By Zara Kessler
So someone won the record-breaking Powerball jackpot. Well, two people actually -- one in Missouri, one in Arizona. You really thought it was going to be you this time, didn't you?
Yesterday, you were envisioning what you would wear as you waved at the TV cameras with your giant check. Today, you're reminding yourself that you were probably more likely to have been killed by a fallen vending machine than to have won.
You shake vending machines when they eat a dollar or two of yours and don't provide anything in return. And yet lotteries eat billions of dollars in Americans' money every year -- money a lot of the people playing cannot afford to lose -- without giving most of us anything.
It might be worth trying to shake up the system a bit, with a concept called "prize-linked savings." Part financial planning, part behavioral economics, PLS products attempt to make saving money fun. One way to do so is through lotteries, where the more you save (up to a certain limit), the more chances you have to win big. And if, heaven forbid, you don't win big, the money you paid into the system remains yours.
In January 2009, the Doorways to Dreams Fund helped launch "Save to Win," the first scaled PLS program in the U.S., in eight Michigan credit unions. Members of the credit unions were given the chance to save in a 1-year, balance-building share certificate that earned interest; the accounts required only $25 to open, and each $25 added gave the account-holder a raffle entry (up to 10 per month) for monthly prizes and a $100,000 annual grand prize. By 2011, STW Michigan had over 25,000 unique accounts, with over $40 million saved at dozens of participating credit unions. This year, the prize design was altered to offer more chances to win at lower levels and a STW program was launched in Nebraska credit unions. (North Carolina and Washington state will launch STW programs in 2013.)
The problem is that these programs are hard to scale up; states have monopolies on their lotteries, and STW is thus only permissible because of legal loopholes allowing credit unions in some states to offer "saving promotions raffles," in which only those who put money away can win. (Another PLS-inspired product, the website SaveUp, which operates under sweepstakes law, rewards users for good financial behaviors like saving and paying off debt. Prizes range from gift cards to a $2 million jackpot.)
Perhaps the best solution is to get the federal government involved. Government-sponsored PLS products exist around the world, from Sweden to Kenya and Pakistan. The best model for the U.S. may be the U.K., which has offered "Premium Bonds" since 1956. These bonds can be purchased by phone, at the post office, online or by mail by any citizen over 16 and by adult family members for their children. They require a minimum investment of 100 pounds ($160) or 50 pounds with a monthly standing order. They offer no interest. Instead, the interest on all the bonds is pooled and distributed through various tax-exempt prizes, including monthly 1 million pound jackpots. For every pound invested (up to 30,000), bond-holders receive a chance to win big. More than a third of British citizens participate.
With interest rates on standard savings accounts extremely low, now seems like as good a time as any for Washington to adopt a hybrid savings-lottery program. States might not be so happy to see the federal government dipping into their base of devoted lottery addicts. But the U.K. has a National Lottery in addition to its Premium Bonds, leaving citizens to weigh the odds of investing in a lottery ticket versus a bond.
Making such calculations might be a good way to pass the time now that you don’t have to stress about whether to take the lump sum or annuity payment on your big win.
(Zara Kessler is an assistant editor and producer for Bloomberg View. Follow her on Twitter.)
Read more breaking commentary from Bloomberg View at the Ticker.-0- Nov/29/2012 20:26 GMT