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

CentER Discussion Paper Series No. 2008-94

40 Pages Posted: 20 Nov 2008

See all articles by Leonard E. Burman

Leonard E. Burman

Tax Policy Center; Maxwell School; Urban Institute; Syracuse University - Center for Policy Research

Norma Coe

University of Pennsylvania - Perelman School of Medicine

Michael Dworsky

Brookings Institution

William G. Gale

Brookings Institution

Date Written: November 17, 2008

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.

Keywords: retirement, savings, behavioral, penalties, taxes

JEL Classification: H2, H3, D1

Suggested Citation

Burman, Leonard E. and Coe, Norma and Dworsky, Michael and Gale, William G., Effects of Public Policies on the Disposition of Pre-Retirement Lump-Sum Distributions: Rational and Behavioral Influences (November 17, 2008). CentER Discussion Paper Series No. 2008-94. Available at SSRN: https://ssrn.com/abstract=1303982 or http://dx.doi.org/10.2139/ssrn.1303982

Leonard E. Burman (Contact Author)

Tax Policy Center ( email )

Urban Institute
2100 M Street NW
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Maxwell School ( email )

400 Eggers Hall
Syracuse, NY 13244
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Urban Institute ( email )

2100 M Street, NW
Washington, DC 20037
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202-261-5248 (Phone)

Syracuse University - Center for Policy Research ( email )

Syracuse, NY 13244
United States

Norma Coe

University of Pennsylvania - Perelman School of Medicine ( email )

423 Guardian Drive
Philadelphia, PA 19104
United States

Michael Dworsky

Brookings Institution ( email )

1775 Massachusetts Ave, NW
Washington, DC 20036
United States

William G. Gale

Brookings Institution ( email )

1775 Massachusetts Avenue, NW
Washington, DC 20036
United States
202-797-6148 (Phone)
202-797-6181 (Fax)

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