Unloseable Lotteries? How Price-Linked Savings Accounts are Reframing the Idea of Saving
Source: Alejandro Garay from Pixabay
Building on top of private community programs, the United States in the latter half of the twentieth century enacted many means-tested welfare programs to provide nutritional, financial, and educational support for those who qualify. Yet even today, despite the decades of time and resources devoted to these policy-alleviating objectives, America still wages Lyndon B. Johnson’s “War on Poverty.” These welfare programs have indeed helped many families avoid hunger and homelessness, shallowing the effects of poverty; yet they only solve half of the problem. More than satisfying people’s immediate needs, a comprehensive anti-poverty plan should also create incentives for better financial habits. For example, the habit of saving, for reasons of both uncontrollable circumstance and personal choice, is absent from many American households today: nearly one-third of households today lack any savings, with an even greater percentage, 70%, having less than $1000 in savings. With hardly any financial security, a sudden, unforeseen cost could in moments subvert the lifestyles of many of these families.
So why aren’t people saving more? Several variables are at play. One of the most obvious being that many low-income workers simply don’t earn enough money to put into savings. Yet another, more surprising trend reveals a second pernicious reason: despite its terrible returns, players come back weekly to buy tickets and test the nearly impossible odds of the lottery; in fact, of households least able to afford these tickets, 28% enter the lottery at least once per week, spending on average $412 per year—4 times that of the wealthiest households. While in terms of financial strategy this figure makes little sense, it becomes more understandable in the context of privation: when people feel hopelessly poor, they become desperate and make irrational decisions, investing money in these high-reward but infinitesimally low or negative-return investments.
To reroute money for the lottery into savings, many countries around the world have adopted Prize-Linked Savings Accounts (PLSA) that have both the allure of the lottery and the infrastructure of an ordinary savings account. So what are these PLSAs? They actually are not much different from normal savings accounts in terms of their main service: to hold people’s savings. While the rates and policies differ from provider to provider, the general template of the PLSA has an ordinary savings account component, typically with lower interest rates, along with a lottery component.
One particularly new PLSA, Big Prize Savings, allows users to open an account with only a $25 opening deposit and earn lottery entries with a minimum deposit of $500. For every $25 in the account per month, a depositor will receive one “lottery ticket” for the $1000 monthly, $10,000 quarterly, and annual $50,000 draws. Even if they don’t win the lotteries, users don’t lose their money; rather, they earn interest on those savings, albeit at a lower rate than standard savings accounts. In some ways, this has created a lottery in which no one can lose. Although interest rates might not be as competitive, better it is that these savings be in a PLSA than lost in the lottery pool.
Although a great idea in theory, America has yet to completely legalize this type of account, only recently permitting PLSAs to open through the 2014 American Savings Promotion Act, with states like California catching up 4 years later in 2018. While PLSA experiments have largely been successful in other countries — in South Africa, for instance, PLSAs seem to have caused a 38% rise in net savings above the average rate — how they will impact the United States is still a mystery of time.
Yet prospects remain hopeful. Returning to Big Prize Savings (BPS) in California: as a leading PLSA provider in the state and subsidiary company of American First Credit Union (serving over 38,000 members), BPS is already wedged into the communities of California, particularly in less wealthy districts like the city of Hawaiian Gardens with a median household income of $44,792, almost $20,000 below the national median. In addition to its banking services, BPS has also explored other avenues of community building—its Caring First initiative, for one, that teaches young students about financial literacy and funds other public events. Because of the low-income demographic that these PLSAs appeal to, they seem invariably drawn toward service and community care. Even for skeptics who would doubt the sincerity of these actions, the fact remains that companies like BPS have done good in the cities that they serve; regardless of the underlying motive, more people now have greater financial security and live happier lives with that assurance in mind.