Do you use a wireless mouse? Some of them update only at about 60Hz, so you'll not see the benefit in window dragging. And even with a wired mouse, the default 100Hz (Linux) or 125Hz (Windows) mouse update rate isn't fast enough to guarantee updating every frame on a 120Hz monitor, so you'll need to change mousepoll (Linux) or install a hacked hidusbf with test certificate (Windows). It's also possible your window compositing system is capped at 60fps. IIRC correctly Compiz does that unless you change some hidden setting, and maybe Aero does too. I don't use compositing.
The difference between 60Hz and 120Hz is extremely obvious if you're actually updating every frame. I refused to use a LCD until 120Hz LCDs were available, and even that's just barely adequate. A 200Hz CRT is clearly smoother.