Cashing Out Pension Rights at Job Change or Retirement
Constantijn Panis, Michael Hurd, Lee Lillard

More and more private pension plans are allowing beneficiaries to take their money at job separation or retirement in the form of a lump sum distribution (LSD), potentially divesting themselves of an income stream during old age. This potential has, over the years, generated alarm. Bills to outlaw lump sum distributions have been introduced in Congress, and the press has reported that most of departing employees' retirement money is being spent rather than saved.

Hurd, Lillard, and Panis use HRS data to re-estimate the extent of the cash-out problem. These data allow for the first time an estimate of the frequency of cashing out relative to the total number of retirees for whom lump sum distribution is an option.

The percentages having the LSD option and stating that they took each of various actions in response are shown in the figure below. It is true that roughly half of those who took the LSD option cashed out. But only 36 percent of those with the option took it. The others drew their annuities or were too young to retire and waited to draw them later ("future benefits" or "leave to accumulate" in the figure). And, of the 18 percent who cashed out, most directed that money toward capital expenditures that would have long-term value in retirement and not toward immediate consumption.

Only Few of Those With a Lump Sum Distribution Option Cash Out