“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.
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.
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.
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?
“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.