A Savings Lottery

by Elaine Schwartz    •    Dec 13, 2010    •    755 Views

Assume you have 3 extra dollars each day. Would you use it for a lottery ticket or a savings account?

Most people would select the lottery ticket. Economists, though, hoping to elevate our nation’s savings rate, would like to encourage the banking alternative. And, they think they have figured out how.

First used in South Africa in 2005, Million-a-Month Accounts connected savings to a lottery. Because Million-a-Month Accounts could have low opening balances and no fees, lower income families were a target customer. The key, though, was that instead of getting interest, account holders had a chance to win a lottery. Each month, the number of lottery tickets you could receive depended on your account size. The larger the account, the more chances you got to win a lot of money. As described by Freakonomics co-author Steve Dubner, Michigan is experimenting with a similar concept through Prize-Linking-Savings Plans (PLS).

As always, though, there is an opportunity cost. If banks can offer their own legal lotteries, then municipal lotteries which had been monopolies will lose billions in revenue. In South Africa, supporting the National Lottery Board, a court declared the Million-a-Month Account was an illegal lottery.

The Economic Lesson

Households and businesses have a savings and investing connection. Households are the savers. Through banks and other financial intermediaries, businesses borrow the money that households save. Businesses then use borrowed funds to buy tools, build factories and offices, expand inventories, and grow.

You can see why saving can be good for the savers, good for businesses, and good for the economy. Lottery officials, though, are not happy.






One Response to A Savings Lottery

  1. Anonymous says:

    Although a lottery ticket is not a necessity, it is another product that consumers are often willing to buy with their money. Just as consumers buy alcohol and cigarettes, they buy a lottery ticket. I do not think that there is a way to get consumers to start saving money by not buying lottery tickets because it is such a small portion of one’s income and the money will most likely be spent on something else. People have the right to choose what they spend their money on and how much they spend. They should not be rewarded for saving money because some people have higher necessity expenses than others.

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