Save to Win: A lottery where you can’t lose

November 23, 2013 at 12:00 AM EDT
Credit unions in four states offer a lottery that gives savers the chance to win small monthly prizes or a yearly grand prize -- even if you don't win you get to keep the money you put in, plus interest. Supporters of this approach say it appeals to low and moderate income households; who have a harder time building assets.

ANNOUNCER: “Tonight’s Mega millions jackpot is an estimated annuitized $149,000,000…”

KARLA MURTHY: it’s a moment that millions of Americans wait for each week.

ANNOUNCER: “Now, let’s see if we can make you a millionaire tonight…”

KARLA MURTHY: The chance to win a huge, life-changing amount of money.

ANNOUNCER: “A check for $10,000 dollars”

KARLA MURTHY: But now some states are experimenting with a different kind of lottery. One where you won’t necessarily win, but you can’t lose.

It’s something called a prize-linked savings account.

And twenty-seven year old Crystal Rose Hudelson was intrigued by a poster for one when she walked into her local credit union in Seattle earlier this year.

CRYSTAL ROSE HUDELSON: It had this girl– she was really cute, too, cute clothes and cute hair, and she had this sign up and you just need $25. And I thought to myself, “Well, what is this?”

KARLA MURTHY: It was for a savings program called ‘Save to Win.’ for every $25 dollars a member puts into their account, they are entered to win small monthly prizes ranging from $50 to $100 dollars, but also the chance to win one of four bigger prizes of $5000 next spring.

Even if you don’t win, you get to keep the money, plus interest.

The prize money is put up by the credit unions and their regional association as an incentive to get members to save.

The idea is new to the U.S, but it has been around for decades all over the world. At least eighteen countries have prize-linked savings options, including the U.K.

COMMERCIAL: “They’d found they’d won five thousand smackers. And gleefully did shout, ‘that’s mine…’ ‘It’s mine’ ‘no mine’ ‘no mine  the moral: buy premium bonds, win something worth really arguing about.”

KARLA MURTHY: Back in Washington State, Crystal signed up for Save to Win.

CRYSTAL ROSE HUDELSON: I’m not going to lose anything, so why not?”  And I keep telling everybody it’s my version of gambling.     

KARLA MURTHY: What Crystal found in Washington State is also offered in three other states. In Nebraska, nearly 1,500 savers are competing for an annual $25,000 grand prize. In North Carolina, more than 1,800 savers are vying for an annual $30,000 grand prize. And in Michigan – where the program has around since 2009 – 12,500 savers are entered into a chance to win six grand prizes of $10,000 each.

It’s all meant to remedy America’s dismal savings rate, which has declined by more than half over the last four decades. In fact today, more than a quarter of all Americans have no savings at all.

But Derek Kilmer has been working to change that.

REP. DEREK KILMER:  The problem with not savings is it can often mean you’re– a crisis away from, as we’ve seen in some cases, living in your car or losing your home or– having your lights shut off.

KARLA MURTHY: As a Washington State Senator, Kilmer sponsored legislation in 2011 to allow credit unions, which are regulated by the state, to offer ‘Save to Win.’

KARLA MURTHY:  Why isn’t just the reward of compounding interest enough to make people save?  I mean, why do you actually need this prize to get people to save?

REP. DEREK KILMER: Why do people play the lottery or why do people gamble, period?  You know, it’s with the hope of winning something more. There’s a sense that this actually makes savings fun.

KARLA MURTHY: As a full-time student studying to become an aircraft mechanic, saving isn’t usually fun for Crystal Rose Hudelson. She’s paying for school on her own by also working full-time.

CRYSTAL ROSE HUDELSON: I think the most I’ve ever had in my savings account honestly, now that I think about it, is probably about $500.

KARLA MURTHY: Sharon Hall is the CEO of Express Credit Union, where Crystal is a member. They are one of six credit unions offering ‘Save to Win’ in Washington.

KARLA MURTHY: When you first heard about this whole idea, what was your reaction?

SHARON HALL: My reaction was yes, yes, yes, yes, yes, I want to play.  I want to play.

KARLA MURTHY: Since launching in April, Express has signed up dozens of ‘Save to Win’ accounts, which are structured as 12 month certificates of deposit – or CDs. Hall says even though the accounts aren’t profitable for the credit union, she’s encouraged by the results so far. The save to win accounts average $573 dollars, which is more than a four times the average savings balance at the credit union.

KARLA MURTHY: Do you really think this is going to change behavior or teach people the value of having a savings account?

SHARON HALL: I think its forced behavior which is really– I hate to say that, but the reason why they’re CDs is because you have to keep it in there for 12 months.  So if you’ve learned that you can live without that $25 for 12 months, it’s a behavioral change.

KARLA MURTHY: Do you think the prizes are big enough to draw people in?

SHARON HALL:  Yeah, I think that the grand prize is.  And the more financial institutions that participate, the bigger the prize is. You know, it’s not going to be a million dollars, but you know, it’s enticing enough to draw– new– people into your financial institution.

KARLA MURTHY: Most members at Express Credit Union are low income.

And Melissa Kearney thinks that prized linked savings accounts will particularly appeal to low income Americans – who spend a disproportionately high share of their income playing lotteries.

MELISSA KEARNEY: It’s often thought that people are irrational when they play the lottery.  But I would challenge that assumption.  If you’re a low income individual, how else can you potentially win enough money to buy a house, or really change your life?

KARLA MURTHY: Kearney is an economist at the University of Maryland and director of the Hamilton Project at the Brookings Institution. She’s thinks these lottery-based accounts help people save by leveraging their desire to win big.

MELISSA KEARNEY: If you have low savings deposits, which many low and moderate income individuals do, you’re only accumulating a few dollars every month, or even every year.  And it will take those ten years to accumulate enough interest payments on,let’s say, a low deposit checking account, to make any sort of down payment or big purchase.  And this changes that. 

KARLA MURTHY: But does prize-linked savings actually help people save more money? Kearney helped design an experiment to find out.

MELISSA KEARNEY: The results were quite striking. What we’re able to say at the end of the day is that for a given amount of interest payment, they can actually entice a lot more deposits, and more savings, if they structure the interest to have some lottery or prize link component to it.

The results were consistent with what’s been seen in Michigan, where the average amount saved with ‘save to win’ has grown dramatically since being launched in 2009.

KARLA MURTHY: So why aren’t prized linked savings sweeping the U.S.? Turns out, the biggest obstacle to expanding these types of savings accounts is federal law. Unlike state-regulated credit unions, it’s illegal for banks, which are federally-chartered institutions, to participate in lotteries.

KARLA MURTHY: But a new bipartisan bill introduced in both the U.S. Senate and House in October could make prize-linked savings accounts much more widely available.

DEREK KILMER: The bill that we offered– is called the American Savings Promotion Act.

KARLA MURTHY: Derek Kilmer is now a Democratic Congressman, and he’s a co-sponsor of the legislation in the House, along with Republican Tom Cotton from Arkansas.  

DEREK KILMER: Ideally, at the very least at the federal level I’d like to see us remove an impediment to financial s– institutions offering this innovative product.

KARLA MURTHY: At the end of the day is it really teaching people to be better savers?  Or is it just teaching them to do this just because you might get a prize?

DEREK KILMER: So, to some degree this is– you know, this is basically intermittent positive reinforcement.  As someone saves more money, they earn more chances and that’s positive reinforcement to save more money.

And I think that’s a good thing. I mean, we’ve just gone through some of the most difficult financial years a nation can go through, and so I think there’s an appreciation for the value of a tool like to help people save.

KARLA MURTHY: Crystal Rose Hudelson is convinced ‘Save to Win’ has helped her save more money, especially after she got some surprising news last month.

KARLA MURTHY: So have you won anything yet?

CRYSTAL ROSE HUDELSON: Yes, I won $50.  I was so excited about it.

KARLA MURTHY: What did you do with the money that you won?

CRYSTAL ROSE HUDELSON: I reinvested it right back into the CD.  ‘Cause every $25 increment you get your name put back into the drawing.  And I would be an idiot if I didn’t put it back in to get my name put back in the drawing two more times.  So it went straight back in.

Additional funding from Citi Foundation.