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Prize-Linked Savings Accounts: Getting Americans Invested In Their Own Future

by Brandon Fallon, published

According to the North American Association of State and Provincial Lotteries (NASPL), lotteries drew in $78 billion and doled out $19 billion in 2012. Lotteries have not slowed down in recent years, but when consumers have a chance to become an instant millionaire that really is not shocking.

State lotteries are in 43 states, plus D.C., with over 200,000 retail locations. The chance at winning a Powerball jackpot is 1 in 175 million. In this multi-billion-dollar business, people are eager to take their chances, even when that means they are just throwing their money away. Now, the lottery concept is merging with credit unions in an effort to encourage customers to save money without losing money in the process.

In 2013, a Bankrate report found that 50 percent of Americans have only enough in their emergency fund to cover three months of expenses or less.

Prize-linked savings (PLS) accounts are pools of money where the accrued interest is the prize and distributed to a handful of lucky winners. The purpose is to increase the number of people who have savings accounts by making saving money fun. This type of savings account has been utilized in European countries and beyond, but due to regulatory restrictions in America, credit unions are the only financial institutions that can offer these accounts, unless a state has a law that completely bans PLS accounts.

The most popular PLS account program, aptly called Save to Win™, was initiated in Michigan in 2009 by the nonprofit Doorways to Dream (D2D). Consumers purchase certificates of deposit (CD) starting as low as $25. Like any CD, they give interest, a portion of which is pooled together and awarded in various amounts throughout the year.

The original amount of money placed in the CD, or the principal, is safe and in some cases can be withdrawn in case of emergencies.

Since 2009 and the success that followed, D2D expanded to Nebraska, North Carolina, and Washington state. According to D2D, Michigan has already amassed $70 million with 40,000 new accounts since its inception. Nebraska started in 2012 and already has $2.5 million saved with over $100,000 awarded.

The effort in Washington was first pushed through the state legislature by Democratic Rep. Derek Kilmer (WA-6) in 2011 when he was a member of the state Senate. Ohio may be next if at least one of its 336 credit unions joins the program.

Rules are not standardized with each credit union giving different prize-amounts and rules on how long the savers have to keep their money untouched after investing in the PLS before they are eligible for prizes. In some instances, the more you save, the greater your chance of winning the raffle. Larger annual prizes have given way to smaller ones with more monthly winners in-between.

The speed of success depends on the number of credit unions that join the program. However, Congress may soon provide a boon to the system.

Congress has yet to pass a law that would allow banks to provide PLS accounts, but that doesn’t mean nothing is in the works.

In a bipartisan effort, Kilmer introduced a bill with fellow Democratic Rep. Niki Tsongas (MA-3) and GOP Rep. Tom Cotton, the current Republican candidate in the Arkansas Senate race. According to Kilmer, the American Savings Promotion Act “will encourage folks to save by creating a chance to win a prize with each deposit."

"The best that can happen is you reap a windfall. The worst that can happen is you’ve saved money,” he added.

Former OMB director Peter Orszag pointed to the benefits of PLS accounts and their possible origins in 1694 England. A million pounds was sold to British commoners in increments of £10 with a modest return for 15 years. The prizes ranged from the initial £10 up to £1,000. Their current incarnations are called premium bonds and the concept has spread to other countries as well.

The allure of winning lotteries has joined with credit unions and savings accounts. Through the evolution of the PLS accounts and with the help from nonprofits like D2D, more people who are new to saving accounts will turn into savers themselves. Now, with a bipartisan push in Congress, the program may expand and grow faster.

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