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Since the American Savings Promotion Act became law in December, banks can now offer prize-linked savings programs, which were previously only available in a handful of states through credit unions. But will the passage of the bill actually help boost Americans' savings rates? Karla Murthy reports.
This is an updated segment that originally aired on PBS NewsHour Weekend and online on November 23, 2013.
"Tonight's Mega millions jackpot is an estimated annuitized $149,000,000…"
it's a moment that millions of Americans wait for each week.
"Now, let's see if we can make you a millionaire tonight…"
The chance to win a huge, life-changing amount of money.
"A check for $10,000 dollars"
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-eight year old Crystal Rose Hudelson was intrigued by a poster for one when she walked into her local credit union in Seattle in 2013.
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?"
It was for a savings program called 'Save to Win.' for every $25 dollars a member puts into their account, he or she is entered to win a small monthly prize of $50, but also the chance to win one of four bigger prizes of $4,000.
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.
"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."
Back in Washington State, Crystal signed up for Save to Win.
I'm not going to lose anything, so why not?" And I keep telling everybody it's my version of gambling.
What Crystal found in Washington State is also offered in three other states. In Nebraska, more than 1,400 savers are competing for $25,000 in annual prize money. In North Carolina, 1,900 savers are vying for 3 grand prizes of $10,000. And in Michigan – where the program has been around since 2009 – 11,000 savers are entered into a chance to win six grand prizes of $10,000 each.
Starting this year credit unions in Connecticut and New York will also be offering save to win and seven other states have laws that would allow prize linked savings programs.
It's all meant to remedy America's dismal savings rate, which has declined by nearly two thirds 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.
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.'
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?
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.
Crystal Rose Hudelson, who recently graduated from a program to become an aircraft mechanic, had struggled to save. She paid her own way through school and is working full-time while also doing a mechanical internship program.
But since starting save to win, Crystal is convinced that she's been able to save more money, especially after she got some surprising news a few months after her first deposit.
So have you won anything yet?
Yes, I won $50. I was so excited about it.
What did you do with the money that you won?
I reinvested it. '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.
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.
When you first heard about this whole idea, what was your reaction?
My reaction was yes, yes, yes, yes, yes, I want to play. I want to play.
Since launching in April of 2013, express has signed up more than 100 '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 $358, which is more than 20% higher than the average savings balance at the credit union.
Do you really think this is going to change behavior or teach people the value of having a savings account?
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.
Do you think the prizes are big enough to draw people in?
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.
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.
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?
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.
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.
But does prize-linked savings actually help people save more money? Kearney helped design an experiment to find out.
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.
So why haven't prized linked savings swept across the us? Turns out, the biggest obstacle to expanding these types of savings accounts was federal law. Unlike state-regulated credit unions, banks, which are federally chartered institutions, could not participate in lotteries.
But that changed last fall, when a bipartisan bill, co-sponsored by Derek Kilmer, who is now a US Representative, passed Congress. The legislation, called the American Savings Promotion Act, was signed by President Obama in December and announced in a White House press release.
Advocates are hopeful that the passage of the bill will lead to dramatically more access to prize-linked savings programs across the country and in turn, help boost savings rates.
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?
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.
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