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Lump Sum Distributions From Pension Plans: Recent Evidence and Issues for Policy and Research

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  • Burman, Leonard E.
  • Coe, Norma B.
  • Gale, William G.

Abstract

We examine preretirement lump sum distributions (LSDs) from pension plans, which have grown significantly in recent years. Most LSD recipients do not roll over the funds into qualified accounts, but the likelihood of rollover rises for larger distributions. We find evidence suggesting that tax penalties imposed in 1986 on nonrollovers by people younger than 55 raised the likelihood of rollovers among this group, but had much less effect on the likelihood that such households saved the funds, where saving includes investing in taxable assets and paying off debt. We estimate that cashouts reduce annual retirement income by up to $1,000-3,000.

Suggested Citation

  • Burman, Leonard E. & Coe, Norma B. & Gale, William G., 1999. "Lump Sum Distributions From Pension Plans: Recent Evidence and Issues for Policy and Research," National Tax Journal, National Tax Association;National Tax Journal, vol. 52(3), pages 553-562, September.
    • Handle: RePEc:ntj:journl:v:52:y:1999:i:3:p:553-62
    DOI: 10.1086/NTJ41789741
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    References listed on IDEAS

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    1. Robert Brown, 1998. "Social Security," North American Actuarial Journal, Taylor & Francis Journals, vol. 2(2), pages 1-23.
    2. James M. Poterba & Steven F. Venti, 2001. "Preretirement Cashouts and Foregone Retirement Saving: Implications for 401(k) Asset Accumulation," NBER Chapters, in: Themes in the Economics of Aging, pages 23-58, National Bureau of Economic Research, Inc.
    3. James M. Poterba & Steven F. Venti, 1998. "Lump-Sum Distributions from Retirement Saving Plans: Receipt and Utilization," NBER Chapters, in: Inquiries in the Economics of Aging, pages 85-108, National Bureau of Economic Research, Inc.
    4. David A. Wise, 1998. "Inquiries in the Economics of Aging," NBER Books, National Bureau of Economic Research, Inc, number wise98-2.
    5. Gustman, Alan L. & Steinmeier, Thomas L., 1999. "Effects of pensions on savings: analysis with data from the health and retirement study," Carnegie-Rochester Conference Series on Public Policy, Elsevier, vol. 50(1), pages 271-324, June.
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    Cited by:

    1. Clark, Robert L. & Morrill, Melinda Sandler & Vanderweide, David, 2014. "Defined benefit pension plan distribution decisions by public sector employees," Journal of Public Economics, Elsevier, vol. 116(C), pages 73-88.
    2. Engelhardt, Gary V., 2003. "Reasons for job change and the disposition of pre-retirement lump-sum pension distributions," Economics Letters, Elsevier, vol. 81(3), pages 333-339, December.
    3. Robert Argento & Victoria L. Bryant & John Edward Sabelhaus, 2013. "Early withdrawals from retirement accounts during the Great Recession," Finance and Economics Discussion Series 2013-22, Board of Governors of the Federal Reserve System (U.S.).
    4. Timothy (Jun) Lu & Olivia S. Mitchell & Stephen P. Utkus & Jean A. Young, 2017. "Borrowing From the Future? 401(K) Plan Loans and Loan Defaults," National Tax Journal, National Tax Association;National Tax Journal, vol. 70(1), pages 77-110, March.
    5. Martin F. Lueken & Michael Podgursky, 2016. "Determinants of Cashing Out: A Behavioral Analysis of Refund Claimants and Annuitants in the Illinois Teachers Retirement System," Working Papers 1605, Department of Economics, University of Missouri.
    6. Burman, Leonard E. & Coe, Norma B. & Dworsky, Michael & Gale, William G., 2012. "Effects of Public Policies on the Disposition of Pre-Retirement Lump-Sum Distributions: Rational and Behavioral Influences," National Tax Journal, National Tax Association;National Tax Journal, vol. 65(4), pages 863-887, December.
    7. Barbara A. Butrica & Gordon B.T. Mermin, 2006. "Annuitized Wealth and Consumption at Older Ages," Working Papers, Center for Retirement Research at Boston College wp2006-26, Center for Retirement Research, revised Dec 2006.
    8. Jason S. Seligman & Jeffrey B. Wenger, 2005. "Asynchronous Risk: Unemployment, Equity Markets, and Retirement Savings," Upjohn Working Papers 05-114, W.E. Upjohn Institute for Employment Research.
    9. Hurd, Michael & Panis, Constantijn, 2006. "The choice to cash out pension rights at job change or retirement," Journal of Public Economics, Elsevier, vol. 90(12), pages 2213-2227, December.
    10. Teresa Ghilarducci & Siavash Radpour & Anthony Webb, 2018. "New Evidence on the Effect of Economic Shocks on Retirement Plan Withdrawals," SCEPA working paper series. 2018-03, Schwartz Center for Economic Policy Analysis (SCEPA), The New School.
    11. Randy Jorgensen & Tirimba Obonyo & John R. Wingender, 2024. "De-risking pension plans: the impact on firm value from lump-sum buyouts," Risk Management, Palgrave Macmillan, vol. 26(3), pages 1-19, September.
    12. Engelhardt, Gary V., 2002. "Pre-Retirement Lump-Sum Pension Distributions and Retirement Income Security: Evidence From the Health and Retirement Study," National Tax Journal, National Tax Association;National Tax Journal, vol. 55(4), pages 665-685, December.
    13. Saul W. Adelman & Mark L. Cross, 2010. "Comparing a Traditional IRA and a Roth IRA: Theory Versus Practice," Risk Management and Insurance Review, American Risk and Insurance Association, vol. 13(2), pages 265-277, September.
    14. Roozbeh Hosseini, 2015. "Adverse Selection in the Annuity Market and the Role for Social Security," Journal of Political Economy, University of Chicago Press, vol. 123(4), pages 941-984.

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