The Wall Street Journal
By: Conor Dougherty
October 15, 2010
"Prize Linked Savings Accounts" -- bank accounts that allow savers to win a cash prize in proportion to how much they save -- could be a good way to get low-income Americans to save more money, according to this recent paper published by the National Bureau of Economic Research.
Such accounts have long been popular overseas and in Latin America, and early experiments in the U.S. show they could work here, according to the paper Melissa Schettini Kearney of the University of Maryland, Harvard Business School's Peter Tufano, Jonathan Guryan of Northwestern University and Erik Hurst of the University of Chicago's Booth School of Business. One reason: People in the U.S. and low-income people in particular, have already proven they have a voracious appetite for state lotteries that provide a similar thrill but with greater downside.
Here's how it works: Prize linked savings accounts are pretty much like any other savings account -- you put in money in a bank in exchange for the promise of your money plus some return -- but for one detail. In addition to (or instead of) an interest rate, depositors have a chance of winning a sometimes large payout that is proportional to the amount of money they've socked away.
In this way, it's much like buying a lottery ticket, the paper notes. The big difference, of course, is that win or lose you always get back the money you put in. Rewards vary: Many Latin American banks give out prizes, while holders of Britain's Premium Bonds can win extra cash if their account is the one called out during a regularly-scheduled drawing.
It's been well established that the poor and middle-income people in the U.S. don't save much, and that many existing types of accounts -- IRAs, 401(k) accounts -- aren't very popular with people on the lower end of the income scale. Prized-linked accounts might do a better job because it folks a shot (albeit a low probability shot) at a potentially huge payday.
In 2008 the 42 states (and the District of Columbia) that have state lotteries brought in about $60 billion in revenue, with households spending more on lottery tickets milk or beer, the paper notes. The disproportionate popularity of gambling among the poor is one reason why prize linked accounts might be popular in the U.S. As a bonus, the paper notes that the lottery concept is well understood by most Americans, while concepts like compound interest and rates of return aren't.
While prized linked accounts go back to at least 1694, according to the paper, Americans have almost no experience with them. The Filene Research Institute, in partnership with credit unions in Indiana and Michigan, has experimented with the idea. And surveys conducted at a Wal-Mart in Clarksville, Indiana, showed that a majority of respondents were intrigued by the concept.
But despite the interest, it's unclear if the idea would ever fly here. Most states prohibit private lotteries (in part to protect their very lucrative public lotteries), which is why the early U.S. experiments were structured as sweepstakes. And, to be sure, the paper notes that have never been shown to increase overall household saving rates.
Still, in the aftermath of a credit bubble that caused the worst recession since the Great Depression, it would seem that gambling on savings is an idea that is worth at least worth some more experimenting.