Prized-Linked Savings Plans

Sarah F. Roach

Our primary goal is to invest clients’ savings wisely. But for the broader population worldwide, saving at all remains the goal, since savings are dangerously low in many house­holds. In fact, half of Americans surveyed by Dr. Peter Tufano of Oxford University said they would be unable to come up with $2,000 from any source within 30 days— leaving them one crisis away from insolvency. Given this situation, a number of researchers have partnered with savings institutions to try a novel approach: In order to foster the good habit of saving, they’re tapping into a widespread bad habit—playing the lottery.

Even though lotteries have been called a tax on the uninformed, 50 – 60% of Americans admit to buying tickets—and it’s not only the poor and uneducated who play. Men and women across the socio-economic and educational spectrums regularly spend money on the very slim chance to “win big.” My intent is not to make a case for lotteries—merely to point out that many people play. Drawing on this human propensity, some banks and credit unions worldwide have begun offering “prize-linked” savings accounts that capitalize on behavioral research findings. The idea is to combine people’s willingness to pay for even a tiny chance for a windfall with our tendency toward loss aversion (an excessive concern over losses—which keeps many households “unbanked” in much of the world). As described below, the plans that have been created to date are essentially savings lotteries in which savers can’t lose the principal they “pay for a ticket,” yet they still get the thrill of a possible prize. Especially when bank interest rates are low, introducing a big-win aspect to saving may be a way to encourage deposits.

Here’s how it works in the U.K: Savers who buy what’s called a “premium bond” can withdraw their funds at any time, and their principal is guaranteed. The catch is that their savings earn no interest. Instead, the aggre­gated interest that would’ve been paid is put into a prize pool, and every month one person wins a £1 million jackpot. As with government-sponsored lotteries, other participants receive smaller payouts.

In 2009, Michigan became the first U.S. state to legalize this kind of program, which it calls Save to Win. For each $25 one-year CD purchased through a participating institution, savers get a chance at monthly cash prizes of $50 – 500 and an annual grand prize of $100,000. The odds of winning are better than for government lotteries, and the savers’ original principal never goes down (or up). The credit unions in the pilot program opened 15,000 new savings accounts in 2009—despite the recession. As of 2017, more than 20 states have legalized prize-linked savings plans, while other state governments resist allowing this potential threat to their massive lottery revenues.

This kind of savings program has its detractors, and we’re certainly not fans of traditional lotteries. However, solving the immense savings problem requires outside-the-box thinking, and it’s not unreasonable to put unconventional ideas on the table. In fact, recent Nobel laureate Richard Thaler has conducted a variety of experiments that suggest other ways we might exploit existing human tendencies to promote positive outcomes, much as prize-linked savings plans do.