TAX POLICY, LUMP-SUM PENSION DISTRIBUTIONS, AND HOUSEHOLD SAVING

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Abstract
The Tax Reform Act of 1986 (TRA) imposed a ten percent penalty on lump-sum pension distributions that are not "rolled over" into tax-deferred instruments by younger recipients (under 55). This paper presents the first estimates of the tax sensitivity of rollovers, based on variations in the tax price introduced by the TRA. For higherincome recipients, a one percent increase in the tax price raises the probability of rollover by 0.4 percentage points; but among lower-income recipients, it rises by only 0.2 percentage points. Most recipients have low incomes and may be liquidity constrained, which explains the ineffectiveness of the penalty in raising rollovers.

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