Who Could Say No to a “No-Lose Lottery”?

DESCRIPTIONStephen Crowley/The New York Times You might think U.S Treasury officials would love a new kind of financial instrument that helps Americans save more. And you would be wrong.
Podcast
Freakonomics Radio

“Who Could Say No to a ‘No-Lose Lottery’?”: Prize-Linked Savings plans work all over the world. But in the U.S., they have some powerful foes.

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What do saving accounts, college degrees, and the death penalty have in common?

That’s the question we ask in our latest podcast, “Who Could Say No to a “No-Lose Lottery?’” (You can download/subscribe at iTunes, get the RSS feed or listen live via the link in box at right.) It’s a followup to our previous episode, “Is America Ready for a No-Lose Lottery?” The answer to that latter question is: not quite.

DESCRIPTIONAll it takes is a dollar, a dream, and a suspension of rationality.

The “no-lose lottery” we’re talking about is a Prize-Linked Savings (PLS) plan, a financial instrument that has flourished in many countries around the world for many years. A PLS is typically a bank savings account (though sometimes a government bond program) that pools some of the interest from all depositors and pays out big cash lottery prizes on a regular basis. It combines the thrill of the lottery with the safety of a savings account. The idea is to encourage people to save money rather than blow it on the lottery, where the expected payouts are typically very poor — but which, admittedly, is a lot more fun than simply putting money in a savings account.

You’ll hear from two economists, Peter Tufano and Melissa Kearney, who think PLS plans present a good solution to the U.S.’s sad savings rate. The PLS idea has finally taken root in the U.S., albeit in very small measures. One state, Michigan, now has a PLS program called “Save to Win” that has awarded its first $100,000 prize — to an 87-year-old woman who won it after depositing $75 in her credit-union savings account. You’ll hear from her too.

DESCRIPTIONDave Trumpie of Trumpie Photography Billie June Smith, the first grand-prize winner of Michigan’s “Save to Win” program

And you’ll also hear from some of the people who aren’t such big fans of PLS. State lottery directors, for instance. This isn’t very surprising. State lotteries are big moneymakers, turning a annual profit of $17.9 billion on $58.8 billion of ticket sales. So a lottery-linked savings plan could be seen as a natural rival. In South Africa, a massively successful bank-run PLS plan was shut down after being sued by the National Lotteries Board. In the podcast, you’ll hear from state lottery directors Gordon Medenica of New York (the biggest lottery in the country) and Leo DiBenigno of Florida.

We also talked to Michael S. Barr, who until a few days ago was the Assistant Secretary for Financial Institutions for the U.S. Treasury. (We interviewed him before his departure was announced.) He has done a lot of notable academic research about making financial services accessible to low- and moderate-income households. My first question to him in the podcast was whether he plays the lottery himself. No, Barr said. Why not?

DESCRIPTIONDepartment of Treasury Michael S. Barr.

“It’s a fool’s errand. As you undoubtedly know, there are a handful of people who will make some money out of the lottery, but most people most of the time will lose money. It’s not a great way of spending one’s scarce resources.”

So you’d think someone like Barr would be a fan of PLS plans. But when I asked if, in his role at Treasury, he would support PLS plans in order to help people save more money, his lack of enthusiasm was palpable:

“One of things that I’ve learned in my role at Treasury is that picking fights that one doesn’t have to pick is not the wisest course of action unless it’s something that’s absolutely essential to take on. I wouldn’t have put that in the category of high priorities, to wage into a discussion of state gaming law.”

So the story of PLS isn’t just your average “you-can’t-fight-City-Hall” story. It’s more like an “even-City-Hall-can’t-fight-a-revenue-juggernaut-like-the-state-lotteries” story.

As for the question about savings accounts, college degrees, and the death penalty — it has to do with hyperbolic discounting, though you’ll have to listen to the episode for this to make sense.

Audio Transcript

DUBNER: In the last episode of this podcast, we started to tell you about a new idea -- a new financial instrument -- that takes advantage of one of America’s favorite pastimes...gambling.

 

Melissa KEARNEY: So two out of three American adults report gambling and 50 percent say they’ve played the lottery, the next closest is casino, which is about one in five adults.

 

DUBNER: Ah, the lottery. We love it! For a couple bucks, you buy the chance to change your life. This asymmetry is called “skewness” -- and it generates hope -- irrational hope, to be sure, and too much of it -- for that life-changing payout. We feed that hope by buying lots and lots of lottery tickets, about $60 billion worth a year, most of which is essentially poured down a big hole.  And the people who pour the most are the ones who can least afford it. The people who don’t make much money to start with, and who generally don’t manage to save anything.

 

So what if: you could attach the thrill of skewness to the boring old prospect of saving your money, instead of pouring it down that hole. This is already happening in 20 countries around the world; it’s called a prize-linked savings account, or PLS. Some people think the idea is ripe for transplanting to the U.S. Just one problem: it’s illegal. Why? Because legally, a PLS plan is a lottery -- and the only lotteries allowed in the U.S. are the lotteries run by the states themselves.

 

But there’s a chink in that monopolistic armor. In Michigan, a small group of credit unions has taken advantage of a loophole in state law to set up a PLS program they call Save to Win. Here’s its first big winner, 87-year old Billie June Smith.

 

DUBNER: So you put $75 of your own money into a credit union savings account.  And as a result, you were entered into a lottery for which you won $100,000.

 

Billie June SMITH: Right.

 

DUBNER: Well, that sounds like a pretty good deal to me. What do you think?

 

SMITH: Well, it is! It has helped me a lot.

 

DUBNER: Tell me what you’ve done with the money, Billie.

 

SMITH: Well, I’ve had to replace the furnace just about a month ago. And I’ve put in water softener. And I have money aside for the taxes. And I have another savings that I don’t touch for just so long. And I can add to it then.

  

[THEME:]

 

ANNOUNCER: From American Public Media and WNYC, this is Freakonomics Radio.  Today, part two of the “No-Lose Lottery”: Why state lotteries and the mighty U.S. Treasury Department don’t want you to put your money in a savings account.  Here’s your host, Stephen Dubner.

 

DUBNER: Prize-linked savings, or PLS, accounts, have a long history. In the U.K., the government-run premium bond program has been around for decades; every month, it pays a top lottery prize of 1 million pounds. A few years ago, a bank in South Africa started a PLS program which was hugely successful -- so much so that the National Lotteries Board of South Africa sued to have it shut down.

 

It’s hard for anyone but the government to run a lottery when the government thinks the only lottery should be run by the government itself. And that’s the biggest obstacle to bringing PLS plans to the U.S.

 

The biggest lottery in this country is run by New York State. Gordon Medenica, the state lottery director, says that 75 percent of New Yorkers play, which generates $7 billion in annual sales. But in order to get there, New York -- like most states that have a lottery -- had to rewrite its existing laws that prohibited any kind of gambling:

 

MEDENICA: New York first began in 1967, and it was the second state after New Hampshire to come in.

 

DUBNER: What was the original impetus? Was it a budget shortfall essentially? Did the state feel we need money; we can void this ban on gambling in the state and come up with a way to do it?

 

MEDENCIA: I think was both a desire to raise money, and also I think it was a recognition that playing was going on anyway. And it was an attempt to tax and regulate an activity that they knew was very common among citizens. And whether you go back to the numbers games that existed in urban areas, and quite frankly still exist, or those kinds of activities, and even sports betting today, which of course technically is illegal but we all know is a huge business, I think it was a recognition on the part of lawmakers that much like prohibition, better to tax and regulate than to ostensibly call something illegal and pretend it doesn’t go on.

 

DUBNER: State governments do more than tax and regulate their lotteries. They take a big cut themselves. In gambling circles, the commission taken by whoever operates the game is known as the “rake.” With state lotteries, the rake can be as high as 60 percent. That means that as little as 40 percent of the money taken in from ticket sales ends up in the pool that pays the winners. The rest of the money usually goes to education and to cover overhead, marketing, and sales commissions. Compare the lottery’s rake to the slot machines in a casino: they pay out more than 90 percent.

 

KEARNEY: Oh yeah, it’s a lot of money they take off.

 

DUBNER: Here’s Melissa Kearny, an economist at the University of Maryland who studies lottery gambling.

 

KEARNEY: States ostensibly run the lottery, at least initially it was “let’s provide an alternative, legal lottery product or numbers product to the illegal groups, it will be transparent, it won’t be corrupt.”  But then they declare themselves monopolies and they take a big cut, which we can think is a really high price. Consumers are paying a very high price to buy this type of product.  They can’t get it from anywhere else legally.  And then the lottery commissions have the mandate to increase revenues. So they innovate, they advertise, they market. They behave like monopolists.

 

DUBNER: What do we know about people who play the lottery? What’s, for instance, the socioeconomic breakdown?

 

KEARNEY: Ok, so this surprises a lot of people, but people throughout the socio-economic distribution play the state lotteries. So it’s roughly 50 to 60percent of men, roughly 50 to 60 percent of women, roughly 50 to 60 percent of people across the education spectrum so high school dropouts, high school degrees, college graduates. When you look at the absolute dollars reported spending, it’s not that different across the income distribution, so it’s sort of lower income house spend about as much in dollar terms as higher income households. The flip side of that, of course, is that it winds up being a larger share of lower-income households’ total spending. 

 

DUBNER: So states have a monopoly on lotteries. And the people who can least afford to play buy just as many tickets as people who make a lot more money. That’s why scholars like Kearney and Peter Tufano, at the Harvard Business School, think that prize-linked savings plans could help America’s pathetic savings rate. So why hasn’t the idea gained more traction here? According to Tufano, the main culprit is history.

 

Peter TUFANO: I think the reason that this product exists elsewhere and not here is because of the, well I don’t want to say accidents of history, but the path that history has taken in America over a long period of time. I’m not a banking expert, nor am I a lawyer, but it’s been explained to me that the prohibitions on banks engaging in lottery activities goes back to the 1930s when for whatever reason the activities that some banks pursued made regulators very nervous about them having anything to do with the lottery which is why you can’t walk into a bank and buy a lottery ticket. And so, that may have been a really smart legislation back then and it might still be smart legislation now but it seem to have in this instance thrown out not only lotteries but also savings programs that have chance elements to it. So that’s half the equation. The other half of the equation is that as a public finance matter Americans states and localities have relied on lotteries as a way to close public finance deficits. There are other ways to close those deficits but unfortunately they’re going to be quite large I supposed looking to the future. But when public entities were given the right to use this vehicle to raise funds, other parties were prohibited from using the same vehicle and therefore there are prohibitions against private parties running lotteries in virtually every state. So the combination of laws to try to protect I suppose the safety and soundness of banks and the laws to permit states and local governments to have a kind of preferential access to this form of funding has led to this situation where this product, which I think no one ever meant to outlaw, has become outlawed.

 

DUBNER: Outlawed! Coming up, we run the prize-linked savings idea past a couple of state lottery commissioners -- they are not enthusiastic -- and we bring it to the U.S. Treasury Department. They don’t like it so much either.

 

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DUBNER: It makes sense that a state-run lottery might see a prize-linked savings plan as a natural rival. But the New York State Lottery, for a little while at least, actually considered teaming up with Harvard’s Peter Tufano on a PLS plan. Here’s Gordon Medenica again, from the New York State Lottery.

 

MEDENICA: We called it a no-lose lottery ticket. And basically what the concept is, is you buy a ticket, it would be an expensive ticket, let’s say a $100, but you can never lose the base of it. Then we pool those funds invest them just like mutual fund or anything else like that, and then the investment gains become the prize pools. Every month or so, instead of earning almost zero percent on savings accounts there’s a lottery and different account holders win prizes just like you would with a lottery game.

 

So, we went through a lot of this research and we went to the FDIC. And this was an FDIC committee on trying to encourage a higher savings rate among low income people, and also to embrace what they referred to as the unbanked, and to get low income people to use banking facilities and financial services better.

 

DUBNER: Medenica says he couldn’t make the math work out for the New York State Lottery. But for the Florida Lottery, it’s not about the math; it’s about the law. I asked Leo DiBenigno, the Florida Lottery Secretary, what he thought about a prize-linked Savings plan.

 

Leo DIBENIGNO: From a purely lottery perspective, I think the Florida Lottery is the only entity in Florida that can operate a lottery game. So if what you described is legally a lottery game, then I’ve got to say that it probably sounds illegal under current Florida law.

 

DUBNER: States protect their lotteries because the lotteries bring in lots of money for the states. Some money goes to education, and other worthy-seeming causes. But even DiBenigno admits that’s not what motivates people to play.

 

DIBENIGNO: I think people -- Floridians in general -- are players.  They like the idea that the money they spend on the lottery, that a proportion of it and, in this case, a significant portion does go to fund education. But I'm the first to say that they don't play the lottery by-and-large to help fund education in Florida. People play the lottery to win. They like the prizes, they like the excitement, they like the fun, the possibility of winning -- you know, sometimes $10, $20, $50 and sometimes many multi, multi millions of dollars. I think the funding for education is ancillary. It’s an extra bonus that the public views the lottery as a different and unique and fun way to be able to fund at least some of things that our education system needs.

 

DUBNER: The lottery has famously been called “a tax on the stupid” -- you get terrible odds, and the state rakes off a huge amount, converting your hard-earned cash into an additional schools tax. Now, you can understand why a state lottery commissioner like Leo DiBenigno of Florida likes things the way they are. But what about the other government officials who work on things like consumer protection? What about someone like the Assistant Secretary for Financial Institutions at the Treasury Department? His name is Michael Barr. We talked to him a few weeks ago -- he has since stepped down -- I doubt it had anything to do with our interview -- and I asked Barr if he ever played the lottery.

 

Michael BARR: I haven’t really played the lottery. I think probably if I went back over my 45 years I may have bought a scratch ticket or two in my 20s.

 

DUBNER: Now why do you not play the lottery?

 

BARR: It’s a fool’s errand. As you undoubtedly know there are a handful of people who will make some money out of the lottery but most people most of the time will lose money. It’s not a great way of spending one’s scarce resources.

 

DUBNER: I don’t know if you’re aware of the pilot program that’s been happening up in Michigan with credit unions where a prized-linked savings program is actually under way, the first lottery type payout of $100,000 was awarded this year - are you familiar with that at all? Called the Save to Win program?

 

BARR: I have not actually studied that.

 

DUBNER: So the folks who are trying to make this happen come up against a very simple reality, which is that it’s typically illegal. That a private institution like a bank or a credit union is not allowed to run a lottery according to state law. State law typically forbids gambling in order to allow a state to run a lottery itself there’s a loophole that must be written, and those loopholes have been written -- most of states do have their own lotteries. But for someone else to come in and do it, it would be illegal. If you looked at the landscape and thought “in my role in the Treasury here I would like to encourage people to save more, I’d like to make it worthwhile for them to save more, and I’d like to remove barriers that prevent from participating in projects that let them save more, would you would you be in favor of sponsoring or trying to get rolling some legislation that would allow for a widespread deployment of prized-linked savings? Do you think that’s something that treasury should get its momentum behind?

 

BARR: One of things that I’ve learned in my role at Treasury is that picking fights that one doesn’t have to pick isn’t the wisest course of action unless it’s something that’s absolutely essential to take on. I wouldn’t have put that in the category of high priorities to wage into a discussion of state gaming law.

 

DUBNER: But if your job is to help American families save more and be better financial stewards generally, and we know that tens of billions of dollars are being spent on lottery tickets every year, which you called a fool’s game, and one alternative is to offer bank savings accounts whereby a customer can put in $100, enter a lottery, maybe win, maybe not, but probably not, but maybe, and keep the $100, why isn’t that something that’s worth considering even in a politically fractious environment when the potential benefit -- getting people to save more -- seems to be much larger than the potential downside of angering some state lottery commissioners, let’s say.

 

BARR: I think there are lots of ways of encouraging greater savings among all American families and I think we should continue to innovate and try new approaches. I think that the question that you posed is potentially one aspect of one way to do that. I don’t think we yet know enough from the research to say that it’s the kind of thing that we think needs to happen on a wide scale in order to be effective and I think we have a number of potential strategies to help meet the needs of American families to save that we haven’t really fully explored and that maybe raise a somewhat lower set of issues and barriers.

 

DUBNER: All right, so the treasury department doesn’t like prize-linked Savings accounts. Lottery commissioners, they don’t like the idea either. But up in Michigan, the one state where it’s now legal, they like it fine: the Save to Win program has taken in $18 million in deposits this year. And two other states -- Rhode Island and Maine – have just passed legislation to give PLS a try. 

 

Now, maybe you think this is a terrible idea. Maybe you think people ought to save money on their own.

 

But you know what? We don’t. People respond to incentives and for a lot of us the incentive to save -- for retirement, for emergencies, for whatever -- is weak. Why? Well, because the payoff is abstract, and it’s too far in the future. It’s the opposite of “skewness.”

 

This dilemma doesn’t just apply to saving money. Think of a school kid, a third- or fourth-grader. You want me to do what? To bust my butt in school for 10 more years -- and then go to college -- just to get some job that I probably won’t like? Or think about crime and punishment. If you look at the data, it turns out that the death penalty does not work as a crime deterrent. Why? Because as it’s currently practiced, with the punishment waiting so far out in the future -- through a maze of delays and appeals -- the incentive simply isn’t strong enough to stop me from pulling the trigger right now. Sometimes you need stronger incentives. Or maybe some good smoke and mirrors.

 

That’s kind of what a prize-linked savings plan could offer. In a country where it’s easy to borrow your way to bankruptcy, where you can buy lottery tickets anytime you buy a loaf of bread, PLS is like a big neon billboard that turns a boring old savings account into an exaggeration of itself. Stick some money in here, it says, and you just might hit a big payday. And even if you don’t -- well, your money still belongs to you.

 

I’ll buy that for a dollar. Wouldn’t you?

 

ANNOUNCER: Freakonomics Radio is a co-production of WNYC, American Public Media, and Dubner Productions. This episode was produced by Bourree Lam, whose lucky lottery number is eight. David Herman is our engineer and he never seems to get lucky. Our executive producer is Collin Campbell. Subscribe to this podcast on iTunes and you’ll get the next episode in your sleep. You can find more audio at FreakonomicsRadio.com. And, as always, if you want to read more about the hidden side of everything, go to the Freakonomics blog at nytimes.com

 

 


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COMMENTS: 53


  1. Eric M. Jones says:

    For the full impact, I suggest dressing up Washington D.C. with a whole lot of neon, showgirls and low-cost buffets.

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  2. VB in NV says:

    Given Levitt’s questioning of the thanking issue, just tell him it’s a “Freeconomics Radio” podcast.

    Oh, and the listeners do thank you for the podcast (and it probably sells a few books, too).

    Thumb up 0 Thumb down 0
  3. Jimbino says:

    If a young worker were to take the 12% or so of wages taken from his paycheck for Social Security premiums and place them instead on any bet for just one spin of the Roulette Wheel, once per month, investing the proceeds in the S&P 500, he would retire at age 67 a multimillionaire. If he died beforehand, his heirs would get the millions. If he died decades later, his heirs would still inherit a bundle.

    As it is, a worker who dies before retirement loses all his SS benefits (unless he has an indolent spouse or minor children). Black men are almost guaranteed to lose, since their life expectancy is now about 69.

    Social security represents a strong transfer of wealth from rich to poor, from singles to married, from the childfree to the breeders and from Blacks and Hispanics to Whites. And paying the monthly premiums to the gummint is a hell of a lot less fun than spinning the Roulette Wheel.

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  4. Hz says:

    This must mean that interest rates for individual PLS savings accounts is uncompetitive with regular “high yield accounts” since the PLS winnings are taken from the accrued interest. I’ll stick with the sure payment instead.

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  5. Fred says:

    I would agree with the plan to do this except that I have nothing but hatred for the us financial industry. They are crooked and rotten to the core and will simply extract your money until they have it all and you and your children are their slaves.

    Thumb up 2 Thumb down 3
  6. Tony B says:

    Black men have a life expectancy of about 69 because of high infant mortality, i.e. well before paying anything into Social Security. The idea that they “lose” or that Social Security is absurd.

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  7. Sara Tonin says:

    I know he’s speaking off the cuff, but Barr’s rhetoric is pretty lame.

    “a fight one doesn’t have to pick” would by definition NOT be “something that’s absolutely essential” – and “wage INTO a discussion” is convoluting “wade into” with simply “wage”.

    When the language lacks clarity, so does the speaker….

    [getting off high horse right about...now]

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  8. Pickler says:

    It shows how, when governments sanction gambling, they lose their moral standing. Predictable!

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  9. Sam says:

    The PLS not quite a no lose lottery. Sure, it is different from the real lottery, where you lose actual money if you don’t win.

    Of course, in a PLS, you don’t lose any actual money if you don’t win. But you could be losing in effect. Saving for tomorrow always constitutes a certain loss of consumption today. But even that isn’t the loss per se.

    It could be that the reason you weren’t saving in the first place is that you value your gain in consumption tomorrow less than your loss in consumption today.

    Thus, if you don’t win the PLS lottery, you are have still effectively “lost” by saving money you would otherwise have preferred to spend, since you put it in the bank account just to enter the lottery.

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  10. BD says:

    The biggest problem with these programs in the US would actually be that many of the people who play the lottery do not have savings accounts because the government seizes their money.

    I understand why there is an interest in seizing funds to cover back taxes and child support; however, these public policies create cultural norms where people dont put money in banks. Its a huge problem and these lotteries wouldnt address this critical underlying issue. Its a very real example of the law of unintended consequences.

    I wonder what the true economic impact of these policies is from the loss of real wealth given the lack of investment. This doesnt even contemplate the even more troublesome problem of cash checking and money wiring services which actively prey on this same population.

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  11. Reality says:

    @ Jimbino

    Math fail. A Roulette wheel as a built in house advantage, so consistently playing it will have one result: losing money to the casino. Your plan would work better if they skipped the wheel and just invested the money.

    Of course your plan assumes that the S and P, or any investment, is a certainty for when someone wants to retire. Imagine the catastrophe for those who had their retirements wholly dependent on the markets in recent years.

    The only sure thing I know of is Government Bonds, which is exactly where all that SS money has been all these years.

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  12. observer says:

    Turns out a deep recession and credit freeze did a pretty good job of “encouraging” people to save.

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  13. John says:

    Sorry, Jimbino, the odds at roulette are not in your favor. The odds on having any proceeds for a single number in Vegas are 1/38, while the payout is 36:1,leaving you behind the 8-ball, as it were.

    When you can convince me that the wealthy (of whom I know many) got that way without the support of the poor etc, I will support eliminating Social Security, and not one minute before.

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  14. Fred says:

    Please explain why you describe the U.S.’s savings rate as “sad.” What is the optimum savings rate? Why should we put money in a bank where it earns no interest and loses value due to inflation?

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  15. Tam says:

    It sounds like the term “breeder” is used as a slur, to degrade people who make choices different than yours. It attempts to cast “these people” as somehow less than human, rather than people who are experiencing different things than you. It’s sad to see this disrespect for others’ dignity. I do hope this word will eventually be recognized as the hate speech that it is, and people would be ashamed to blithely toss it into their comments.

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  16. ShowMe says:

    The financial industry is stealing the people’s savings. I hate to do business with any banks, insurance companies, or stock brokers anymore.

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  17. Brissy says:

    @ Jimbino (#3):

    You must misunderstand Social Security. It’s also there for survivor and disability insurance not just old-age benefits.

    FWIW, some sound financial advice would be to skip the roulette wheel. Just invest it.

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  18. Liberty Lover says:

    I haven’t played the numbers since the Mafia ran the operation. They were a better risk, had better odds, and didn’t report your winnings to the IRS.

    I always find it interesting that when I was young, the cops regularly rounded up the neighborhood bookies and tossed them in the slammer. The reason most often given for the government’s hatred of bookies was that they “took advantage of the poor,” who should have been putting their money into savings account rather than gambling it away.

    That was, of course, until the government got into the business. NYC started OTB (the only bookie joint in history ever to lose money), and the State got into the numbers racket via the lottery. Suddenly, enticing the poor to spend their meager earnings on gambling was no longer considered exploitation. In fact, it was heavily promoted by the same government that had persecuted the bookies.

    That the government was more corrupt than the Mafia was a given then, as it is now. But we did think they could run a lottery on the up-and-up, it being so profitable an endeavor to begin with. Unfortunately, we were wrong. The New York State Lottery was shut down for a while in the 1970′s due to a corruption scandal. Many winning tickets were never sold on the public market, thus proving that gambling with the Mafia really was a safer bet.

    I literally get sick to my stomach when I’m waiting on line to pay for something at a local deli, 7-11, or bodega, and the line of poor people wasting what little money they have on the false dream of the lottery snakes its way out the door. What a shame.

    The state really should be ashamed of itself. In their endless quest for revenue, they’ve become no better than racketeers and mobsters. Worse, actually, because the state actively promotes their exploitation of the poor. At least the Mafia kept it under wraps.

    -LL

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  19. MFord says:

    I don’t understand most of the comments here, but I’ll say that PLS is a terrific idea and it would take off here in America. It would be of tremendous benefit to regular lotto players to maintain even a small savings account.

    State lottos are a farce. Sure, they bring in some revenue, but they are also for-profit enterprises that pray on human weaknesses. And, of course, they absorb money mostly from low-income folks. Money spent on lotto does virtually nothing for the economy, whereas savings accounts are a great thing.

    Perhaps if interest rates ever go back up, then PLS wouldn’t be as attractive, though it would still encourage people to save, and only some of the interest needs to go to the prize.

    So, corrupt state officials and lotto vultures should get out of the way and see how the market reacts.

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  20. Bob says:

    Mr Barr seems like a great thought leader….what a freaking politician…….

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  21. ed g says:

    One flaw, the same as in all schemes to keep the rich from paying anything and at most a slight portion of their fair share in taxes.

    Let’s have a real lottery that requires every person, corporation, and every profit or not-for-profit entity every quarter of the year put into a “Democracy Pot” 25% of all assets over $500,000,000.

    Then let all Americans whose income is less than $250,000 and/or assests of $1,000,000 or less be eliglble for a random selection to win a portion of the Democracy Pot. The contributors would be listed according to their contribution level and given an award: the Award for Peace, Justice and The American Way.

    This fair, ethical, democractic and non-discriminatory method of re-redistribution of the ill-gained, unethical, immoral, greedy and undemocratic hoarding of wealth would make a lottery a good thing.

    Don’t believe it? Wanna bet it is better change than what we have seen for the last fifty years. Well if you are not ready now, maybe next year!

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  22. Josh says:

    I think this is a great idea. It promotes responsibility.

    http://www.philstockworld.com

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  23. dave says:

    It all comes down to how much and where does it go.

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  24. tbrucia says:

    I love the first comment: “For the full impact, I suggest dressing up Washington D.C. with a whole lot of neon, showgirls and low-cost buffets.” Well, there are all those monuments and museums to show the folks back home their money has given them a great theme park! And the politicians seem to have a ready supply of show girls (though they seem to keep them hidden, maybe because the wives don’t appreciate what they show about their husbands?) As for ‘low -cost buffets’, well, where else can you be taxed 10 bucks and get back $20 in tasty ‘goodies’?

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  25. trudy says:

    I understand why there is an interest in seizing funds to cover back taxes and child support; however, these public policies create cultural norms where people dont put money in banks.

    - BD

    Well, heaven forbid we should distress people who don’t pay to support their children.

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  26. Eric Rasmussen says:

    Bwahahaha. Link is lamenting the “breeders.” I think he should visit Japan or Eastern Europe, where even modest family size fell from favor decades ago. Now it’s hard to find a taxi driver under 70 and the population is apallingly gray. The work force is shrinking. Furthermore, Link is complaining about the transfers from the rich to the poor while ignoring the horrific, but subtle, tranfers from the poor to the rich by school systems that grossly underfund districts heavily populated by the working class and minorities. America’s inequality is now sliding below that of many middle income countries. And folks like Link are happy with that.

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  27. Matt says:

    While I can see merit in PLS system – they have a very popular one in the UK where you buy Premium Bonds – gov’t bonds that pay out tax free prizes from ?25 to ?1 million each month – and means you don’t lose the contributions and, in a way, could encourage some people who don’t normally save to do so, there are 2 issues that go against the average Joe.

    1) It doesn’t say whether there is a limit that can be saved in the PLS in Michigan, in the UK the maximum any one person can put in is ?30,000. This is to prevent a very rich person getting richer as they could plonk in a very large amount and have much better odds.

    2) Regardless as to whether there is a limit or not, the odds are very much against you that on average you will get any kind of decent return and it will be below inflation.
    I think the UK interest (based on the prize award totals for a given month) is about 2%, although it is tax-free.

    While you may not get a lot higher than that in a normal savings account you can do a fair bit better with other investments. Also, while you may win ?1 million, you could easily go even 18-24 months without winning any prizes.

    It is popular, though, because people are enticed by the big prizes and also because of currently very low regular savings rates. At least if you put your money in PLSs you don’t lose your contributions outright if you lose on your lottery ticket.

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  28. Patrick says:

    “As it is, a worker who dies before retirement loses all his SS benefits (unless he has an indolent spouse or minor children).”

    Jimbino, I think you meant to write “indigent”.

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  29. Chris Foreman says:

    The PLS idea needs to be more fully explored. State lotteries are a state racket. I once bought a Maryland lottery ticket and got the One Dollar Fantasy (What if I win?!) but in truth its a con and I wish we would move low- and moderate-income people to other endeavors.

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  30. Glen says:

    RE: “breeder” comment.

    I’m a “breeder” and I don’t consider this a slur at all.

    It IS of interest that the government frequently picks groups for preferred treatment, whether they be married couples, minorities, home mortgage payers, earners of capital gains, or “breeders.”

    I’m not suggesting that this is wrong; I AM suggesting that it’s tricky to pick ANY group as deserving of special treatment. We’re about to see this first-hand as the debate over cutting the deficit heats up. “Sure we need to make painful cuts… but not MY favorite program, which is VITAL.”

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  31. Harold Esven says:

    Gambling is about loss, about the gamble. If people thought the money were simply being paid over to their savings account, the incentive to gamble would be lost, unless you could replicate the experience of paying cash for tickets, with that cash, somewhat deceptively, being payed into their account.

    My neighbors who stand at the corner store counter and pay over large amounts of cash for shimmery lottery tickets derive some satisfaction from the idea of winning, but given the odds, they must derive a certain enjoyment from losing as well. This does not mean they are masochists or perverse, but I think a lot of pleasure has to do with loss in some way.

    In order for this scheme to be effective, you would need to be able to preserve this experience of loss.

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  32. JR says:

    I’m still on the fence about the PLS concept. Personal savings is one of those theoretically important ideas, but so is “free will” and “luck of the draw.” That is, its not intuitive that an increase in personal savings is worth jettisoning a vital source of public funding. So I’d ask: Would the cost to the public purse be offset by the financial health of the population, or would downgraded public services hurt the community at large? Assuming that interest rates remain low and lottery-seekers are by-and-large poor, I’m not sure I could say it would be.

    I talked to my sis who is an anti-poverty activist, and she had a completely different reaction. She didn’t like PLS because it holds itself out as a savings vehicle, yet offers a lower savings rate; for most poor, they would be better off with a better rate and less risk. So, in her mind, PLS becomes as much of a tax on the poor as does the current lottery system. She felt education and training in investment remains the only moral and reliable way to give people a habit of saving.

    Of course, risk appetite is not based on reason but on desire. Many educated people still love gambling, and it isn’t irrational to hunger for more risk. So I doubt that education will “solve” the regressive lottery system.

    At the end of the day, the question is whether its better to have Joe’s and Jimmy’s lottery proceeds end up back with either Joe or Jimmy (minus administrative costs from the bank), or have them pumped into roads and public schools (minus administrative costs from the gov’t). As a non-gambler, I’m biased towards the latter.

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  33. Rich says:

    I have a question that is a little off-topic: is retirement savings (401ks, IRAs, etc) considered when the nation’s savings rate is calculated? That would seem to be an incredible amount of money that is saved every month.

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  34. Pat says:

    If the lottery benefits senior citizens like it does in PA, then, playing the lottery is like donating to charity. So, probably the poor people who play the lottery will eventually end up as it’s recipients.

    If PLS has much smaller prizes ($10,000 instead of $1,000,000) which are less frequently distributed than the lottery, then, there should be minimal conflict with the lottery, no?

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  35. Richard Hastings says:

    “You must misunderstand Social Security. It’s also there for survivor and disability insurance not just old-age benefits.”

    Unless your surviving spouse happens to be of the same sex.!!

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  36. jfree says:

    I seem to remember one complaint that the economy sputters because we are not spending. If not spending, and not saving, are we also not earning?

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  37. Pizen says:

    #21 from ed g:

    “This fair, ethical, democractic and non-discriminatory method of re-redistribution of the ill-gained, unethical, immoral, greedy and undemocratic hoarding of wealth would make a lottery a good thing.”

    Thank you, ed, for the powerful belly laugh created by the apparently sincere position that the seizure of private property from people who have earned it to hand out to those who hadn’t earned is fair, ethical, etc. It sounded like the Clinton plan to proffer a “one-time” 25% tax on 401(k) account balances. Thank God this country isn’t a democracy, else solutions like these would undoubtedly be adopted.

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  38. Annie says:

    Jfree #36:
    Those of us who are earning are neither spending nor saving. We’re paying down debt!
    And in the meantime, I’m trying to build up a savings cushion for a rainy day, which is earning me a fabulous 0.2 % rate of interest. That’s 0 point 2 per cent, not 2 %. Pretty soon we’ll have to pay the banks to hang on to our money. Is it any wonder Americans don’t put money into savings?

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  39. SH says:

    This idea has fewer negative side effects as compared to regular lottery.

    American capitalism is designed to extract wealth from all sources.

    How proud the WWII generation must be with how we’ve made the world a catastrophe that sycophants prevent us from fixing.

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  40. JJ says:

    To commenter #6:

    It is true that blacks have higher infant mortality and this does contribute to a lower life expectancy than whites, but it explains only a small part of the difference.

    See Table A (page 2) of the following link, which are 2006 life tables from the CDC:

    http://www.cdc.gov/nchs/data/nvsr/nvsr58/nvsr58_21.pdf

    Except at very old ages (>95), black men have lower life expectancy than white men. At age 20, the difference is five years. At age 30, the difference 4 years. That’s a decent chunk of social security lost.

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  41. tom marion says:

    Agghh! I’m disgusted by Barr’s comment. The reason one SHOULD take on causes is because they are right. Whimp. Regular people sacrafice in so many ways everyday, and I have to read that a bigwig can’t pull up his boot strings for regular folks. Gag me.

    Also: Lotteries are so popular that folks in the US will STILL play even if they are ALSO investing in a PLS. Pullleeezzz. There is NO conflict, except maybe in state advertising. Just form the PLS’s and have them proliferate by their own steam…. that ain’t gonna stop my neighbors in Harlem blow’n their SS dough on lotto and a 40oz.

    Wake up people and do the right thing!

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  42. jared says:

    Foolish! Saving money causes inflation! Why do you think U.S had such a strong economy? Because the people kept spending! So this idea seeks to destroy America! Ha just kidding about the destroy America part… personally if I won a 100 grand off this I would not complain.

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  43. Ken says:

    #21 Ed G:
    “Let’s have a real lottery that requires every person, corporation, and every profit or not-for-profit entity every quarter of the year put into a “Democracy Pot” 25% of all assets over $500,000,000.

    Then let all Americans whose income is less than $250,000 and/or assests of $1,000,000 or less be eliglble for a random selection to win a portion of the Democracy Pot. ”

    25% of all assets over 500 mil for all entities be given up to this “Pot”?? And this distribute this pot randomly?

    There’s a LONG list of companies with assets over 500 million. Just look around you, and tell me how many products are made by companies with over $500M in assets (or better yet, how many are not).

    Yes, this way you can go out and hurt the rich! Because while there’s always a few bad apples in every group, no one is stopping millions of people from buying, say an iPod. So Steve Jobs doesn’t deserve his money because people WANT to buy his products?

    Please think before you post…

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  44. Adam says:

    I thought it was very funny that you prefaced the Treasury guy’s interview with the fact that he stepped down recently for issues unrelated to the interview. Because, after listening to the guy talk, my only thought was:

    “This guy is an idiot. He should really have been fired for the things he has said during this interview.”

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  45. tadamr says:

    When you spend your interest earnings on lotto tickets and you don’t win, you loose your interest earnings. This is not “no-lose”. Stephen, you should know better.

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  46. Saver says:

    I have a savings account that gets a paltry amount of interest. It’s all I have and it ain’t much. I have no desire to lose a cent of that to a lottery pot that may be won by a millionaire.

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  47. John Bolton says:

    Michael S. Barr is a complete Tool, with a capital T. His non-answer, “I think there are lots of different ways of encouraging greater savings among all American families, and I think we should continue to innovate and to try new approaches blah blah blah blah…”, shows a complete disrespect for the American people.

    What he really said is, “I have the cushy job where I don’t really have to do anything and I get paid a huge salary for doing nothing, and in a few years I get to retire with a full pension and there is no way I am going to jeopardize that by answering your question.”

    I hope he is gone because he got fired, but I wouldn’t be surprised if he has been promoted and somebody even worse has taken his place.

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  48. Homero Gonzalez says:

    Why can the banks work in partnership with State Lotteries?

    They can have the Lottery run a special draw for them, subject to similar rules of the regular lottery…. Or maybe at a higher payout rate, as they would have minimum administrative costs.

    Bank gives to Lottery all the interest earned. Lottery takes commission (uses it to build schools), makes the draw and announces who is the winner. Lottery gives the prize money to bank and bank gives the prize money to the “lucky” investor.

    Everybody is happy that way. The net return to the investors may be worse than if there is no monopoly of lottery, but the main goal is reached, namely, you get people to use the bank who wouldn’t otherwise.

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  49. Jimbino says:

    “As it is, a worker who dies before retirement loses all his SS benefits (unless he has an indolent spouse or minor children).”

    Jimbino, I think you meant to write “indigent”.

    - Patrick

    No, Patrick, I meant indolent (“disinclined to work”). A rich indolent widow (one or more!) gets a boatload of the deceased spouse’s SS benefits, while an indigent single or indigent spouse often gets nothing. SS is not welfare, and there are many indigent persons, particularly illegal immigrants who have been paying into the Ponzi SS for years who get NOTHING.

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  50. Jimbino says:

    Reality and John do not get the idea of the roulette comment. The idea is this: Instead of putting that 12.6% of your wages into the black hole of SS, you put is on one spin of the roulette wheel and invest the proceeds in the S&P.

    Your expected lifetime winnings at the monthly roulette spins will yield about 96% of your bets. Yes, you lose 4% in the end. But that 96% invested in the S&P will yield MILLIONS in 45 years and at your premature or early death, your heirs will get MILLIONS, not just the pittance from SS of from $0 to $1400 per month and $250 for your burial.

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  51. Tim Hawes says:

    This is probably very late to the conversation, however I thought you guys would be interested to know that a bank here in Australia has gone ahead and put this idea into practice!

    It’s the Bank of Queensland: http://www.boq.com.au/save_to_win/default.htm

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  52. Jimblargh says:

    I have to say…I went into this 2-part episode as a skeptic. 50 minutes or so later I’m convinced. Heck, lottery/savings account where you only have to give up part of your interest even sounds fun! For many of us (broke grad student here!) the interest accumulated in a savings account doesn’t amount to much anyway. Why not turn part of that small amount into a lottery, especially when evidence suggests that it might help everyday people save?

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  53. Jovan Milosevic says:

    I just heard Michael Barr speak and he sounds exactly like the stereotypical politician/business manager who is completely unaware that he is a useless piece of crap, who contributes less than zero to the society. Here are some quotes:

    - Lottery is “a fool’s errand.” No kidding. So why does the government keep providing it?

    - “I have not actually studied [the save-to-win program]” (this is habitual liar’s way of saying “I have no freakin clue what you’re talking about”)

    Dubner explains it, to him, so now that Barr has learned about how amazingly beneficial to society it may be, what does he say? “One of the things I’ve learned in my role at Treasury is that picking fights that one doesn’t have to pick is not a wisest cost of action.”
    Translation: “I’m lazy [or I know it's not worth trying, considering the idiots you'd have to convince, but I can't say that publicly], I just want to go with the flow. My goal at this position is to not get fired.”

    But but, won’t it be good for the country???
    “Steve, I think there are lots of different ways …” – Finally we have it. Addressing you by name. A staple of salesman and politicians. Ugh. Now I need to go wash myself.

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