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regressive taxes. prize-linked savings

How To Kill The Lottery

Great idea!

Great idea!

I’ve reached the conclusion that Americans actually enjoy paying taxes. While that may seem counter-intuitive, I see it happen every time I gas up my car. In the gas station, I usually see at least two or three people (often many more) lined up to pay their taxes. They don’t seem grumpy like they do at the DMV. Rather, they seem eager to plunk down their money to help support the American way of life.

It’s the lottery, of course. Or rather, the lotteries. I’ve just read (in The Atlantic) that Americans spent $70.1 billion on state and regional lotteries in fiscal year 2014. By comparison, we spent roughly $30 billion on the federal gasoline tax, $17.8 billion on sports tickets, $14.6 billion on books, and $13.1 billion on video games. (I was pleasantly surprised to learn that we spent more on books than video games).

On a per capita basis, we spent $280 per person on lotteries in 2014. If we exclude children from that number, the figure rises to about $300 per person.

Who is spending that money? Poor people account for a disproportionate share. According to a study by Elizabeth McAuliffe, the poorest third of Americans buy more than half of all lottery tickets. The Washington Post ran the numbers and estimates that “…households making less than $28,000 a year are dishing out $450 a year on lotteries.” In other words, poor people are paying about 50% more than average people.

Lotteries have essentially addicted state and local politicians. People willingly play them, no well-organized lobby opposes them, and they raise oodles of cash with minimal bureaucracy. So, can we ever change this system?

Actually, there may be hope in the form of prize-linked savings accounts (PLSAs). Some smart people asked the question, “Why don’t poor people save more money?” An important part of the answer seems to be that people believe that they’ll never get ahead by putting their money in small savings accounts. By comparison, a lottery offers some hope of getting ahead – not much but more than a small savings account. In other words, it’s a rational choice.

So, why not add lottery-like features to saving accounts? Presto! It’s the PLSA. Like any other savings account, a PLSA offers interest. In a PLSA, however, a good chunk of that interest is swept into a lottery and awarded as prizes. If you win the prize, then bully for you – it’s like winning a lottery. If you don’t win the prize, then you still have the money in your account plus (usually) a small amount of interest. It’s a lottery with virtually no downside.

Does it work? According to Wikipedia, various forms of PLSAs are now available in at least 17 countries. In the United States, Michigan’s Save To Win program enrolled 36 credit unions and gave away prizes based on random drawings. By saving more, participants could increase their chance of winning. A study found that 56% of the participants had been non-savers prior to the program, 39% were considered asset-poor, and 44% had low-to-moderate household incomes. By 2010, participants had opened 16,833 accounts with an average balance of $1,673 or a total of $28.1 million. The program has now spread to Nebraska, North Carolina, and Washington.

Why don’t we have more PLSAs? In some states, it’s against the law – only the state can offer a lottery. In other cases, it’s probably just lack of awareness. If you think it’s a good idea, it’s time to talk it up.

(Though this idea is new to me, it’s not such a new idea. You can find out more about current Save To Win programs here. The Save to Win website is here. Peter Tufano, formerly of Harvard Business School, and now the Dean of the business school at Oxford, has written about it here. Stephen Dubner of Freakonomics fame has written about it here.)

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