Burman, L., Coe, N., Dworsky, N., & Gale, W. (2008). Effects of public policies on the disposition of pre-retirement lump-sum distributions: Rational and behavioral influences. CentER Discussion Paper Series No. 2008-94.
- The study’s objective was to determine whether tax policies that differently frame the rollover of lump-sum distributions (LSDs) from defined-contribution retirement plans into tax-preferred funds affected rollover behavior.
- The authors investigated two tax reforms, the first in 1986 and the second in 1993. The 1986 reform levied an additional tax of 10 percent on LSDs (framed as a penalty) that were not rolled over into tax-preferred funds. The 1993 reform required LSDs to provide an automatic rollover option and increased tax withholding rates on cash LSDs.
- The authors used data from the 1993 Current Population Survey Employee Benefit Supplement to analyze the effects of the 1986 tax reform and data from the 1992–2004 Health and Retirement Study to assess the effect of the 1993 tax reform.
- Treating the tax rate on LSDs as a penalty in the 1986 reform framework increased LSD rollovers by 16 to 32 percentage points for the average individual in the study. The 1993 reforms led to a 10 to 13 percentage point increase in rollovers for the average individual in the study.
- The quality of causal evidence provided in this study is low. This means that we are not confident that the estimated effects are attributable to the intervention alone; other factors are likely to have contributed.
The 1986 Tax Reform Act and 1993 Addendum
- Framing an additional tax rate on LSDs as a penalty led to an increase in LSD rollovers of 16 to 32 percentage points for the average individual in the study
- The 1993 tax reform was associated with a 12 to 13 percentage point increase in rollovers among those ages 35 to 54. Among those ages 55 to 64, the policy corresponded to a 10 percentage point increase in rollovers.
Considerations for Interpreting the Findings
In the analysis of the 1986 reform, the changes in penalties applied only to those younger than 59 when they received the LSD. Thus, the study compared people ages 60 and older with those younger than 60. Because savings behavior is likely to evolve differently in different age groups, regardless of additional tax reforms, the comparison and treatment groups used in this portion of the study were not comparable.
In the analysis of the 1993 reform, people receiving an LSD before the law change were compared with those who received an LSD after the change. But there was no reason to believe that the timing of the LSD was random and people who received LSDs at different times might differ. Thus, the comparison and treatment groups used in this portion of the study were not comparable.
Causal Evidence Rating
The quality of causal evidence presented in this study is low. This means we are not confident that the estimated effects are attributable to the two tax reforms investigated in the study; other factors are likely to have contributed. To provide more convincing causal evidence that meets CLEAR standards, the study would have to find treatment and comparison groups that would respond similarly to an LSD in the absence of the policy changes. Alternatively, the authors could demonstrate that savings behavior changed in a similar manner for the treatment and comparison groups before the reform of interest and focus their analysis on the change in behavior after the reform occurred.