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14.3 Million Have Taken A Lump Sum Distribution From a Retirement Plan Reports CRS

Over 82 percent of all employees participating in an employer-sponsored pension plan are eligible for a lump sum distribution reports the Congressional Research Service (CRS) in "Pension Issues: Lump Sum Distributions and Retirement Security." Needless to say, the choice of a lump sum distribution and what is done with that retirement savings has significant implications on retirement policy and the retirement security of the 53.3 million working Americans who have pension coverage through their employer.

Given that the average 25 year old will work for no less than seven different employers, he or she may encounter a lump sum distribution multiple times during his or her career. CRS reports this job changing reduces the overall likelihood that the half of our workforce who have the benefit of pension coverage, will receive a pension. Instead, they will receive lump sum distributions and be faced with the choice of saving in a tax-deferred retirement plan?rolling over distributions; saving outside of a tax-advantaged account; or spending the distribution; or some combination of spending and savings.

The CRS study attempts to analyze how the lump sum distribution choice is exercised by studying data collected in the Bureau of Census' Survey of Income and Program Participation. Of the 39.5 million who reported having the option of a lump sum distribution, CRS found that:

• 14.3 million received at least one lump sum distribution. The average value of distribution was $15,400 and the median value was $5,000. The average age of the individual receiving a distribution was 39 and the median age was 36. CRS notes that given these statistics most recipients of lump sums were 20 years away from retirement.
• 36 percent of this group said they rolled over the entire distribution into another retirement plan, which made up 59 percent of the dollars distributed. Individuals who rolled over their entire distribution were older. They had an average age of 43 and a median age of 41. Their distributions were also higher. The average distribution reported was $26,159 and the median distribution was $10,000.
• 48 percent of the group reported they saved some of their lump sum distribution. This group had an average age of 37 and a median age of 34. Their lump sum distributions tended to be smaller. The average distribution was $9,360 and the median distribution was $3,000.

Additionally, the CRS study found some increase in rollovers possibly due to tax law changes enacted by Congress to encourage rollovers. For those who reported receiving a distribution after 1992, 42 percent said they rolled over the entire lump sum into another plan, which accounted for 70 percent of assets. Another 44 percent said they saved some of their lump sum distribution.

Congress attempted to encourage retention of pension savings or rollovers in three recent laws:

• The Tax Reform Act of 1986, which imposed a 10 percent excise tax on pre-retirement distributions that are not rolled over.
• The Unemployment Compensation Amendments of 1992, which required employers to withhold 20 percent of distributions for income tax payment for pre-retirement distributions.
• The Economic Growth and Tax Relief Reconciliation Act of 2001, which required employers, unless directed otherwise by the employee, to deposit distributions of $1000 or more into an IRA account.

CRS did not make any earth-shaking conclusions. They point out that taking lump sum distributions can significantly reduce retirement income and undermine an individual's financial security in retirement. They note the competing demands of tax policy continue to produce a compromise of goals when it comes to retirement security: encouraging participation among employers and employees in pensions; promoting the preservation of retirement assets; allowing participants to have access to their retirement savings; and assuring that tax-deferrals granted to pensions are not used to fund other initiatives.

The Joint Committee on Taxation's $493 billion price tag for the tax deferral of pension plan contributions and earnings over the next five years (2003 to 2007) assures one thing: how to encourage pensions and savings will be a frontline issue as the U.S. Government once again scores record budget deficits. Minimizing the use of retirement savings for non-retirement purposes and encouraging rollovers of lump sum distributions will continue to be a major Congressional focus along with a renewed debate on the tax equity issues of pension savings.

Individuals Who Reported Having Received One or More Lump Sum Distributions

Source: CRS analysis of the 1996 panel of the Survey of Income and Program Participation

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