A Lottery You Can't Lose

Imagine that you have a low-paying job but still manage to save a little for your kids' future every month. Then someone comes along and offers you a chance to win a cash prize. You just have to put your interest into a pool from which the prize is made. Would you do it? My bet is you would. Today's interest rates are so low that you would be giving up a little for the chance to win a lot. That's prize-linked savings in a nutshell, and it could spur a lot of people to save.

It is very encouraging to witness the increased interest in motivating low-income households to save and accumulate wealth around the nation. Scholars like Michael Sherraden have helped us understand how the lack of assets is one of the main factors preventing low-income families from upward economic mobility (read more about Sherraden's work here). First, the Individual Development Accounts (IDAs), then the Children Savings Accounts (CSAs) and matched 529 college savings accounts, and now there is yet another exciting development: prized-linked savings (PLS).

PLS is a powerful idea based on the premise that savings can be made more fun and attractive when merged with the logic of the lottery. Compared to traditional savings accounts, PLS accounts do not earn interest. The interest accrued on all the accounts is pooled and periodically distributed as prizes to its participants. It is essentially a no-loss lottery.

PLS has the potential to kill two birds with one stone. You've probably heard the lottery referred to as the poor man's tax. Low-income individuals invest large sums hoping to win the jackpot. In one of the poorest town in Massachusetts, the average resident spent $1,179 on lottery tickets in 2013 alone. With PLS, this amount would be saved and if lucky, the individual might still win a prize. PLS is also powerful because it has the potential to attract those who traditionally do not save. Harvard Prof. Peter Tufano (now Dean of the University of Oxford's Saïd Business School) has studied, tested, and promoted the idea with his organization Doorways to Dreams (D2D). He found that 56 percent of PLS participants were non-savers before joining such a program. When 44 percent of American households live in a state of persistent financial insecurity, any savings can make a big difference.

One important obstacle to establishing PLS in the United States is the law that limits lottery activities to the state-sanctioned lottery. But President Obama recently signed bipartisan legislation leaving it up to states to decide. Ten have already passed legislation allowing PLS at their banks, and now it seems that Massachusetts may be next. Massachusetts State Senator Benjamin Downing has recently put forward a proposal that would allow banks and credit unions to conduct savings lotteries. Now let's see if the legislature and Governor Charlie Baker approve the changes that would make PLS a reality here in Massachusetts.