Support is building for a novel approach to increasing the household savings rate. Rather than lecture people about saving more of their cash, some experts recommend linking traditional household savings accounts to lottery-style jackpots instead.
Proponents say that prize-linked savings accounts are not only more fun than traditional savings accounts, they also tend to draw a bigger crowd of people — including those who are more likely to buy a lottery ticket than save their extra cash.
Unlike traditional savings accounts that reward savers with paltry interest payments, prize-linked savings accounts mimic the appeal of state lotteries by giving players a slim but seemingly realistic chance to substantially improve their financial odds. Each time a customer makes a deposit, they are entered in a lottery-style drawing. The more deposits a customer makes, the more chances he or she has to win.
In a recent interview with the New York Times’ Tina Rosenberg, nonprofit leader Joanna Smith-Ramani explained the game’s appeal. “A high percentage of low-income players view a lottery as a form of financial planning,” said Smith-Ramani. “It’s hard for financially vulnerable families to save $10 a month. I can get crappy interest, or I can spend that $10 on scratch-off or Powerball — if I hit it, I hit it really big.”
The difference with a prize-linked savings account, however, is that people who participate actually get to keep the money they put in.
Already, a handful of credit unions around the country are experimenting with lottery-style raffles (with some jackpots as high as $100,000) and, so far, the results are promising.
According to the Doorways to Dreams (D2D) Fund, which helped launched the nation-wide savings program known as “Save to Win” in 2009, more than 40,000 customers at participating credit unions have already opened prize-linked savings accounts in the state of Michigan alone.
Customers at credit unions across the state participate by depositing $25 or more into a designated savings account. With each deposit they make, they are entered into a monthly raffle and an annual grand prize drawing of $10,000 or more.
So far, participants have saved more than $72.2 million since Michigan’s “Save to Win” program began, and the savings are continuing to grow. In 2012, for example, participants saved an average of $2,872.65 per account, according to the D2D Fund — with non-savers (people who didn’t save regularly before entering the program) increasing their savings by an average of 23 percent by the end of the year.
Meanwhile, in Nebraska, where another statewide “Save to Win” program recently launched, savers socked away an average of $1,163 per account in 2012, with more than half of the participants claiming they didn’t have an adequate emergency savings fund before starting the program. (Fifty-two percent of Nebraska participants also told researchers at the Doorway to Dreams Fund that they were drawn to the account because of the prizes being offered.)
Last summer, the National Bureau of Economic Research added to the growing body of evidence supporting prize-linked savings with a working paper, posted in June 2013.
After extensively polling a group of consumers in a controlled experiment, researchers at the National Bureau of Economic Research found consumers are significantly more likely to increase their savings if they’re presented with some kind of raffle. That’s especially true, say researchers, if the participants are male, already have lower account balances or are self-reported lottery players. “The data from the experiment demonstrate clearly that individuals are enticed to save at a higher rate — for a given expected return — if they are presented with a prize-linked savings choice,” wrote study authors Emel Filiz-Ozbay, Jonathan Guryan, Kyle Hyndman, Melissa Kearney and Erkut Y. Ozbay in the report.
Only two other states — North Carolina and Washington — currently offer “Save to Win” programs at participating credit unions. However, proponents say that list is set to grow.
Many states currently ban credit unions from offering lottery-style games (big banks across the country are also barred from participating.) However, several states are actively considering legislation that would make it legal for credit unions to offer prize-linked savings accounts. And at least eight states, including New York, Connecticut, Maryland, Rhode Island and Maine, have already passed new legislation explicitly permitting the practice.
Now, federal lawmakers are considering passing legislation that would make it legal for major U.S. banks to attract savers with a lottery-style raffle.
In October, Democratic Senator Sherrod Brown of Ohio and Republican Senator Jerry Moran of Kansas introduced a bipartisan bill that would permit banks to operate prize-based savings programs in an effort to get more people to save.
The same day, Congressmen Derek Kilmer of Washington, Tom Cotton of Arkansas and Niki Tsongas of California introduced a companion bill in the House. In a press release announcing the new legislation, Congressman Kilmer underscored the bill’s appeal. “This bill will encourage folks to save by creating a chance to win a prize with each deposit,” said Kilmer in the release. “The best that can happen is you reap a windfall. The worst that can happen is you’ve saved money.”