I think that you can make a case for O'Connor's work to represent all three ideas. There is an undeniable element in the work that offers an observation on life. The main focus of alcoholism and how it ends up impacting far more than the individual prone to drink is an observation that the story makes on life. Alcoholism is powerful in changing the roles between abuser and abused. This observation is powerful as Mick, the former abuser, watches Larry model his own behavior when he is drunk. The abused has become the abuser and this is a powerful observation about life.
A case can be made for the story being a distortion of life as well as it being a reflection of life. Some might suggest that O'Connor's view of alcoholic consumption in families is a distortion of what actually happens. In this vein, individuals might argue that alcoholic consumption can be controlled and the depiction shown in the story actually distorts this reality. Along these lines, there is ambiguity in the ending when older Larry says that he is not sure of the target of his father's statement, "Never again, never again, not if I lived to be a thousand." Some might suggest that if Larry's father is referring to his son as the subject, then there is a distortion of life present as fathers would not so easily relinquish the bond with their sons.
Taking this construct, some might see this as a reflection of life. For many, alcoholism inverts one's life, in the same way that the roles of Mick and Larry are inverted. At the same time, the ending in terms of whether Mick does emotionally distance himself from his son is a reflection of how some emotional bonds between family members exist. For some, fathers do foreswear their children and the result is having to wrestle with the emotional implications of such abandonment. This is a reflection of what life displays, something that the ending of the story captures.