688
^{1993 t}^o¹⁹⁹⁸^49.2^50.8⁴^,655
^A^f^t^e^{r 1998}^45.2^54.8⁶^,664
^T^o^tal^44.3^55.7^16,007
^So^urce^:^C^R^S^an^al^y^sⁱ^s^of^t^h^{e 2001 pan}^e^l^of^t^h^e^Sur^vey^of^{Income and Pr}^ogr^{am Par}^ticipation⁽^S^I^PP)^.
^{a. A}^m^ouⁿ^t^of^t^h^{e l}^u^m^p^-^s^u^m^di^s^t^ri^bu^tⁱ^oⁿ^,^adj^u^s^t^{ed t}^o^{2003 dol}^l^a^rs^.

Table 5. Percentage of Lump-Sum Distribution Recipients Who
Saved All or Part of the Distribution
Was any part of theYesNoPersons
distribution saved?(percent)(percent)(thousands)
Age when received
^{21 t}^o²⁴^66.7^33.3¹^,303
^{25 t}^o³⁴^82.7^17.3⁵^,281
^{35 t}^o⁴⁴^85.9^14.1⁴^,174
^{45 t}^o⁵⁴^88.4^11.6²^,725
^{55 t}^o⁶⁴^89.7^10.3¹^,855
^{65 or ol}^der^84.8^15.2⁶⁶⁹
Race
^Whⁱ^t^e^84.9^15.1^14,452
^Bl^ack^73.8^26.2⁹¹⁶
^O^t^h^e^r^79.2^20.8⁶⁴⁰
Sex
^Mal^e^85.8^14.2⁷^,575
^F^e^m^a^l^e^82.5^17.5⁸^,432
Marital status
^Marri^ed^85.6^14.4^10,350
^N^o^t^m^a^rri^ed^81.3^18.8⁵^,657
Children present
^N^o^C^hⁱ^l^d^ren^83.8^16.2^10,207
^Oⁿ^{e ch}ⁱ^l^d^{or m}^o^re^84.5^15.5⁵^,801
Education
^Hⁱ^g^h^S^c^h^ool^{or l}^e^s^s^81.7^18.3⁴^,198
^S^o^m^e^col^l^e^g^e^82.0^18.0⁵^,206
^C^o^l^l^e^g^e^g^r^adu^a^t^e^87.2^12.8⁶^,603
Home ownership
^H^o^m^e^owⁿ^e^r^85.6^14.4^12,931
^N^o^t^{a h}^o^m^e^owⁿ^e^r^77.6^22.4³^,076
Income in 2003
^Uⁿ^{der $25,000}^82.0^18.0⁶^,922
^$25,000-^$49,999^83.3^16.7⁵^,247
^{$50,000 or m}^o^re^89.0^11.0³^,838
Amount of distribution^a
^L^e^s^s^t^h^an^$3,500^75.0^25.0⁵^,460
^{$3,500 t}^o^$9,999^82.5^17.5³^,657
^{$10,000 t}^o^$19,999^89.2^10.9²^,347
^{$20,000 or m}^o^re^93.6⁶^.4^4,544
Year distribution received
^Bef^o^{re 1993}^81.1^18.9⁴^,688
^{1993 t}^o¹⁹⁹⁸^84.3^15.7⁴^,655
^A^f^t^e^{r 1998}^86.0^14.0⁶^,664
Total 84.1 15.9 16,007
^So^urce^:^C^R^S^an^al^y^sⁱ^s^of^t^h^{e 2001 pan}^e^l^of^t^h^e^Sur^{vey of Income and}^Pr^ogr^{am Par}^ticipation⁽^S^I^PP)^.
^{a. A}^m^ouⁿ^t^of^t^h^{e l}^u^m^p^-^s^u^m^di^s^t^ri^bu^tⁱ^oⁿ^,^adj^u^s^t^{ed t}^o^{2003 dol}^l^a^rs^.

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 39.2% 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,
51.6% rolled over the entire amount. (See Table 4.) 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 $21,895.
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 $33,810. Those who had not rolled over the entire distribution
received lump-sums with a mean value of $12,420. (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 that they had not rolled over their most recent lump-sum
distribution, the Congressional Research Service (CRS) calculated the amounts that
these individuals could have accumulated if they had rolled over their entire lump
sums into another retirement plan. For each individual who had not rolled over the
most recent lump-sum distribution, CRS calculated the amount that would have been
accumulated by 2003 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 10-year U.S. Treasury notes in each
year since the year the distribution was received; and
^!the total annual rate of return of the Standard & Poor’s 500 stock
index in each year since the distribution was received.
If all of the respondents who reported 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 10-year U.S. Treasury notes, the
distributions would have attained a mean value of $37,427 by 2003. 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
$41,272 by 2003.
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
had a median value of $7,214 by 2003. If invested in bonds that earned the rate of
return paid by 10-year U.S. Treasury notes, the median lump sum would have been
worth $6,930 by 2003.
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 27 to 30 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 38.
Their median age in the year of the distribution was 35. In 2003 — the year of the
survey — the median age of these individuals was 46.
As noted above, the median value of the lump-sum distributions that were not
rolled over would have reached $7,214 by 2003 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%, a 46 year-old individual who invested $7,214 for 19 years
would have accumulated $31,130 by age 65. At current interest rates, this would be
enough to purchase a life-long annuity that would provide income of $225 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 10-year Treasury notes, they would have reached
a median value of $6,930 in 2003. Assuming 46 year-old individual invested $6,930
in bonds for 19 years at an average rate of return of 5.8%, it would grow to $20,230
by age 65.¹⁹ This would be sufficient capital to purchase a lifetime annuity that
would provide a monthly income of $147.
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

¹⁸ Based on a level, single-life annuity purchased at age 65 at 4.125%.
¹⁹ The long-run nominal interest rate assumed in the 2005 annual report of the Board of
Trustees of the Social Security System was 5.8%.

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. In the
model, we restricted the sample to lump-sums received after 1986 by people under
age 60 in the year of the distribution. Results of the model are shown in Table 6.²⁰
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 1.69. This means that the dependent variable is 69% 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
69% more likely than a renter to have rolled over the entire lump sum into another
retirement plan.

²⁰ 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. Results were similar in a second model that included all recipients of lump-sums,
regardless of age in the year of distribution or the year the distribution was received.

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.²¹ All amounts were adjusted to 2003 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 63% more likely to be rolled over
than lump sums of less than this amount. Lump-sum distributions of $10,000 to
$19,999 were 102% more likely to be rolled over than lump sums of less than $3,500.
Distributions of $20,000 or more were 329% more likely to be rolled over than were
distributions of less than $3,500.
The variable indicating the year the distribution was received 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 38% more likely to have been rolled over than those
received between 1987 and 1992.
Race was also a significant variable on the model. White recipients of lump-
sum distributions were 96% 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 69% 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 35% 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 30% 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.

²¹ 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.

Age in the year of the distribution, education, and average monthly income were
included in the model in broadly defined categories. 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. Relative to recipients under age 35,
workers aged 35 to 44 and those aged 45 to 54 were 28% and 29% more likely,
respectively than the youngest group to have rolled over their most recently received
lump sum. Recipients aged 55 and older were 48% more likely than those under 35
to have rolled over their most recently received lump sum distribution.
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 27% more likely to
have rolled over their distribution into an IRA or other retirement plan. College
graduates, however, were 206% 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
2003 was grouped into three categories: under $2,000; $2,000 to $3,999; and more
than $4,000. On an annualized basis, these groupings correspond to yearly earnings
of under $24,000, $24,000 to $48,000, and more than $48,000, respectively. Relative
to recipients with monthly earnings of less than $2,000, those who had earnings from
$2,000 to $3,999 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 $4,000 was significantly and positively related
to the likelihood that a distribution was rolled over. Individuals with monthly income
of more than $4,000 were 101% more likely to have rolled over their most recent
lump sum.
The variable indicating the recipient’s sex was statistically significant, but just
barely (at the .10 level). Other things being equal, men were 15% less likely than
women to have rolled over their most recent lump-sum distribution into another
retirement plan.

Table 6. 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
Analysis WeightedParameterStandardOdds
VariableMeanEstimateError Ratio
^c
Intercept — -2.9360.221—^c
Race (1 = white)0.8930.6750.1441.964^a
Sex (1 = male)0.474-0.1620.0890.85^c
Marital status (1 = married)0.6560.2990.1011.348^c
Children in family (1 = yes)0.434-0.3640.1000.695^c
Own home (1 = yes)0.7810.5250.1111.690^b
Age = 35 to 440.2910.2440.1021.277^b
Age = 45 to 540.2030.2560.1241.294^a
Age = 55 or older0.0730.3900.1801.478^b
Education: some college0.3380.2360.1121.266^c
Education: 4+ years college0.4151.1190.1133.063
Monthly income: $2,000-0.3460.1640.1001.178^c
Monthly income: $4,000+0.2700.6980.1162.010^c
Lump sum: $3,500 - $9,9990.2400.4880.1091.628^c
Lump sum: $10,000-$19,9990.1410.7040.1292.022^c
Lump sum: $20,000 or more0.2511.4570.1184.293^c
Received after 1992 (1= yes)0.8220.3220.1101.380
^So^urce^:^C^oⁿ^g^r^es^sⁱ^on^al^R^e^s^earch^S^e^rvⁱ^{ce (C}^R^S^{) an}^al^y^sⁱ^s^of^t^h^{e 2001 pan}^e^l^of^t^h^e^Sur^{vey of Income}
^{and Pr}^ogr^am^Par^tⁱ^cⁱ^patⁱ^oⁿ⁽^S^I^PP)^.
^No^tes^:^L^u^m^p^-^s^u^m^di^s^t^ri^bu^tⁱ^oⁿ^s^h^a^v^e^been^adj^u^s^t^{ed t}^o^{2003 dol}^l^a^rs^{. T}^h^{e “}^odds^ratⁱ^o^{” i}^s^{a m}^eas^u^r^e
^of^h^o^w^m^u^ch^m^o^{re (or les}^s⁾^lik^ely^{it is}^f^o^{r a s}^p^ecifⁱ^{c o}^u^t^c^o^m^{e to be obs}^erv^e^{d w}^h^en^{a particu}^l^ar
ⁱⁿ^d^e^p^eⁿ^d^en^{t v}^a^rⁱ^ab^{le is “}^t^r^u^{e” (}^{x = 1}⁾^th^an^{it is w}^h^en^th^{at in}^d^e^p^eⁿ^d^en^{t v}^a^rⁱ^ab^{le is “}^f^alse”(^{x = 0}^).
ⁿ^{= 2,902 records}^.
^{a. s}ⁱ^gⁿⁱ^fⁱ^can^{t at >= .10}
^{b. s}ⁱ^gⁿⁱ^fⁱ^can^{t at >= .05}
^{c. s}ⁱ^gⁿⁱ^fⁱ^can^{t at >= .01}
Association of Predicted Probabilities and Observed Responses
Concordant = 75.9%, Discordant = 23.8%, Tied = 0.3%

Implications for Public Policy
The results of this analysis indicate that while fewer than half of lump-sum
distributions from retirement plans have been rolled over into IRAs or another
employer-sponsored plan, about two-thirds of the dollars distributed as lump sums
have been rolled over. 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. However, the
percentage of recently received lump-sum distributions that were rolled over into
another plan was only slightly higher in the Census Bureau’s 2003 survey than it had
been in the 1998 survey. In 1998, 42.4% of respondents who had received a lump-
sum distribution within the last five years reported that they had rolled over the full
amount of the distribution into another retirement plan. In 2003, the comparable
figure was 45.8%, an increase of just 3.4 percentage points in the percentage of
recent distributions that were rolled over into another retirement plan.
Many 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
44% of recipients rolled over the entire amount, another 40% 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. However, taking a distribution and saving part of it is not a
tax-efficient way to save. Distributions received before age 59½ that are not directly
rolled over into another tax-qualified retirement plan are subject to both ordinary
income tax and a 10% additional tax.
While the lump-sum distributions that were not rolled over tended to be
relatively small — with a median value of $4,000, compared to a median value of
$12,000 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 rolled over into
IRAs or other retirement plans. Among the sample of lump-sum recipients examined
in this report, those who did not roll over their most recent lump sum distribution
gave up retirement wealth with an estimated median value of $31,000 at age 65 if it
had been invested in stocks, or $20,000 if it had been 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
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, but only 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