New York Times
By: Tina Rosenberg
January 15, 2013
Americans' lack of savings has become a crisis. Our confidence that we've got enough saved for retirement is at historically low levels, according to the Employee Benefit Research Institute's annual Retirement Confidence Survey. More than a quarter of Americans have saved less than $1,000 for retirement. Only half of those surveyed say they could definitely find $2,000 if an emergency arose in the next month.
Our society tries to push people to save. Various incentives make it less painful. But since they largely rely on the tax code or employer-based savings plans, they don't reach a large percentage of Americans -- the very people who need to save most and find it the most difficult.
There is a financial product; however, that Americans use enthusiastically, especially the people who most need to save: we buy lottery tickets.
Lotteries aren't usually considered part of the solution to our savings crisis. They're usually cited as a big part of the problem. Lotteries offer the worst odds in legal gambling -- about 55 percent of what people pay for tickets is paid out in prizes. Yet we spend an average of $540 per household on lottery tickets every year -- about $100 more than we spend on milk or beer. That is disproportionately spent (pdf) by African-Americans, who spend five times as much on lottery tickets per person than whites, and the very poor. People with a household income of less than $10,000 a year who play the lottery spend $597 a year on tickets.
We buy lottery tickets because it's fun -- a brief hope break in a dreary day. And for the poor, a lottery ticket isn't necessarily an irrational purchase. What other way exists for a poor person to get rich, or even to amass enough money for a down payment on a house? "A high percentage of low-income players view a lottery as a form of financial planning," said Joanna Smith-Ramani, the director of scale strategies at the D2D Fund, which acts as midwife to ideas that help low- and moderate-income people save money. "It's hard for financially vulnerable families to save $10 a month. I can get crappy interest, or I can spend that $10 on scratch-off or Powerball -- if I hit it, I hit it really big."
The lottery is the one pathway to wealth where poor people have an equal footing with rich people. Lottery players know the chance of getting rich with a lottery ticket is infinitesimally small. The point is that without one, the chance is zero.
What if saving could be like a lottery?
The idea of rewarding savings with prizes dates from at least 1694, when Britain, desperate to pay off war debt, lured savers with a jackpot. Prize-linked savings exist in some form in at least 18 countries today. Perhaps the experience most relevant for the United States is Britain's Premium Bonds, established in 1956. The interest on the bonds isn't repaid to the holders. Instead, it goes into a prize fund. Every pound savers put in (to a maximum of £30,000) gives them a chance to win a monthly £1 million jackpot plus a million different smaller prizes -- all tax free. The program was begun as "Savings With a Thrill," and the winning numbers were announced each month by celebrities.
At the program's 50th anniversary, there was £32 billion in bonds -- providing the government with capital at a cheaper rate than borrowing. Nearly 40 percent of Britain's population -- 23 million people -- hold Premium Bonds. They are sometimes, but not always, the best savings deal -- there is often a product whose return is better than the odds of what you'd win with Premium Bonds with average luck. But that's the point: even though they might not be the left-brain choice, they get people to save.
In America, banks can't run raffles or lotteries. They can run sweepstakes. The difference is a sweepstakes can't require entrants to put in money -- people must be able to enter by simply sending in their names. That effectively kills the idea for banks.
D2D, which is short for Doorways to Dreams, works to change federal and state laws to allow banks to offer prize-linked savings. But it is also collaborating with institutions that can do this right now: credit unions. In some states, credit unions can hold raffles. Michigan has long been one of them, and in 2008 D2D approached the Michigan Credit Union League about trying it out. Eight credit unions joined a pilot.
One was the Communicating Arts Credit Union in the Detroit area, so named because its first branch was in a newspaper printing plant. (Three more branches are in poor neighborhoods.) It wasn't among the credit unions recruited -- it was too small. But Hank Hubbard, the president and chief executive, had read about prize-linked savings and asked to participate.
Communicating Arts' average deposit was between $200 and $300, said Hubbard. "I was struggling. I had tried lots of different things to get people to save." The most dramatic was a one-year certificate of deposit -- maximum deposit $1,000, minimum $500 -- paying a whopping 10 percent interest. "But our members can't scrape together $500," Hubbard said. That CD still exists, but of 10,000 members, only 20 have one.
"I knew that interest rates were not moving the dial in terms of whether people save or not," Hubbard said. "If it's a half a percent on $100, we're talking about 50 cents. Even at 10 percent, people say what's 10 bucks? I talk to them and say, 'It's a lot to you, actually, because you don't have it at the end of the pay period.'"
The next year, Save to Win was born. Doorways to Dreams, the Michigan Credit Union League and its subsidiary CUcorp, the Center for Financial Services Innovation and the Filene Research Foundation, which does research and analysis to help credit unions, designed it and paid for administration and prizes, including a grand prize of $100,000.
The project grew. It now has 34 credit unions involved, 12,000 accounts in total, with an average of $2,596 in each account. So far, more than 9,000 prizes have been awarded.
Save to Win was an immediate hit at Communicating Arts. An eighth of members signed up -- about 800 people. And they saved, increasing their accounts by about $300.
But then people dropped out -- the 800 accounts fell to 500 or 600. "People would put $25 in and not win right away, so they stopped. They just decided that it wasn't worth it," Hubbard said. He thinks the prizes may have been too small. "We've been giving out a lot of $20, $25 prizes every month. We hoped that more winners would generate more buzz, but it doesn't seem like it's having that impact."
Now Hubbard has started giving out fewer, larger prizes -- $100 instead of $25. That's big enough that, heartbreakingly, people are crying when they win.
For the first four years of Save to Win in Michigan, the program was free to credit unions. But last year, participating credit unions had to pay between $3,000 and $10,000, depending on size. Many dropped out -- of the 58 who were in the program, only 34 remain.
This is in part a result of the recession. There are times in the economic cycle when financial institutions need more deposits, and a program like Save to Win would be highly profitable. The last few years have not been among those times. What banks and credit unions needed was more good loans -- ways to make money on those deposits. They still need loans; credit unions nationwide are still sitting on 40 percent of their deposits, said Adams.
"This hasn't been embraced more broadly because it's being implemented at the worst time in depository institutions," said Adams. "Despite that, credit unions see the merits for this type of program. It is part of their social mission to help people of modest means achieve their financial objectives."
It may soon be possible to get even closer to the lottery. Doorways to Dream is developing a savings card that can be sold right next to lottery tickets in the corner store. For $15, you buy a scratch-off or big jackpot card -- the difference is that you are saving that $15, not spending it. Smith-Ramani said that the group has spoken to several states and is in "pretty advanced conversation" with one state -- they hope to have a pilot in 2015.
Putting lottery-style savings cards into corner stores in poor neighborhoods, where there are often no banks, could produce the large-scale consumer demand needed for big jackpots. In the meantime, Save to Win programs are spreading. Michigan's program is considered a success, and now it has imitators: Washington, Nebraska and North Carolina have started Save to Win-style programs. Other states are now changing their laws to allow the program as well. At the federal level, bills are in the House and Senate that would remove federal prohibitions on banks' participation in prize-linked savings. (States would have to remove their legal hurdles as well.) Adams said credit unions are trying to organize a multi-state prize pool with a big jackpot. "It's not the silver bullet, but it's making a difference," said Hubbard. "It's the best thing we've been able to find to encourage people of modest means to put a little bit aside."