This post comes from Anne Tergesen at MarketWatch.
The savings rate in the U.S. has been in decline for decades, with about one-third of households currently lacking any savings at all. Now, some members of Congress are backing a novel approach to boosting savings -- especially among the segment of the population with the lowest savings rates.
Recently, a bipartisan group of legislators introduced The American Savings Promotion Act, which would allow credit unions and other financial institutions to offer so-called prize-linked savings accounts. Currently, these accounts are banned under a federal law, passed in the 1960s, that prevents banks from operating lotteries.
“At a time when the annual savings rate in the U.S. is just 4.1%, prize-linked savings accounts would incentivize personal savings by offering participants chances to win prizes based on savings account deposit activity while never putting their savings at risk,” Senator Jerry Moran (R-Kan.), a co-sponsor of the measure, said in a statement.
While advocates of the idea don’t specifically envision creating prize-linked retirement accounts, many say that such vehicles could help lower-income families boost their overall savings rates and put aside money that they could use later in life.
Prize-linked savings seek to tap into the impulse that prompts Americans to spend nearly $61 billion a year on lottery tickets. In Michigan, one of a handful of states that currently allow these accounts, for every $25 put into a special savings account, the owner receives a chance to win a prize – including a $100,000 jackpot and some smaller monthly prizes – in a raffle. The more money the account holders save, the greater their chance of winning.
With prize-linked savings accounts, individuals make a tradeoff, earning less interest than they otherwise would in return for a chance at a large payout, says Peter Tufano, dean of the Said Business School at Oxford University. (Some of the interest earned by the deposits gets diverted toward the prize money.) Tufano is also the co-founder of the nonprofit Doorways to Dreams, or D2D, Fund, which has collaborated with some credit unions in Michigan and South Africa to create these programs.
Prize-linked saving accounts offer “a small chance at a life-changing event rather than a large chance at a cup of coffee,” says Tufano.
Does the model work?
Michigan’s “Save to Win” program launched in a handful of credit unions in 2009. By 2011, the product was available at 47 credit unions, with average account balances of $2,109, according to a publication prepared by the Office of Legislative Research, the Connecticut General Assembly’s nonpartisan research arm. “After three years of “Save to Win” in Michigan, financially vulnerable account holders, such as individuals with household income less than $40,000, have seen average annual growth in average account balance of 34%,” according to the report, which cites research by D2D.
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