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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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Author Info
Burman, L.E.
Coe, N.B.
Dworsky, M.
Gale, W.G. (Tilburg University, Center for Economic Research)

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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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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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Find related papers by JEL classification:
H2 - Public Economics - - Taxation, Subsidies, and Revenue
H3 - Public Economics - - Fiscal Policies and Behavior of Economic Agents
D1 - Microeconomics - - Household Behavior

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  1. Esther Duflo & Emmanuel Saez, 2003. "The Role of Information and Social Interactions in Retirement Plan Decisions: Evidence from a Randomized Experiment," Natural Field Experiments 0036, The Field Experiments Website. [Downloadable!]
  2. Poterba, James M & Venti, Steven F & Wise, David A, 1996. "How Retirement Saving Programs Increase Saving," Journal of Economic Perspectives, American Economic Association, vol. 10(4), pages 91-112, Fall. [Downloadable!] (restricted)
  3. Engen, Eric M & Gale, William G & Scholz, John Karl, 1996. "The Illusory Effects of Saving Incentives on Saving," Journal of Economic Perspectives, American Economic Association, vol. 10(4), pages 113-38, Fall. [Downloadable!] (restricted)
  4. James J. Choi & David Laibson & Brigitte C. Madrian, 2005. "$100 Bills on the Sidewalk: Suboptimal Saving in 401(k) Plans," Levine's Bibliography 784828000000000649, UCLA Department of Economics. [Downloadable!]
  5. Marianne Bertrand & Dean S. Karlan & Sendhil Mullainathan & Eldar Shafir & Jonathan Zinman, 2005. "What's Psychology Worth? A Field Experiment in the Consumer Credit Market," Working Papers 918, Economic Growth Center, Yale University. [Downloadable!]
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  6. Erik Hurst, 2003. "Grasshoppers, Ants, and Pre-Retirement Wealth: A Test of Permanent Income," NBER Working Papers 10098, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
  7. James M. Poterba & Steven F. Venti & David A. Wise, 1999. "Pre-Retirement Cashouts and Foregone Retirement Saving: Implications for 401(k) Asset Accumulation," NBER Working Papers 7314, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
    Other versions:
  8. Esther Duflo & Emmanuel Saez, 2003. "The Role Of Information And Social Interactions In Retirement Plan Decisions: Evidence From A Randomized Experiment," The Quarterly Journal of Economics, MIT Press, vol. 118(3), pages 815-842, August. [Downloadable!] (restricted)
    Other versions:
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