Could A Lottery Help Boost Our Savings Rate?

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.

Related: My 20 favourite business books

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.

Could A Lottery Help Boost Our Savings Rate?

Prize-linked Savings Accounts to Boost our Savings Rate

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.

RelatedDreaming of a lottery win

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.

Related: What could you do with $5 a day?

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.”

Final thoughts

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.

Related: Why tax-free savings accounts are still misunderstood

Perhaps there’s something to the gamification of savings – could a lottery-based savings account really boost our savings rate?

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  1. Dan @ Our Big Fat Wallet on October 12, 2014 at 9:50 pm

    I think the best way to boost savings rates are to give people incentives to save – increasing the percentage of earned income (maximum) for RRSPs (currently 18%) or increasing the annual TFSA limit are a couple ways to get people to save more. Another idea is to link tax credits to certain percentages of income saved. For example if you max out your RRSP you could be eligible for more tax credits. Or if you max out your TFSA you could claim a one-time tax credit for that year. A lottery would be fun but I think most of the money would be wasted and it would likely only be temporary

  2. Grant on October 13, 2014 at 6:32 am

    I think the best way to increase the savings rate is to make it compulsory by doubling CPP tying further increase to inflation. This gets around the two big problems with saving.

    1. Voluntary savings programmes just don’t work. Note the 24% participation rate for RRSPs. People are just unwilling or unable to save enough.

    2. The huge fees that the financial industry charges to manage what people do save severely depletes their savings over time. Of course, the financial industry will fight tooth and nail any changes.

  3. Roy Murray on October 13, 2014 at 8:47 am

    This has been happening in the U.K. for years. The scheme is called Premium Bonds and has been operating since 1956.

  4. My Own Advisor on October 13, 2014 at 10:59 am

    I’m a big believer that both carrots and consequences are required to change behaviour. Investing behaviour is no different.

    There likely needs to be more incentives for folks to save more and more present-day consequences if they don’t.

    Anything that makes saving more forced/mandatory, is a good thing. Otherwise, you’re left to rely on the heroics of voluntary action.

    I want to read Think Like a Freak. On my to-do list!

  5. Stephen @ on October 14, 2014 at 8:48 am

    I’m surprised so many people are in support of forced action and having to sugar coat everything. People need to wake up and take control of their lives!

    Better education about how to manage your finances and the consequences of not doing so. We already have good programs for saving in Canada, people just need to use them.

    Although gamification is a powerful concept … I’m getting a little wary of how much manipulation goes on in the world today. We are all constantly being manipulated by marketing, advertising, software, games, and even the government. Maybe I’m just really cynical, but the world seems so messed up to me these days.

  6. Robert on October 14, 2014 at 11:00 am

    I like the prize-based savings notion as part of the solution. It pulls people in from an existing large consumer gambling market and focuses their attention partly into savings.

    I doubt that any sort of mandatory savings is the way to go – what we have in CPP is more than enough as first base for elderly security. A major increase in CPP is the worst idea I hear, except for my own province’s aspiration to start from scratch with a new plan.

    The only comprehensive solution I can see is in a cultural shift. I doubt that is simple to arrive at, but truly it has to be come “cool” to save. There will be a problem as long as buying the next gadget for $700 is cool without weighing whether you can after saving first, or pondering the impact on 40 years of such choices. I’m not picking on gadgets as this applies equally to many other consumer choices – just highlighting a need for an attitude shift.

  7. Gaye Doolittle on October 15, 2014 at 6:45 am

    I could use the higher limit for RRSPs now but when I was younger as single parent, I had no extra cash to save.I wonder about the tax fairness of allowing higher income people to shelter more of their money. A higher limit should be closer to retirement age maybe. Plus after 50 it all seems more imminent.

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