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May 2002, Vol. 125, No. 5

An analysis of lump-sum pension distribution recipients

James H. Moore, Jr. and Leslie A. Muller

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 1990² , 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.

This excerpt is from an article published in the May 2002 issue of the Monthly Labor Review. The full text of the article is available in Adobe Acrobat's Portable Document Format (PDF). See How to view a PDF file for more information.

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Footnotes

1 Income of the Population 55 or Older (Social Security Administration, Office of Research and Statistics, 1996).

2 John R. Woods, "Pension Benefits Among the Aged: Conflicting Measures and Unequal Distribtuions," Social Security Bulletin, Fall 1996, pp. 3–30.

3 John Sabelhaus and David Weiner, "Disposition of Lump-Sum Pension Distributions: Evidence from Tax Returns," National Tax Journal, September, 1999, pp. 593–613.

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