Prize-linked Savings Accounts

A Wall Street Journal article by Khadeeja Safdar asks the question “Can the lure of gambling be used to help people save?” A new study conducted with students from the University of Maryland looked at prize-linked savings, where people can win cash or other prizes through saving money. The study compared a prize-linked savings account with a standard interest-bearing account and discovered that the students were more likely to save when the possibility of winning a prize was set before them. In the past, research has discovered the poorer people are more apt to buy lottery tickets and those who earn less than $13,000 spend about 9% of their income on the tickets. In other words, “…low-income people who don’t save very much also spend a disproportionate amount of money on lottery tickets” as one of the researchers stated, which led to the idea for this particular study. The prize-linked savings program started at eight credit unions in Michigan in 2009, though as this program is considered a private lottery, it is illegal in many states. However, in the years since the program started some states of passed amendments on this ban, allowing financial intuitions to offer the prize-linked savings program. It turns out that Americans have been saving less money over the years. Personal savings rates, which sat at 12% in the 1980s, now sit around 3%. The researchers involved with the study hope to present this savings program as a substitute for state lotteries, not unlike South Africa.

The early findings presented in this article suggest that saving money does not seem to be a priority for the average American. I believe this idea would more easily fall in line with the Keynesian school of thought; people are spending more than they are saving. I tend to think that this program will be successful. Without this incentive to save presented by financial institutions, I think that it is harder for people to resist spending, especially if they are of a low economic standing. They cannot see a reward beyond what they can purchase an item in a given moment, be it something they really need or perhaps only think they need. With this program, people can really see a long-term reward that provides the incentive to save their money. It seems to me that people would be more willing to save if they were going to receive something for doing it rather than saving their money only to have to give it away again.