Saturday, January 29, 2011

A Smart Lottery

I don't think much of lotteries. Study after study has shown that the people who play lotteries are those who can't afford it--the poor and uneducated. They also spend a larger percentage of their income on tickets, making it a kind of regressive tax.

I was listening to a Freakanomics podcast the other day, and heard what I think is one of the best ideas to come along in a long time. It's called a prize-linked savings account. It's changed my mind about 'lotteries', and I think it's time Utah allows this kind of lottery.

Let me explain.

Americans, on average, spend more than they make. We like to put things on our credit card. When bank accounts get drained, many people often become desperate and play the lottery, hoping to strike it rich. And of course, the odds are against them, and they only end up deeper in the hole.

What Americans really need to do is save more. They need to put money away in case it's needed later. It's a simple concept, but one that millions just don't seem to get.

A prize-linked savings (PSL) account could be the answer to this problem. PSL is often called the no-lose lottery. The idea is simple. When you buy a lottery ticket you either win or lose. If you lose, you've lost all your money. If you win, you get more than you spent, but the odds are against you.

With a PSL, you put money in a savings account. Every month, the bank picks a handful of lucky winners, and gives them a large sum of money. The banks pay this money from the interest earned on all the accounts. If you didn't win, no big deal, you haven't lost a cent. You can either pull your money out, or you can keep it in for a chance to win next month. In other words, the only thing you lose is the interest you would have earned in a regular savings account.

The PSL idea was tried in South Africa with incredible success. Poor people, many of whom never even had a bank account to begin with, suddenly were pouring into the banks and putting money in PSLs. It was so successful, in fact, that the government of South Africa sued the bank, and shut down the program. Why? Because the government of South Africa runs a lottery, and they realized they were losing revenue. That's right, people stopped playing the lottery, and were saving money. And the government shut the program down.

Here in the states we're no better. It's illegal in almost every state to do something like PSL, because it competes with the state run lotteries. States don't want to lose money. Banks could encourage people to save, and American needs it's citizens to be more responsible with their money, but it's illegal because it would hurt State's bottom line.

Here in Utah, we don't have a lottery. Many people cross over to Reno, or up into Idaho or Colorado to play the lottery. Why not be trailblazers and allow PSL here in Utah? It would encourage our citizens to save, and it would very likely  keep more money here in the state.

I wouldn't use PSLs, because I think I can get a better return through careful investing. But for thousands of people who play the lottery, and see it as a wealth building strategy, this would be a much better option. Both for them, and for the rest of society, because they'd be more responsible, and would need to turn to social programs less often. The Legislature is in session. Let's allow PSLs here in Utah, and see what happens.

By the way, I linked to the Freakonomics article above, I highly recommend reading the whole article, as well as listen to the podcast (15 minutes or so). Michigan is currently experimenting with PSLs, with some intriguing results. Billie June Smith deposited $75, and won $100,000.

And everybody else? Well, their savings accounts are still full.


hornet_1 said...

In the UK we have both a lottery run by the government and also a government run PSL. They are called Premium bonds and work as you describe with your money secure but no interest just the change for each GBP£ invested to win from £10 to £1,000,000 each month. There is very little advertising for the premium bonds, while the lottery is in every corner shop and has the usual razz-a-mataz TV show! I agree that the PSL's should be pushed more.

Elena said...

Sounds like a great idea to me. Are you still writing, Marion?

Marion Jensen said...

Yep, still writing. Putting the final polishes on Almost Super and then the hunt for an agent begins.

Cami Checketts said...

It will be intersting to see what happens in Michigan.
I'm with you on saving. We always want to pay down debt, but the savings is often more important.

I recommended your book on my blog again. Can't wait for Almost Super to come out!

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Alex at Fusion of Fashion said...

I think it's a great idea. Governments a la South Africa have hardly ever gotten it right. There's nothing like a little incentive to help people save.

Alex @ Cheap Cocktail Dresses Online