Freakonomics : Could a Lottery Be the Answer to America’s Poor Savings Rate?
In a nutshell, PLS is a kind of savings account that pools some of the interest from all depositors and pays out a big lottery prize every month or so. It combines the thrill of the lottery with the safety of a savings account. It’s sometimes called a “no-lose lottery,” since a depositor is automatically entered into the lottery but can’t lose the original money she deposits.
And while PLS might play well in the poorest parts of Africa and Asia, there’s a group of researchers who feel that PLS is very badly needed right here in the U.S.
Peter Tufano is a Harvard Business School professor who specializes in consumer finance. He recently helped conduct a survey in several countries, including the U.S., which asked people if they could come up with $2,000 in 30 days if they had to. It turns out that nearly half of Americans couldn’t - “which means,” Tufano says in the podcast, “that they stand only one emergency or crisis away from really quite dire circumstances. This isn’t picked up in the national economic statistics.”
What if there was a way to win a big jackpot without having to risk losing anything at all? (Photo by JOEL SAGET/AFP/Getty Images)
The facts are simple. Americans have a low savings rate; and Americans love to play the lottery. Last year, we spent more than $58 billion on lottery tickets, or roughly $200 per person. As entertainment goes, the lottery is pretty cheap - a dollar and a dream and all that. But as an investment, it offers a dreadful return. States typically withhold about 40 percent of the ticket money from the prize pool for overhead costs and, often, education funds. That’s a far worse return than casino gambling or horse race betting. Which is why the lottery is sometimes called “a tax on stupid people.”
That’s why people like Tufano and University of Maryland economist Melissa Kearney are interested in bringing PLS plans to the U.S. (Here’s their paper on the topic, well worth a read.) PLS accounts have been successful in other parts of the world for years. In the podcast, you’ll hear from Tufano and Kearney, as well as from the folks who started a successful PLS program in South Africa - and the folks who got that program shut down.