Prize-Linked Savings

by Albert B. Kelly, Mayor, City of Bridgeton

If there’s one thing people like to do, it’s play the lottery. Some estimates have the average American spending slightly more than $200 a year on the lottery. In the Garden State, that number is estimated to be somewhere in the neighborhood of $315 a year for the average lottery-playing resident. In 2017, New Jersey’s lottery realized more than 3.1 billion in revenue while paying out 1.9 billion in prizes on everything from instant scratch-off games to Pick-3 and Jersey Cash 5.

On the flip side, if there’s one thing many Americans don’t do very well, it’s save money—even for emergencies such as car repairs or medical expenses. Numbers coming out of the Federal Reserve suggest that almost half of all Americans would be in crisis mode if they had to come up with $400 to cover an emergency expense. Similarly, a Harvard study found that half of all Americans couldn’t scrape together $2,000 in 30 days if faced with some pressing need.

But what if we take the appeal of the lottery, something we like, and combined it with a savings program, something we need? Turns out that it’s already been done and this hybrid is called “Prize-Linked Savings Accounts.” I heard about it on the podcast Freakonomics (Episode #72). In a nutshell, Prize-Linked Savings (PLS) accounts pool together small amounts of interest from all savings accounts and pay out cash prizes through lottery drawings of all depositors. For those who don’t win in a given drawing, they still have all of their savings intact with the knowledge that they might win the next time out.

This matters because here in New Jersey, 31.25 percent of the population has zero dollars in savings, according to the website Go Banking Rates, while another 25 percent claim savings somewhere between $1 and $1,000. While something is better than nothing, the truth is that half the state’s population essentially has no financial cushion to deal with emergencies when they arise. When you’re desperate, you can easily find yourself at the mercy of predatory lenders with triple digit interest rates. A white paper by the Postal Service a few years ago found that the average payday loan of $375 from a payday lender averages $520 in interest. That translates into an interest rate of 391 percent. It can quickly get to the point where you can’t catch up. That’s why establishing savings matters.

It’s all about incentives but the challenge has always been trying to find the right type of incentives to get people to save. The Prize-Linked Savings approach works well and we know this because as the podcast pointed out, it worked extremely well in South Africa until the National Lottery Board sued the bank administering the PLS and shut it down for no other reason than people were actually saving and it was cutting into their lottery revenues. Closer to home, Michigan’s “Save to Win” PLS program is counted as a success.

My point is that changing laws to allow banks to offer PLS programs here in New Jersey would provide an incentive for tens of thousands of residents to save. Taking it a step further, we would do well to consider whether a public bank or several regional public banks could offer Prize-Linked Savings. A PLS program could help capitalize a public bank.

As for impacting the lottery, at present it contributes some $900 million to the State for various programs and uses. That’s no small amount and certain interests might well argue that money going to PLS programs would automatically mean less money for programs supported by the lottery and that this alone should shut down any discussion. My thought is that if done within the context of public banking, the money not spent by the State on debt service would make up most or all of what might be lacking as a result of PLS programs.

Is it right to extend exclusivity to the lottery, which does nothing in terms of helping people save, while preventing any consideration or exploration of PLS programs that not only encourage savings, but also offer people the chance to win a jackpot? Whether through a public bank or traditional banks, Prize-Linked Savings should be considered as an option for New Jersey.

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