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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 the casino, which is about one in five adults.

Ah, the lottery. We love it! For a couple of 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 a 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.

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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 [it] 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.

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.

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 60 percent 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. 

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 go 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 seems 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, American 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 suppose, 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.

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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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 a 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.

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 pure 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.

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 a bonus that the public views the lottery as a different and unique and fun way to be able to fund at least some of the things that our education system needs.

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 underway, 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 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 [them] from participating in projects that let them save more, 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 the 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.

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?

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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 And, as always, if you want to read more about the hidden side of everything, go to the Freakonomics blog at

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