Prize-Linked Savings and the No Lose Lottery

The guys from Freakonomics are suggesting something called “Prize-Linked Savings” (PLS).  With a PLS, Americans could put money into special savings accounts that would accumulate interest for the individual account holder like traditional saving accounts. Some of the interest from all the PLS accounts would be pooled into a big cash prized that would occasionally be awarded to one of the account holders. So, depositing money in your account would be a combination of saving money and buying a lottery ticket. Your deposit would always be there and have the savings of a traditional savings account (“no lose”) plus the chance of a big payoffs (“lottery”).

Why it works:

Americans love lotteries. Last year the average American spent $200 on lotteries. That would total about $58 billion.

Americans don’t love saving. America has had one of the lowest rates of savings of advanced industrial nations. We like to spend. We don’t like to save.

Why it will not happen

What’s the barrier to this? State lotteries. The states likely would fight this vigorously since they make so much money off what we might call “almost always lose lotteries.” States keep about 40% of what they take in on lotteries. That’s like a tax that hardly anyone notices. Unfortunately, states have become addicted to lotteries.

The case for why it will would work is spelled out in one story (“Could a Lottery Be the Answer to America’s Poor Savings Rate?“) and why it will not happen is spelled out in another story (“Who Could Say No to a ‘No-Lose Lottery’?“).

It may not be the best solution for America’s savings problem. It may be the most interesting.

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