Prize-Linked Savings Holds Promise, Isn’t Panacea

Peter Orszag takes to the pages of the Financial Times to herald an innovative idea to increase savings. Given the enduring popularity of lotteries, he suggests we can make savings more attractive by linking it to prizes.

The allure of lotteries, he argues, can be used to help raise the national savings rate, which over the long term is an important precondition for sustained economic growth. That’s a pretty big lift. As the former head of Obama’s White House budget shop, Orszag knows that most of the work will be done by the balance sheets of the public sector and business, but he is right that households will need to be part of this shift as well. Higher household savings, especially among low to middle income families, can contribute to increasing national savings and also, importantly, provide a “much-needed cushion against the vagaries of life.”

My friend and colleague at the New America Foundation, Steve Clemons, doesn’t like the idea one bit. He thinks it is small bore gimmick that will undercut the revenue raised by existing lotteries and take attention away from addressing our macroeconomic imbalances.

To be honest, I didn’t care for the idea either when I first heard of it. I don’t buy lottery tickets and I’m not a gambler myself (even though I don’t begrudge others from partaking if it is harmless). Gambling is not appealing to me because the house almost always wins and people often end up parting with money they can ill afford to lose. And I’ve never liked the idea of creating state-run lottery franchises as a way to extract resources from the public to pay for things (like schools) that should be priorities on their own. Still, lotteries sure are popular.

Peter Tufano of the Harvard Business School (and soon to become Dean of Oxford University’s Business School) has been leading the way thinking about how to take the popularity for lotteries and put it to good use. In his conception, the principle investment is protected but the prospect of hitting the jackpot gets people to set aside money that might otherwise be earmarked for consumption. While this is a relatively new idea for the US, prized-linked savings lotteries have thrived for years in the United Kingdom, Latin America, and the Middle East. Since 2009, the Doorways to Dreams (D2D) Fund, the Filene Research Institute, and the Michigan Credit Union League have piloted the concept. They offered a share certificate that earns interest, is principal protected, and enters the saver into drawings for small monthly prizes and a large jackpot. When last I checked, more than 10,000 certificates with $4.67 million in savings have been opened since the start of the project and more than 300 account holders have won $22,000 in small, monthly prizes. There are updated figures available but the point is that the pilot has shown there is demand for this product and it can work in the marketplace.

I’ll agree that this idea is not the golden ticket. It will not solve the macroeconomic challenges of rebalancing global trade or transform the US from a nation of consumers into savers. Perhaps Orszag overplays his hand by linking these issues in his op-ed. But prized-linked savings lotteries are a way to make savings more attractive and begin the process. This will be a welcomed development since many  families on the lower end of the economic ladder can’t take advantage to the various saving incentives offered up in the tax code and miss out on opportunities if their employers don’t offer savings plans. That’s why we should be looking for mechanism, opportunities, and incentives to get these families saving more over time.

What is particularly attractive about this concept that it doesn’t require new government spending or the facilitation of Wall Street. As far as I can tell, the primary obstacle to expanding this demonstration into other states rests on state anti-gambling statutes. But prize-linked saving could be expanded if state legislatures follow the Michigan example and offer a “raffle carve out” for credit unions. Maybe Citibank will look for a role to play but we should welcome the return of our financial institutions as facilitators of savings rather than as purveyors of irresponsible credit. At its core, this isn’t a Wall Street proposal, and the reason to oppose it is not that Orszag’s new employer has figured out a way to have a stake in it.

I agree with Clemons that the savings and consumption ratios in the US need to be shifted and the best way to do that in the aggregate is to remake the economy so that it becomes a producer and creator of value. Investment in educations and infrastructure is a big part of the equation. In the long run, to fund these investments, we will need a greater supply of domestic savings. Prized-linked savings isn’t going to rebalance global trade on its own. That is going to require more. But it is an idea that has been tested, is generating results, and moves us in the right direction by offering families a means to build up their own pool of savings and assets that they can deploy productively down the road. It is a nudge that works.