Playing the Savings Sweepstakes

Photograph by Jonathan Kitchen/Getty Images Close

Photograph by Jonathan Kitchen/Getty Images

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Photograph by Jonathan Kitchen/Getty Images

In the mid-1950s, Harold Macmillan, the U.K.'s Chancellor of the Exchequer, had an idea to boost the British savings rate: Issue "premium bonds" that, instead of paying out interest each month, awarded cash prizes. The program is still going strong; more than a third of Britons compete each month to win prizes ranging from 25 pounds to the 1 million pound jackpot. More than 45 billion pounds are invested in premium bonds.

Almost 60 years after Macmillan’s brainstorm, prize-linked saving is being championed in the U.S. by credit unions and the nonprofit Doorway to Dreams Fund. States and the federal government had banned such programs in the 19th century in the wake of corrupt lotteries and raffles, and the ban lasted until New Hampshire approved the first state lottery in the 1960s. Now, some states are loosening the rules further to allow credit unions to run savings sweepstakes. Experiments in Michigan and Nebraska have signed up 42,000 people who have put away more than $72 million over four years, according to Doorway to Dreams. Each contribution makes account holders eligible for drawings ranging from monthly $1,000 prizes to grand prizes of $25,000 or more.

The pitch for such accounts is tailored to the many Americans who live paycheck to paycheck, without funds to rely on in an emergency. It's a group likely to see the lottery as their only path to big riches, helping fuel the nearly $61 billion in lottery ticket sales each year. For the fifth of lottery players who buy up 70 percent of the tickets, the annual cost is about $1,400. Surely some of this could be re-directed to building up permanent wealth -- or at least an emergency cash fund?

The question is whether the accounts stimulate extra saving or merely attract money that would have gone into savings regardless. The popularity of Britain's premium bonds, even as other savings options offer higher and more reliable payouts, suggests that the fun of competing for prizes is an attraction all its own.

Jackpots also boost savings in lab experiments, according to a new study. By presenting various saving scenarios to college students, the authors, led by University of Maryland economics professor Emel Filiz-Ozbay, found that a 0.01 percent probability of winning a large prize results in savings 4 percent greater than another savings option with an equivalent expected return.

The study's authors admit they don't know if such results would hold up in the real world and say they hope to follow up with field experiments. They should have more opportunities soon. In June, Connecticut approved a law legalizing prize-linked savings. Two weeks later, the New York legislature approved a similar law, which is waiting for Gov. Andrew Cuomo's signature.

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