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Effects of Public Policies on the Disposition of Pre-retirement Lump-Sum Distributions: Rational and Behavioral Influences

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  • Burman, L.E.
  • Coe, N.B.
  • Dworsky, M.
  • Gale, W.G.

    (Tilburg University, Center for Economic Research)

Abstract

A variety of public policies aim to influence workers’ disposition of preretirement lump-sum distributions (LSDs) from pensions. We use the implementation of several policy changes as natural experiments to test for rational and behavioral motives for saving behavior. Using data from the HRS and the CPS in the 1980s and 1990s, we find that higher tax rates on cash-outs increase rollovers. Controlling for the overall effective tax rate, structuring the tax as a “penalty” or adding withholding taxes on cashouts significantly increases rollovers. Allowing employers to unilaterally cash out balances for departing employees who do not make their own choice significantly reduces the effects of higher tax rates but boosts the impact of withholding taxes. These results suggest that both behavioral and rational factors influence workers’ choices, that policies relating to pre-retirement cash outs can interact in important ways, and that the government has several levers at its disposal to influence behavior beyond tax penalties.

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Bibliographic Info

Paper provided by Tilburg University, Center for Economic Research in its series Discussion Paper with number 2008-94.

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Date of creation: 2008
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Handle: RePEc:dgr:kubcen:200894

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Web page: http://center.uvt.nl

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Keywords: retirement; savings; behavioral; penalties; taxes;

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