With Great Powerball Comes Great Responsibility

[T]he damage done by earning less interest in a savings account is minuscule compared to lottery spending and the financial risk for families that have no savings.

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The Powerball is a multi-state lottery based in Florida, which I’m told is still a thing. Florida, that is. I knew Powerball was a still thing because I own several media devices which regularly dump media all over me. This week, the Powerball prize was large enough that if there had been a single winner, that winner could’ve become Batman.

Lotteries tout the contributions they make to citizens through expenditures on road construction, road signs, orange road signs, orange blinking road signs, and really big orange road signs with blinking text that drivers can read as they are driving, with helpful themes like “Don’t text and drive.” Sometimes, these signs are hacked by obnoxious teens to say obnoxious teen things like “Han Solo dies.”

In 1964, the first modern U.S. State-run lottery began in New Hampshire. Today 44 States and D.C. have lotteries, and the first multi-State lottery began in 1985. Since then we’ve learned a couple of honest-to-goodness facts about lotteries. First, poor people buy lottery tickets as a much larger percentage of their income than the middle-class. Second, lotteries really hate competition. (And not just State lotteries. Nevada’s gambling industry has successfully prevented a State-run lottery there.)

It’s easy to categorize the poor as being victimized by State-run lotteries. After all, the poor can least afford to lose discretionary income, right? But before you lament a low-income earner falling into mathematical quicksand as a result of ignorance or government predatory schemes (or both), consider the possibility that the poor are rational actors in playing the lottery. The argument goes something like this: a low-income person with a big mountain of debt who plays and loses the lottery still has a big mountain of debt. This same person who doesn’t play the lottery at all still has a big mountain of debt.  A chance of winning, however small, is the only chance of climbing atop the debt mountain. Depending on factors such as income and interest rates, this may be completely accurate. That’s not to say most poor aren’t objectively (financially) worse off for playing the lottery—they are. But lotteries would be broke if we were all objective. Humans, not calculators, buy lottery tickets.

Yep, they’re goats. In trees.

Americans also have a bad habit of not saving money. Sure, in a world where you can buy a 2016 Goats in Trees Calendar, who wants to save money?  I get it. Still, most of us know we should save more, but our national vices—including the lottery—seem to be an obstacle.

Some countries have harnessed the public’s desire to play a lottery to combat poor savings habits. The result is a Prize-Linked Savings (PLS) account. The concept is pretty simple. Suppose a regular savings account pays 3%. A PLS account pays less than 3%, maybe even nothing. But in exchange for foregoing all or part of the interest, the account owner is automatically entered into a lottery. PLS accounts have grown in popularity in the last 10 years.

Some critics of PLS accounts suggest that the cut in the interest rate hurts the poor. Would the poor be better off earning interest? Sure. Objectively.  But considering low-income household finances, the damage done by earning less interest in a savings account is minuscule compared to lottery spending and the financial risk for families that have no savings. Governments should not open candy stores and then feign shock when diabetics walk in the front doors, ignoring the “eat responsibly” signs.  Offering sugar free options might be a better response.

The PLS idea has caught on in such exotic, far off locations as Sri Lanka, Japan, and Michigan. How much does it help people save? The research of Peter Tufano, Dean at Oxford’s business school, noted that 56% of the participants in Michigan’s “Save to Win” PLS program were first-time savers.  At present, 12 states, including Indiana, do allow PLS accounts, but more states should. Even if it means fewer traffic signs.

Author: T. Andrew Perkins

I have practiced law in Rochester since 2001. My practice is varied: appellate law; general civil litigation; real estate; family law; and probate and estate planning. I am an active member in the Peru Grace Brethren Church. I have also served on the boards of various community organizations, including: Fulton County Community Foundation, Fulton County Leadership Academy, Fulton County United Way, Rochester Kiwanis Club, Fulton County Council on Aging, and the Fulton County Chamber of Commerce. You can reach my office from the Links page.

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