A Poor Man’s Tax? This Lottery Aims to Help People Save Money

Scott Olson/Getty Images

Scott Olson/Getty Images

It’s no question that the allure of winning it big in the lottery is a draw for many people. In the 43 states (and the District of Columbia) where gambling is allowed, Americans spent an astounding $70.1 billion on lottery tickets and drawings during 2014 alone. According to data from the North American Association of State and Provincial Lotteries, that’s even higher than the $68.8 million spent in 2013. Rhode Island spent the most per capita on tickets, an average of about $800 per person. The prevalence of buying lottery tickets is highest among low-income groups, who often have the most difficulty saving money. But instead of vilifying the lottery system and denouncing it altogether, some states and financial institutions are turning the narrative on its head by using a lottery system to encourage those same people to save their money.

According to a Duke University study conducted in the 1980s, the bottom third of people on the economic ladder are the ones who purchase at least half of the lottery tickets in a given year. Another study found that those with lower incomes tend to play the lottery for the potential to win more money, instead of playing it for fun as those with higher incomes tend to do. Still another report found that people in lower-income counties buy the most tickets.

Paired with that, the national savings rate has been dismally low for the past decade. According to the St. Louis branch of the Federal Reserve, the lowest savings rate occurred during 2005 at a valley of 1.9%. It’s since come back up to 5.3%, but is far below the rates of the 1970s through the 1990s, when rates were commonly closer to 10%. According to the Heritage Foundation, roughly one-third of households have no savings at all.

To combat both issues, the idea of prize-linked savings is catching on in the United States, following a trend that exists in other countries in regions such as the United Kingdom, Latin America, and the Middle East. Doorways to Dreams, a nonprofit organization, began a program called Save to Win that is now implemented by certain credit unions in Michigan, North Carolina, Nebraska, Washington, and Connecticut. Doorways to Dreams first began the program in 2009 with select credit unions in Michigan. For every $25 that participants deposited into savings accounts, they would be entered into a raffle with the chance to win an annual jackpot of $100,000 and smaller cash prizes awarded on a more regular basis.

By the end of 2013, it was clear that the program was catching on among participants. At that time, the program was available in four states and had more than 50,000 account holders over the four years. Those people had managed to save more than $94.3 million. What’s more, the program was working for the people Doorways to Dreams hoped to help. About 62-81% of the account holders were what program director Joanna Smith-Ramani calls “financially vulnerable,” meaning they have low incomes or no history of savings.

Pablo Blazquez Dominguez/Getty Images

Pablo Blazquez Dominguez/Getty Images

The account holders have an average range of $921 to $2,662 in their savings accounts, according to the organization, and the accounts are reopened year over year at a rate of 81-85%. The depositors don’t earn interest or collect dividends on their savings, but instead those earnings are pooled as the prize money. According to CNN Money, Save to Win has awarded $1.58 million in prizes to 14,000 winners as of the beginning of 2015.

As the program has grown in certain areas, so has attention on a national level. At the end of 2014, a federal law was passed that allows this sort of prize-linked savings program to happen in any bank or credit union in states where the practice is not formally prohibited. (Up until the passage of this American Savings Promotion Act, big banks were not allowed to participate in any sort of lottery or drawing system.) Congressman Derek Kilmer, who co-sponsored the bill, said that the programs would be able to offer expanded programs in numerous locations as a result. “This bill provides an innovative way to encourage savings, and folks cannot lose,” he said in a statement promoting the bill before its final passage. “The worst thing that can happen is that people save more money.”

Not all participants have stayed the savings course. Of the 50,000 account holders total, the group reported that about 16,799 of them were still open at the end of 2013. However, for others who have invested often — or just got lucky — the program has literally paid off. One participant in North Carolina, Gail Miller, told The New York Times she makes 10 deposits of $25 each month, the highest number of deposits eligible for the raffle drawings. So far, Miller’s won one monthly drawing worth $25. Participant Cindi Campbell started saving $25 per month when she knew she couldn’t afford to put $500 in a certificate of deposit all at once. Campbell said she “got addicted” when she won $100, and later was also the recipient of a grand prize drawing in North Carolina worth $30,000.

Account holders are free to withdraw their money for various expenses, but Smith-Ramani said many of them build their balances back up. “That kind of pattern and activity is more important than the total number of account holders,” she told the Times. “People are learning how to save and to forecast. That’s a huge psychological shift.” The Times also notes that other programs that follow the same sort of model include a prize-linked program called SaveUp and a college savings program for students called Fund My Future.

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