Effects of public policies on the disposition of pre-retirement lump-sum distributions: rational and behavioral influences.

I. INTRODUCTION In a purely rational and frictionless model of economic behavior, individuals understand and respond to incentives, have full information, optimize and plan effortlessly, face no obstacles to implementing [...]
We examine workers' disposition of pre-retirement lump-sum distributions, using policy changes in 1986 and 1992 as natural experiments. We find that higher taxes on cash-outs increase rollovers, consistent with both rational and behavioral motives. Several results, however, only make sense in a behavioral framework. Controlling for effective tax rates, structuring the tax as a 'penalty' or adding withholding taxes on cash-outs increases rollovers. Allowing employers to unilaterally cash out balances for departing employees alters the impact of other policies. These results suggest that both rational and behavioral factors influence workers 'choices, and that policies can interact in important ways. Keywords, household saving behavior, lump-sum distributions, pre-retirement cash-outs JEL Codes: D14, D91, G02