In their best selling book, Freakonomics, and its sequel Superfreakonomics, economist Steven Levitt and writer Stephen Dubner used unconventional analysis and creative storytelling to tackle problems like high crime rates, low test scores, and global warming.
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Their latest work – Think Like a Freak – takes us inside their thought process to show how to think more productively, more creatively, and more rationally about problems big or small.
Prize-linked Savings Accounts
One problem that Levitt and Dubner examined was the abysmal savings rate in the U.S., which currently sits at about 4 percent. We know it’s important to put away money for emergencies, education and retirement yet we don’t do it because it’s a lot more fun to spend money than to lock it up in a bank.
Meanwhile, Americans spend roughly $60 billion a year on lottery tickets. The authors state that nearly 40 percent of low-income adults consider the lottery their best chance to ever acquire a large sum of money.
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Of course we know the lottery is a terrible investment. It only pays out about 60 percent of the take, so for every $100 you “invest”, you can expect to lose $40.
The authors describe an idea that harnesses the fun part of playing the lottery to help people save money – a prize-linked savings account. Here’s how it works:
Instead of spending $100 on lottery tickets, you deposit $100 into a bank account. Let’s say the going interest rate is 1 percent. In a prize-linked savings account, you agree to surrender a small piece of that interest rate, say a quarter percent, which then gets pooled along with other small chunks from fellow depositors.
The pool of money is periodically paid out in a lump sum to some randomly chosen winner – just like the lottery.
Let’s be clear – a prize-linked savings account won’t deliver a multi-million dollar jackpot. But even if you never win the lottery, you’ll still benefit from saving the original deposit, plus interest, in your bank account.
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Prize-linked savings programs have helped people all over the world save money while at the same time not blowing their hard-earned money on the lottery. Michigan’s “Save to Win” program was started by a group of credit unions and its first big winner was an 86-year-old woman who won a payout of $100,000 with a deposit of just $75.
Levitt and Dubner explained that while a few states were experimenting with similar programs, prize-linked savings accounts weren’t exactly sweeping the nation.
Most states prohibit these programs because it is a form of lottery and state law typically allows only one entity to run a lottery – the state itself. Moreover, federal law currently prohibits banks from operating lotteries.
“You can hardly blame politicians for wanting to keep the exclusive rights to that $60 billion in annual lottery revenue. Just keep in mind that as much as you may enjoy playing the lottery, the state is having even more fun – because it always wins.”
Federal and provincial governments have long debated the best way to get Canadians to save more.
A forced savings program like CPP is effective to a certain degree, yet any talk of expanding CPP and increasing mandatory contributions is faced with stiff opposition.
Voluntary savings programs like RRSPs and TFSAs have had mixed results. The RRSP participation rate declined from 38 percent in 2011 to 24 percent in 2012. Many Canadians still think a TFSA is just a fancy name for a savings account.
Perhaps there’s something to the gamification of savings – could a lottery-based savings account really boost our savings rate?