Prize-Linked Savings Programs
By Albert B. Kelly
If there’s one thing people like to do, its play the
lottery. Some estimates have the average American spending slightly more than $200
a year on the lottery. In the Garden State, that number is estimated to be
somewhere in the neighborhood of $315 a year for the average lottery-playing NJ
resident. In 2017, New Jersey’s lottery realized over 3.1 billion in revenue
while paying out 1.9 billion in prizes on everything from instant scratch-off
games to Pick-3 and Jersey Cash 5.
On the flip side, if there’s one thing many Americans don’t do
very well, it’s save money- even for emergencies such as car repairs or medical
expenses. Numbers coming out of the Federal Reserve suggest that almost half of
all Americans would be in crisis mode if they had to come up with $400 to cover
an emergency expense. Similarly, a Harvard study found that half of all
Americans couldn’t scrape together $2,000 in 30 days if faced with some
pressing need.
But what if we take the appeal of the lottery, something we
like, and combined it with a savings program, something we need? Turns out that
it’s already been done and this hybrid is called “Prize-Linked Savings
Accounts”. I heard about it on the podcast Freakonomics
(Episode #72). In a nutshell, Prize-Linked Savings (PLS) accounts pool together
small amounts of interest from all savings accounts and pay out cash prizes through
lottery drawings of all depositors. For those who don’t win in a given drawing,
they still have all of their savings intact with the knowledge that they might
win the next time out.
This matters because here in New Jersey, 31.25% of the
population has zero dollars in savings according to the website Go Banking Rates while another 25% claim
savings somewhere between $1 and $1,000. While something is better than
nothing, the truth is that half the state’s population essentially has no financial
cushion to deal with emergencies when they arise. When you’re desperate, you
can easily find yourself at the mercy of predatory lenders with triple digit
interest. A white paper by the Postal Service a few years ago found that the
average payday loan of $375 from a payday lender averages $520 in interest.
That translates into an interest rate of 391%. It can quickly get to the point
where you can’t catch up. That’s why establishing savings matters.
It’s all about incentives but the challenge has always been
trying to find the right type of incentives to get people to save. The
Prize-Linked Savings approach works well and we know this because as the
podcast pointed out, it worked extremely well in South Africa until the
National Lottery Board sued the bank administering the PLS and shut it down for
no other reason than people were actually saving and it was cutting into their
lottery revenues. Closer to home, Michigan’s “Save to Win” PLS program is counted
as a success.
My point is that changing laws to allow banks to offer PLS
programs here in New Jersey would provide an incentive for tens of thousands of
residents to save. Taking it a step further, given the discussions over the
last several years about public banking and the benefits of recapturing and
utilizing the money that now goes to debt service, we would do well to consider
whether a public bank or several regional public banks could offer Prize-Linked
Savings. A PLS program could help capitalize a public bank.
As for impacting the lottery, at present it contributes some
$900 million to the State for various programs and uses. That’s no small amount
and certain interests might well argue that money going to Prize-Linked Savings
programs would automatically mean less money for programs supported by the
lottery and that this alone should shut down any discussion. My own thought is that
if done within the context of public banking, the money not spent by the State
on debt service would make up most or all of what might be lacking as a result
of Prize-Linked Savings programs.
Given the benefits of savings, would it be right to extend
exclusivity to the lottery which does nothing in terms of helping people save, while
preventing any consideration or exploration of Prize-Linked Savings programs that
not only encourage savings, but also offer people the chance to win a jackpot? Whether
through a public bank or traditional banks, Prize-Linked Savings should be
considered as an option for New Jersey.