Powerball fever is gripping the nation, as Americans flock to purchase tickets for a shot at winning $1.5 billion—the largest jackpot in history.
Not to be a downer, but other than for the winner(s), the lottery represents a black hole into which millions of Americans are throwing away their savings. Sure—a dollar or two here or there won’t do much damage, and the thrill is undeniable, but repeated purchasing of these tickets can do serious financial harm to folks who really can’t afford it.
Lotteries have long been lamented as a regressive tool to fill state coffers, with low-income individuals far more likely to play and spend a higher percentage of their income. Some also subscribe to the misguided notion that playing the lottery is a wise financial decision. For example, according to a survey from the Consumer Federation of America, 16 percent of respondents believed that playing the lottery was the best retirement strategy for every American. Apparently, no one told them that the odds of winning are infinitesimally low—around 1 in 292 million. To put things into perspective, individuals are over 300 times more likely to get struck by lightning in a given year than to win the lotto. Despite these odds, however, Americans are not deterred: They spent over $70 billion on tickets in 2014!
Fortunately, a new type of savings tool exists that may be able to satiate Americans’ appetite for games of chance with large prizes while also nudging folks toward increasing their personal savings. It’s called prize-linked savings (PLS).
PLS accounts are very similar to standard bank accounts, with the major difference being that they do not earn interest (which certainly isn’t much of a downside these days). Rather, interest is pooled across PLS accounts and paid out as raffle prizes to lucky savers. (Savers in PLS accounts are guaranteed their principal, so even if they don’t win a cash prize, they are not at risk for losing their savings.) PLS is designed to tap into the same impulse that drives individuals to play the lottery, but instead directs it towards boosting personal savings. While account-holders have the opportunity to win money, the real prize is building up some modest emergency resources that could be a lifeline in the future.
PLS has primarily been shown to encourage savings among the financially vulnerable—a population that might otherwise spend these dollars on state lotteries. Save to Win—a PLS initiative that began in Michigan—has grown to include over 15,000 accounts and operates in four states (though it remains by far the largest in Michigan). Roughly 75 percent of enrollees are either asset poor (with $5,000 or less in financial assets); are low-to-moderate income (with $40,000 or less in household income); and/or not regular savers.
Unfortunately, many states have legal barriers that prevent financial institutions from offering PLS accounts. Indeed, PLS was recently illegal even at the federal level, with most financial institutions barred from running lotteries of any sort. The American Savings Promotion Act, a bipartisan bill introduced by Senators Jerry Moran (R-KS) and Sherrod Brown (D-OH), and signed into law in 2014, created an exception for savings promotion raffles conducted by banks and credit unions, which cleared federal barriers for institutions throughout the country to begin offering PLS accounts. While just 10 states have passed similar legislation, which means considerable hurdles still exist before PLS can become widespread, momentum is building.
Neither the lottery nor PLS accounts are appropriate retirement strategies for most Americans. But given the strong affinity that many have for lottery-type games, PLS represents a way to channel those desires in a responsible way and holds the promise of boosting savings among the financially vulnerable.