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Kim: Could Hoosier innovation boost nation's saving rate?

October 11, 2014

KimWhen a Powerball or Mega Millions jackpot hits $200 million, I can’t wait to buy tickets. It’s fun to dream, but the harsh math of lotteries makes them a losing proposition.

According to industry figures, the 44 American lotteries generated sales of $63 billion in 2013, but paid only $39 billion in prizes. This 60-percent payout means that for every dollar you spend on lottery tickets, you can expect to lose a whopping 40 cents. A house advantage of that magnitude would make casinos blush.

In 2012, Americans saved only about 4 percent of after-tax income, less than half the savings rate of the 1970s. Our society values instant gratification, so spending and borrowing is both fun and encouraged by billions in sophisticated advertising and marketing. By contrast, saving is boring and an exercise in self-denial.

How can saving possibly compete against the excitement of spending or the chance to win a lottery jackpot?

Enter the Prize-Linked Savings (PLS) account, a product pioneered in the U.S. by Columbus, Ind.-based Centra Credit Union with its 2007 Super Savings program. Individuals make deposits into a savings account or certificate of deposit. In lieu of most or all of the interest the account would otherwise earn, the depositor is entered into a lottery/raffle, if they do not withdraw the money for a specified period of time.

The number of lottery/raffle tickets each depositor receives is based on the size and frequency of deposits. The deposits are held on a risk-free, fully insured basis, just like a normal savings account or CD. The prizes are paid out of the interest that would have been otherwise paid on the pool of all PLS accounts.

Thus, individuals have the chance to win the lottery without risking a penny of their deposit. It’s easy to see how people who aren’t motivated to make a $25 deposit to earn 25 cents of annual interest become very motivated if that same deposit buys them a shot at a $100,000 jackpot.

While other countries have long, successful histories with PLS plans (Britain’s Million Adventure program in 1694 led the way), they have been much slower to catch on in the United States because PLS products have been prohibited under laws governing and regulating lotteries and financial institutions.

The Save to Win (STW) PLS plan was launched in 2008 with eight Michigan credit unions. To fund attention-grabbing jackpots, STW followed the example of the multistate consortiums behind Powerball and Mega Millions by expanding to include 57 credit unions in four states. Save to Win has changed people’s savings habits and boosted savings rates, particularly among some of the most financially vulnerable.

A 2011 study revealed that half of American households stated they could not raise $2,000 within 30 days in case of emergency, including nearly a quarter of households making $100,000 to $150,000 annually. One in three adults has zero retirement savings. The PLS plans help individuals and families create financial safety nets, a concept both liberals and conservatives support.

Indeed, in a stunning display of bipartisanship, the U.S. House overwhelmingly passed the American Savings Promotion Act on Sept. 15, allowing federally regulated financial institutions to offer PLS plans. Let’s hope the Senate follows suit and the president signs it into law.•

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Kim is the chief operating officer and chief compliance officer for Kirr Marbach & Co. LLC, an investment adviser based in Columbus, Ind. He can be reached at (812) 376-9444 or mickey@kirrmar.com.

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