An Analysis of Lump-Sum Pension Distribution Recipients: According to Data from the Survey of Income and Program Participation (SIPP), Most Recipients of Lump-Sum Pension Distributions "Roll Over" at Least Part of Their Lump Sums; Those Who Spend Theirs Typically Do So to Pay off Debts, Purchase Other Items, and Cover Everyday Expenses. (Lump-Sum Pension Distribution)

By Moore, James H., Jr.; Muller, Leslie A. | Monthly Labor Review, May 2002 | Go to article overview

An Analysis of Lump-Sum Pension Distribution Recipients: According to Data from the Survey of Income and Program Participation (SIPP), Most Recipients of Lump-Sum Pension Distributions "Roll Over" at Least Part of Their Lump Sums; Those Who Spend Theirs Typically Do So to Pay off Debts, Purchase Other Items, and Cover Everyday Expenses. (Lump-Sum Pension Distribution)


Moore, James H., Jr., Muller, Leslie A., Monthly Labor Review


Employer-sponsored pensions, one-third of the "three-legged stool" consisting of Social Security income, private savings, and pensions, account for almost 20 percent of aggregate income for people 65 years or older. (1) With Social Security's projected financial shortfall, income from pensions may play an even greater role in providing economic security in the future, especially for those without substantial private savings.

While pensions have traditionally been paid in the form of a monthly annuity, lump-sum options have always been prominent in defined contribution plans (especially 401(k)-type plans); in the past decade, however, availability has also increased in defined benefit plans. Woods estimated that approximately $65 billion was distributed from both defined contribution and defined benefit plans in 1990 (2), with this amount growing to between $87 and $130 billion in 1995. (3) With preretirement access becoming more prevalent in the design of pension plans through loans, withdrawals, and lump-sum distributions, concerns have been raised in both the public policy and retirement research communities regarding future retirement income adequacy for today's workers. If individuals spend their retirement nest egg early in their career or even at retirement, they risk spending their golden years in poverty.

In this study, we use both descriptive and regression analysis to examine the characteristics of individuals who save and spend their lump-sum distributions, examining both preretirement distributions and those received at or after retirement. We use data from the 1991, 1992, and 1993 panels of the Survey of Income Program and Participation (SIPP) matched to Summary Earnings Record (SER) data maintained by the Social Security Administration. This study adds to the lump-sum literature in two ways. First, we examine specific uses of the distribution--such as medical expenditures or car purchases--while most other lump-sum studies only aggregate specific lump-sum uses into two categories, `saved' or `spent'. Studying specific uses of these distributions can prove to be a valuable key as to what motivates the spending in the first place. For example, using the funds for everyday expenses could signal a need to meet immediate cash constraints, while purchasing a boat or car may suggest myopia or excessive consumption on the part of the recipient.

The second way this study adds to the existing literature on lump-sum distributions is by examining the role that individual earnings may play in lump-sum decisions by using three different measures of earnings constructed from earnings records of the Social Security Administration. Previous research has found financial variables instrumental in explaining who saves their distributions, but most research has used only one-year, self-reported measures of earnings, which may include both permanent and transitory components. We try to assess the effects of these more permanent and transitory components by examining the relationship between earnings and lump-sum decisions using earnings measures for three different periods: annual earnings in the year of the distribution, average earnings for the 5 years preceding the distribution, and average projected lifetime annual earnings. Each of these three earnings variables reflects a different time frame to which the lump-sum recipient may look when making the decision about what to do with his or her distribution.

The first two sections of the article provide background information on lump-sum distributions, including the various types of pension plans available, a description of what constitutes a lump-sum distribution, and a summary of current trends regarding lump sums in pension plans. The next three sections discuss, respectively, the tax treatment of lump sums, previous research conducted on the incidence and utilization of lump-sum distributions, and the data used and our analysis. …

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An Analysis of Lump-Sum Pension Distribution Recipients: According to Data from the Survey of Income and Program Participation (SIPP), Most Recipients of Lump-Sum Pension Distributions "Roll Over" at Least Part of Their Lump Sums; Those Who Spend Theirs Typically Do So to Pay off Debts, Purchase Other Items, and Cover Everyday Expenses. (Lump-Sum Pension Distribution)
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