Did you know that one-third of Canadians admit winning the lottery or receiving a large inheritance is part of their financial plan? Think about that for a second. Then think about how many people you know who’ve actually won the lottery or received a large inheritance. Yeah, exactly.
Now that we’ve established that very few people will actually win the lottery or receive a large inheritance (certainly not one-third of Canadians), you’ll also likely agree with me that these 3 statements are true:
- We don’t save enough money.
- Many people are looking to make money, but don’t necessarily want to put in the effort.
- Canadians love to gamble (a recent study showed that low-income families spend 9% of their annual income on lotto tickets)
So what if there was a way to potentially win a huge jackpot, without having to risk losing any money at all?
Enter this thing called Prize Linked Savings (PLS). Maybe you’ve heard about it before. There was a Freakonomics podcast on it back in 2010, but I hadn’t heard about it until just recently. Basically, it’s a kind of savings account that pools the money from all depositors, and pays out a big “lottery prize” every so often based on a portion of the interest generated from that pool of money. This combines the excitement of playing the lottery, with the safety net of having your money in a legitimate savings account. The best part is, you would never be able to lose the money you originally deposited – you’d just lose out on some of the interest (and subsequent compound interest) for the duration your money is “invested.”
This isn’t a new concept; it was once run so successfully by a bank in South Africa that the government decided to sue the bank after its own lottery revenue started dropping (and this was after iniitally approving the program). In Michigan, their Save To Win program (offered by credit unions) is going strong, and awards monthly cash prizes as well as an annual prize of $100,000.
Here are some thoughts I had about Prize Linked Savings, and what it would mean in Canada:
Wouldn’t you earn more investing your money instead?
That was my initial thought when I first started doing research into Prize Linked Savings. You aren’t guaranteed a win – you might never win. So wouldn’t it make more sense to invest your money in indexed funds or even a regular savings account, and watch your money grow that way? Plus I wonder, even if you did end up winning the lottery at some point, if you would actually come out ahead over X amount of years if you carefully invested your money (and earned compound interest) instead of leaving it up to chance.
Isn’t this perpetuating gambling addictions?
I asked this to a friend, who was also interested in learning more about Prize Linked Savings. Isn’t it morally wrong of banks (or any organization) to endorse gambling as a means to make money? As stated above, low-income families spend 9% of their annual income on lotto tickets. Perhaps it would be more advantageous to teach them better money management techniques by saving and investing their money, instead of feeding into a potential addiction.
But, my friend made a good point: he said that people are going to gamble regardless of how much effort we put into informing and teaching the public about good money management. They always have, and they’ll likely never stop. So maybe we need to take that part of people’s lives seriously and find a different and unique way to help them save, instead of trying to force them to do something they don’t think they have the capacity to do. For many people, they think that the lottery is their only chance at becoming “rich” … but at least with a PLS, they’re actually saving the money they’re “gambling” away, instead of losing it all in a slot machine or playing blackjack. That’s fair.
Would it work in Canada?
I don’t know. PLS kind of has an identity crisis. Is it a banking product, or is it a lottery? Still, I can see there definitely being a market for something like this. As a nation, we aren’t saving enough money. In 2012, our savings rate was 3.3% (down from 3.8% in 2011). And the projected number for 2013? Even lower, at 3%. :| Giving people the opportunity to potentially win a life changing amount of money, while still putting cash away for the future? That’s a really big incentive. Plus, if you consider how ridiculous our savings rates are these days, perhaps your money is safer in this PLS lottery system, than investing it in mutual funds or any other financial product that has an element of risk to it.
The Save to Win program in Michigan has seem tremendous growth. In 2009, the program had 8 credit unions participating, with 11,700 accounts for a total saved of $8.6 million (average account balance was $734). By 2010? They had 36 participating credit unions, 16,200 accounts, and a total saved of $27.9 million (average account balance was $1,268). That’s a huge jump. But it does make me wonder how much of that money being put into Save To Win accounts, has been potential revenue lost for the state-run lotteries.
So for that reason, I don’t see the Canadian government allowing something like this to happen if it means taking a bite out of their lottery profits. I do think it would be good for Canada to have a product like this. There’s a market for it, and it’s an interesting and unique way for non-savers to save.