Saving money isn't sexy. But winning money - now that's a different story.
As consumers crawl their way back from the worst savings rates in generations, state lawmakers from coast to coast are looking to spice up financial responsibility by offering lottery-like prizes for people who sock their money away. The concept, which has been employed for years in other countries, is gaining greater attention in the U.S. following a two-year-old experiment in Michigan called “Save to Win.”
The idea is pretty simple: Offer consumers a cash prize to do something good for their finances. Since Americans are more than willing to toss some money at the long odds of winning a lottery jackpot or slot machine payout, why wouldn’t they enter a contest that promises they’ll at least keep their money in the long run?
“The beautiful thing about this is, there is no loser,” said Bill Anderson, chairman of the Northwest Credit Union Association. “Worst case scenario, you end up a year later with savings and interest.”
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Maine, Rhode Island and Maryland passed laws allowing such “prize-linked savings” accounts last year, according to the nonprofit Doorways to Dreams Fund, a driving force behind the idea in the U.S. This year, bills calling for savings lotteries have been drafted in four states – Washington, Iowa, Nebraska and New Mexico – with at least four more considering possible legislation, Doorways to Dreams’ Joanna Smith-Ramani said.
In Michigan, where the program was first tried on a large scale in 2009, savers get one entry in the prize pool for each one-year $25 certificate of deposit, with a maximum of $250 in prize entries allowed per month by any one person. Interest ranged from 1 percent to 1.5 percent, and one withdrawal was allowed per year, giving savers an opportunity to access their money if needed while also encouraging longer-term saving. Smaller monthly prizes were offered to keep people interested, with a $100,000 grand prize.
Supporters say the idea is particularly attractive in the aftermath of the Great Recession.
The economic meltdown was hard on consumers’ retirement accounts, home equity and cash savings – the three major ways that Americans typically save money, said John Annaloro, the Northwest Credit Union Association’s chief executive. Americans’ personal savings rate was recently pegged at 5.3 percent. That’s a major improvement from 2006 and 2007, when the rate turned negative for the first time since the Great Depression, but still far from the 10 percent saved in 1985.
At the same time, financially strapped state governments are less able to offer their own incentives, such as matched savings accounts, tax credits, or even financial education programs, Smith-Ramani said.
“Government’s not going to be able to do everything,” said state Sen. Derek Kilmer, D-Gig Harbor, the primary sponsor of Washington’s prize-linked savings bill. “Looking at opportunities to help folks become more selfsupporting is important.”
Michigan’s “Save to Win” program attracted some $8.5 million in savings from more than 11,500 people in its first year, according to a report from Doorways to Dreams, which was a co-sponsor of the program.
Moreover, a survey found that 56 percent of participants hadn’t saved regularly before and 59 percent spent money on a lottery in the previous six months. That indicates the concept was not only bringing in new savers, but might divert cash from a gamble into an actual investment. And even relatively minor rewards could spur increased interest: People who won a smaller monthly prize were more likely to up their savings the next month.
Credit unions, which recently sent a large group to Olympia to lobby for Kilmer’s bill, have been particularly enthusiastic about the concept. But Washington’s proposed bill wouldn’t restrict lotterylike offerings to credit unions alone, instead allowing banks or other financial institutions to also offer a prize-linked savings product if their own federal regulators approve.
It’s uncertain how far Kilmer’s bill will progress in a legislative session dominated by shrinking state finances, but there does not appear to be any significant political opposition. Banks aren’t raising competition objections, and the state Lottery also has no problems with it. Supporters also are counting on the fact that consumers can’t lose their principal as inoculation against any objection from opponents of gambling in general.
“This isn’t like saying, ‘Should we allow gas stations to offer their own games of chance?’ ” Smith-Ramani said. “These are financial institutions that are already heavily regulated.”