Where's the downside to a prize-linked savings account?
“Who could say no to a ‘No-Lose Lottery’?”
That’s the title of a new, intriguing post on the New York Times’ Freakonomics blog. The premise: could a lottery system, based off of the interest earned from your savings account, be a responsible alternative to the traditional jackpots we seek?
Some economists think so. The proposed system works like so – prize-linked savings accounts, as they’re known, are opt-in accounts where the holders choose to enter their earned interest into a lottery-style draw.
That interest, combined with the savings account interest of every other participant, would pool into a giant pot for payout, much like buying a lottery ticket. If you win, congratulations. If your account isn’t called upon, your interest is forfeited but you haven’t theoretically lost any money.
“It combines the thrill of the lottery with the safety of a savings account,” Freakonomics writes of the prize-linked savings system. “The idea is to encourage people to save money rather than blow it on the lottery, where the expected payouts are typically very poor – but which, admittedly, is a lot more fun than simply putting money in a savings account.”
Prize-linked savings accounts, it’s worth mentioning, aren’t totally new. They’re in place in about 20 countries, yet to MSN’s knowledge, not yet in Canada. (If you know of a similar system currently active here, please let us know in the comments.)
Though, wouldn’t this be a slam-dunk way for policy makers in Canada to encourage savings yet still run a profitable, revenue-producing enterprise?
The saving deficiencies of modern Canadians are certainly well documented – hardly anyone born after 1970 does it at all, really – so perhaps the chase of a lottery without much of the risk could spark more interest in responsible finances, especially among lower-income families, who notoriously play the lottery much more than other Canucks.
Would you participate in a prize-linked savings lottery system? Would you risk your savings account interest if it meant a shot at a jackpot, without having to dump "real" money down the drain on lottery tickets?
By Jason Buckland, MSN Money
Posted by: Guy | Dec 6, 2021 6:03:13 PM
Get a life!
Posted by: John | Dec 7, 2021 3:10:34 AM
Lotteries are a scam plain and simple.
We deal with the olgc (Ontario lottery and gamming commission) and they cost us taxpayers billions every year with the scam they have going.
The only people who truly benefit from the lotteries are the people who run them.
Posted by: Jordan (Paps) | Dec 7, 2021 10:28:42 AM
It is potentially a good idea...however, Canadians are having a hard enough time being convinced to open a Tax Free Savings Account....so just imagine what a challenge it would be to get everyone or at least a decent amount of people on board to participate in a prize-linked savings account. People have enough trouble saving money in general, and I assume not too many people would be open minded to the idea of a 'lottery' with their savings account at the beginning...but you never know!
Posted by: Western Guy | Dec 7, 2021 12:21:17 PM
Ummm, not much of a finance guy are you? Money has a time value to it. Losing that time value is a loss. I find it funny that you won't consider losing that interest as "losing" but if you took that interest out and spent it on a losing lottery ticket it would be "lost." Either way the result is the same so either way you actually lost money.
Therefore I consider your pitch above almost criminal as you attempt to guide people less financially astute into gambling with a tag line of "no-lose lottery."
Pragmatically the only way this would work is if you banned the current lottery system which the government won't do for obvious finanicial reasons. Therefore if this was added as an extra lottery on top of the current offerings it would appeal to some people (those careful savers that would actually buy your line above about a no-lose lottery) that currently don't play the lottery. Therefore it would increase gambling and increase lottery losses. Therefore overall individuals would be poorer. GREAT GOING EINSTEIN.
Basically speaking lotteries are a tax on the stupid. If you play long enough you are certain to lose money (in the short-term you can get ahead but in the long-term its horrible).
If anybody disagrees with this I will happily start a lottery with just them as a player and just me as the provider. They can choose a number between 1-100 for $1 and if they get it right I will give them back 50% of the money they have given me since they last won. Any takers?
Posted by: Rob | Dec 7, 2021 1:16:48 PM
I'd be curious to see how this is working in those 20 countries...I'll make my stats up on the spot here and say that 99% of people that are contributing to a savings account and earning interest on it have absolutely no interest in lotteries...whether this would draw newcomers into the savings game I'm not sure. Its a bit like creating a new mink scarf complete with real eyeballs for decorative bulbs and selling them at PETA conventions...
Posted by: Gail | Dec 7, 2021 1:34:19 PM
is this what you were talking about?
Posted by: Ross | Dec 7, 2021 3:55:04 PM
Now the interest paid to you will get sucked in to a vortex never to be seen again. The system has enough of our money.
Posted by: Jeff | Dec 7, 2021 5:29:51 PM
Note to those who have responded and not understood the article....especially Western Guy as to what is actually being suggested. Rather than put your money into a lottery game you place it into a special savings account. Your interest on that money is then entered into a draw for whatever the jackpot is. For people who find it necessary to play the lottery this would be a valid option. The money they put into the account would be the money they would be spending on tickets so they would actually end up saving more money. The only thing they would lose is interest which they normally would not have earned (unless a ticket they bought actually won).
Whether this would actually work would really depend on the various governments and whether they are willing to forgo or limit the ticket type lotteries and replace it with this type of system. If the government were to institute something like this it would increase savings for anyone who regularly plays the lottery. The main negative for the "player" would be the size of the jackpot since with current interest rates (and I hope they remain low) it would take a lot of savings and the related interest to generate a jackpot of any significant size.
Posted by: Perla | Dec 7, 2021 6:19:01 PM
I think it is a very good idea however how can we make it fair so that equal input is equal output.
for example if I buy 10 lottery tickets I have 10 times more chances than the person who bought 1 lottery tickets so how is this going to work with interest. Let's say I have $1000 in savings and someone else has $100 in savings do I have the same equal chance as the $100 depositer or are you chances going to be based on the $ saved??
Posted by: kulot | Dec 7, 2021 8:50:58 PM
England has been running this for years it's called National Savings bonds or nicknamed Ernie which is a computer that picks bond numbers each month. Each Bond costs 1 pound sterling and you can hold up to 30,000 bonds which translates to 30,000 numbers which have a chance of being picked each month.
The bonds never increase in value so the downside is if you don't win anything then inflation eats away at the value, but if like myself and my wife we have small winnings each year which so far have equated to approx 8% of the value of the bonds held and you can cash in the bonds at any time. Show me where I can get 8% here in any bank or mutual fund.
Posted by: Western Guy | Dec 8, 2021 2:33:22 PM
Jeff you reiterated the article perfectly. Unfortunately it doesn't make it any better of an idea and yes I understood the original article perfectly. The loss of interest is still a loss of the time value of money. If you don't understand that concept then you understand very little about finance.
Lets look at the results of your "new" lottery scheme. Most people "lose" interest they would otherwise have received. A "few" win extra. The net effect is that everybody has less money and the government raises a bit more but with higher costs to run it (operation costs). Given that non-saving lotteries are already available people adverse to savings will use those options instead. So now the only individuals that will likely sign up for this are individuals that likely already have savings accounts. Therefore you will ultimately decrease the savings rate as individuals that participate with savings will earn less than they otherwise would have (in fact on average they will lose where before they gained). Lastly this will be a particularly effective lottery as with current pay lottery systems you have to go buy tickets each week which at least gets people into stores and stimulates the economy somewhat where instead people will sign up once for this lottery scheme and it can potentially run for years without them changing it.
Obviously Jeff I get the concept entirely (and did in my first post if you actually read it). I just consider the article borderline criminal for its portrayal of losing interest on an investment as a "no-lose lottery."
Posted by: Freakonomics Fan | Jan 5, 2022 5:23:00 PM
It would benefit all who commented to download the actual Freakonomics podcast regarding this issue. Personally I think a PSL (prize linked savings account) is a great idea. It is specifically targeting people who do not have savings accounts; they did a sample run in Michigan and found that 55% of the people who opened accounts didn't have savings accounts before. In Africa it was so successful that the lottery sued the bank that started it and had it shut down.
Yes you lose the interest; I won’t argue that however, you still have your original investment. In my opinion that’s not so bad, especially for people who have not been saving. There is a serious problem in Canada with people not having savings, why not try what we can to alleviate the situation.
BTW Western Guy you are clearly not in the target market for one of these and should open up that closed mind of yours.
Posted by: denize t. | Mar 31, 2021 3:26:36 AM
A certificate of deposit (CD) resembles a savings account, in that a customer makes a federally insured, interest-accruing financial institution or credit union deposit. Unlike a savings account, however, a Certificate of deposit does not allow early withdrawal without penalty. If terms are to your liking, read on to learn about some of probably the most popular CD possibilities. If you make investments right, you will not likely need to take out a money advance anytime soon.