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OCTO
PRIZE-LINKED SAVINGS: AN INNOVATIVE STRATEGY FOR HELPING
LOW-INCOME HOUSEHOLDS BUILD SAVINGS
American households do not have enough savings.
One in four lacks the financial cushion to support themselves for
three months at the federal poverty level (equivalent to $5,887 for
a family of four in 2013) if their income is suddenly interrupted.
That proportion jumps to almost half if the household’s illiquid
assets, such as a home or car, are excluded from net worth.
More than 80% of “liquid asset poor” households earn less than
$55,000 per year. When a personal financial crisis strikes, these
already-vulnerable low- and moderate-income (LMI) households
face deeper financial insecurity.
Setting aside money for emergencies is especially difficult for those
with modest incomes, who often lack bank accounts and resort to
expensive payday loans to make ends meet. Yet given the right
supports and incentives, these households can accumulate savings
that will help them weather financial hardships.1 Prize-linked
savings (PLS) is one promising example of such an incentive.
Numbers to know:
Prize-linked savings increases
savings by 36% among those
with low income and low savings.
Non-savers are 70% more
likely than savers to show
interest in prize-linked savings.
Source: Tufano et al. (2011); Atalay et al. (2013)
FACT: Prize-linked savings programs focus support on LMI households.
PLS offers participants the opportunity to win a prize every time they deposit money into a savings account.2
Prizes are usually cash, although some international PLS programs include non-cash prizes like cars.3 Several smaller
cash prizes with better odds will often accompany one longshot “jackpot,” of, say, $10,000 to encourage participation.4
PLS captures the ease and excitement of the lottery without taking away participants’ hard-earned cash. Even if
they don’t win a prize, savers always have access to their original deposits plus any interest accrued. This win-win
combination may be why more frequent gamblers are almost three times as likely to show interest in PLS as less
frequent gamblers, and non-savers are 70% more likely to show interest in PLS than frequent savers.5 PLS programs
around the world prove time and time again that PLS programs help financially insecure households:
• In the US, almost 80% of participants in Nebraska’s PLS program are financially vulnerable, and in Michigan,
94% of financially vulnerable participants have renewed their PLS accounts annually for at least two years.6
• The United Kingdom’s government-sponsored PLS program attracts more lower-income households to
participate in saving for the long-term.7
• Demand for South Africa’s PLS program was particularly high in low-income areas and places where people
reported being more severely financially constrained.8 The largest net borrowers were most likely to open a PLS
savings account.
The possibility of winning such prizes makes PLS more attractive to those with low incomes. The Consumer
Federation of America and Financial Planning Association found that more than a third of those with incomes below
$25,000 see the lottery as the most practical way to earn several hundred thousand dollars. This belief may stem
from the minimal return offered by low-interest traditional savings options on small account balances. Research also
shows that poverty-induced stress about immediate financial needs is all-consuming and crowds out any attempt
to plan for the future.9 Therefore, the easily accessible and life-changing potential of the lottery quickly outweigh its
weak odds.
FACT: Prize-linked savings programs boost savings for low-income people.
PLS accountholders increase their total savings, which is highly likely to include new savings. Some worry that
participants are simply transferring money from traditional savings into PLS accounts and therefore saving the same
dollar amount regardless. This concern is heightened given that some PLS programs offer no interest on savings, although
other PLS programs are offering above-market interest rates.10
Research suggests this fear is unfounded: financially
vulnerable individuals given a hypothetical choice of how
to spend $100 not only increased their average total savings
by 36% when offered a PLS account but also, on average,
decreased their consumption by 26% with no significant
decrease in traditional savings.11 This means PLS does not just
displace previously saved money, it creates new savings
for low-and moderate-income households.
Results from the field are also encouraging. Michigan’s PLS
program, the longest-running in the US, saw account balances
of financially vulnerable participants (LMI, asset poor or nonsavers) increase on average by more than 20% after one year.
Notably, the asset poor saw their balances more than double
that of non-financially vulnerable participants.12
MICHIGAN PLS ACCOUNT BALANCE
AVERAGE INCREASE AFTER ONE YEAR
23%
LMI
Asset Poor
27%
Non-savers
23%
Non-financially
vulnerable
12%
Source: D2D Fund, July 2013
FACT: Support for prize-linked savings is growing throughout the U.S.
Several states have already changed their laws to promote PLS. In March 2014, Indiana became the ninth state to change
its laws to permit savings promotion raffles at state-chartered credit unions (and community banks in some states).13
PLS programs are currently operating at select locations in five states—Michigan, Washington, Nebraska, North Carolina
and Rhode Island.14
There are significant legal obstacles to scaling PLS in
existing lottery systems in the United States. Lotteries
run by federally-chartered banks are currently forbidden
in order to protect the banking system, and states can only
operate lotteries to generate revenue. PLS programs would
most likely not raise as much money as state lotteries
do.15 Federally-chartered credit unions can already offer
“savings promotion raffles” modeled after the successful
Save to Win programs, thanks to National Credit Union
Administration regulations.16
Each state could also change their laws to allow statechartered credit unions and banks to offer such programs.17
An additional four states may already allow PLS via
existing laws; another four have introduced legislation
to amend their laws.18 At the federal level, there has been
bipartisan effort in Congress to expand PLS by changing
laws to allow federally chartered banks to offer savings
promotion raffles.19
This Fact File was authored by Alexander Scarlis.
CFED FACT FILE
14
OCTOBER 20
THE STATE OF PRIZE-LINKED SAVINGS
PLS in operation; law already allowed PLS
Existing laws may allow PLS
PLS in operation; after law change
Introduced favorable PLS legislation
Changed law to allow PLS
No legislative action and no PLS
Source: CFED Scorecard, 2014; D2D Legislative Success, 2014
Questions or Comments? Contact CFED:
Jeremie Greer, Director of Government Affairs
Email: [email protected] Phone: 202.207.0125
Ezra Levin, Associate Director of Government Affairs
Email: [email protected] Phone: 202.466.5925
Alicia Atkinson, All Families Can Save for the Future, 2014.
Doorways to Dreams Fund, Playing the Savings Game: A Prize-Linked Savings Report, 2012. There is usually a limit to the number of entries (but not
deposits) each person can make in order to give everyone a more equal chance at winning.
3
Melissa Schettini Kearney, Peter Tufano, Jonathan Guryon and Erik Hurst, Making Savers Winners: An Overview of Prize-Linked Savings Products, 2010.
4
Mauro F. Guillen and Adrian E. Tschoegl, Banking on Gambling: Banks and Lottery-Linked Deposit Accounts, 2002.
5
Peter Tufano, Jan-Emmanuel De Neve and Nick Maynard, U.S. consumer demand for prize-linked savings: New evidence on a new product, 2011.
6
Doorways to Dreams Fund, Building Financial Security through Fun: Findings from the Save to Win Expansion, 2013; and Doorways to Dreams Fund, Save
to Win: Highlights from Michigan 2012, 2013.
7
Peter Tufano, Saving whilst Gambling: An Empirical Analysis of UK Premium Bonds, 2008.
8
Shawn Allen Cole, Benjamin Charles Iverson and Peter Tufano, Can Gambling Increase Savings? Empirical Evidence on Prize-Linked Savings Accounts, 2014.
9
Eldar Shafir, Poverty and Civil Rights: A Behavioral Economics Perspective, 2014.
10
Kearney, et al., 2010; and Kyung M. Song, You win even if you lose: Put cash in savings, be entered in a lottery, 2014.
11
Kadir Atalay, Fayzan Bakhtiar, Stephen L. Cheung and Robert Slonim, Savings and Prize-Linked Savings Accounts, 2013.
12
Doorways to Dreams Fund, Highlights from Michigan 2012, 2013.
13
Doorways to Dreams Fund, Legislative Successes.
14
CFED, 2014 Assets and Opportunity Scorecard: Strength of State Policies: Prize-Linked Savings, 2014.
15
Kearney, et al., 2010.
16
Testimony of Douglas A. Fecher on behalf of the Credit Union National Association before a House Financial Services Subcommittee hearing, 2014.
17
Kearney, et al., 2010.
18
Ibid.
19
See the American Savings Promotion Act, S. 1597 introduced by Senator Jerry Moran (R-KS) and H.R. 3374 introduced by Representative Derek
Kilmer (D-WA).
1
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CFED FACT FILE
14
OCTOBER 20