As I was driving back from my recent vacation to North Carolina, I did something I’ve never done before—I bought a lottery ticket. The jackpot was $137 million and as I talked to the woman behind the register, I could tell she was amused by my clear naïveté in this venture. I chose my numbers, paid a dollar and got back on the road. I viewed the dollar I’d just handed over as, at worst, a donation to the state of North Carolina or, at best, the luckiest dollar I’d ever spent. My wife and I passed the next hour of driving discussing what we would do with the money if we won.
Would I keep my job? How much would we give away? Would my friends and family judge me if I insisted on riding a gold Segway everywhere I went?
Needless to say, I wasn’t too surprised when I checked the lottery drawing a couple days later and my numbers hadn’t hit. You’re welcome, North Carolina. This experience made me reflect on a concept called Prize-Linked Savings (PLS). In short, PLS is a kind of savings account that pools a portion of the interest from all depositors and pays out a big lottery prize every month or so. It combines the thrill of the lottery with the safety of a savings account.
It’s sometimes referred to as a “no-lose lottery,” since a depositor is automatically entered into the lottery but can’t lose the original money he/she deposits. Other than the prize payouts, the depositor doesn't receive an interest payment, but their saved money is always available for withdrawal. PLS is being considered by some researchers as a potential solution to America’s abysmal savings rate. While Americans apparently hate to save, they love to gamble! In fact, it's estimated that 75% of Americans gamble and 50% of those who gamble play the lottery too. Even though it's incredibly unlikely to win the lottery, the possibility of winning is appealing enough to make people lay down their hard earned cash. As the lottery draws a disproportionate number of its players from poor communities, these savings accounts could be marketed to exactly those who would benefit from increasing their savings the most. PLS accounts have been in existence in other countries for years and have been linked to raising savings rates. That said, they're currently illegal in all but one state in the US as they would be competition to the state-run lotteries.
What do you think of PLS? Would it appeal to your inner gambler and help you save?
Comments
Indeed PLS's are an interesting concept and by virtue of their being considered illegal in most states, indicative of the "don't mess with our good thing" attitude of local governments. They don't want anyone taking away from their cash cow..The State Lottery.
Additionally, it's a misconception that the lottery draws a disproportionate amount of it's players from the poorer communities. Actually, the draw is pretty evenly spread out amongst all social classes. The troubling fact is that the poor can least afford to "waste" their money on such follies..a subtle but important distinction.
Jonathan
Jonathan- Good points. I've seen conflicting statistics as to the percentages of various socioeconomic demographics that play the lottery. Either way, as you said, poor people are hurt most by this use of their money. In the end, I think PLS's could be quite effective at getting those who need to save more to do so.