New America
Asset Building

The Lottery Where Everybody Wins

Blog Post
By 

Justin King

Feb. 9, 2010

In the past, we have put forward the idea of "prize-linked savings." Basically this is an attempt to induce more savings behavior among those least likely to save by introducing the element of chance into the equation--specifically the chance to win more money.

This "lottery-based" approach to savings has been practiced in the UK for many years, and has been promoted heavily at home by Peter Tufano of Harvard Business School and by the D2D Fund. However, in the US many states have laws on the books prohibiting competition with their own state-run lottery. And so this innovative attempt to promote savings (primarily among low-income households--who are least likely to save and most likely to play the lottery) has found hard ground when efforts have been made to seed it.

In spite of these difficulties, some promising efforts are underway to test this idea. Our colleague Anne Stuhldreher had an op-ed published on this topic in Sunday's Washington Post. She describes the results of a program in Michigan featuring credit unions, and a target demographic with high unemployment and low-incomes. Hardly a likely place for a success story, but the results have been remarkable: 

"Yet Save to Win produced stunning results. More than 11,000 Michigan residents opened accounts through the contest, saving $8.6 million throughout 2009. People can open the accounts -- they're like certificates of deposit -- with as little as $25. They need to keep their money in for at least a year and can make deposits as small as $1 as often as they like.

 

More than half of the participants said they hadn't saved regularly before opening their accounts. About 60 percent admitted they played the lottery during the past six months. And 44 percent earned less than $40,000."
 
It is exciting to see the results of this type of demonstration. Perhaps those numbers will make financial institutions, State regulators and legislators take note of what is possible when a little innovation and competition are applied to a public policy problem like low-savings rates.