Using Gambling To Get Low-Income Fams To Save

[summer]

www.nytimes.com/2014/08/31/business/using-gambling-to-entice-low-income-families-to-save.html?module=Search&mabReward=relbias%3Ar%2C%7B%221%22%3A%22RI%3A5%22%7D&_r=0

While building up savings offers the best route out of poverty, the glamourless grind of socking away a dollar here and there has a tough time competing with the heady fantasy of a Mega Millions jackpot. But instead of attacking lotteries, a growing number of credit unions and nonprofit groups are using them to encourage low-income families to save.



They offer what are known as prize-linked savings accounts, which essentially treat every deposit as a ticket in a prizewinning raffle. The idea is to offer the thrill of gambling without the risk. Even perennial losers keep their savings.



These accounts have won support from a rare combination of liberal poverty advocates and conservatives who like the private market-based approach and emphasis on personal responsibility. In Congress, bills to modify federal banking laws and permit more financial institutions to offer prize-linked accounts have Republican and Democratic co-sponsors. And several states, including Indiana, Connecticut and New York, have modified their banking laws to allow credit unions to offer such programs.





The accounts make up a small part of the savings universe, but they are slowly gaining traction.



Doorways to Dream, a nonprofit organization based in Massachusetts, helped start Save to Win in Michigan five years ago. It is now the nation’s largest prize-linked savings program, having spread to Nebraska, Washington and North Carolina. The program has created 50,000 accounts that saved a total of $94 million, although not all of them are still open, according to the nonprofit.



With Save to Win, account holders buy shares in one-year certificates of deposit, or C.D.s, at a participating credit union. (Federal law prohibits banks from holding lotteries or raffles.) For every $25 share, they receive an entry in a monthly lottery.



“I didn’t have $500 to start a C.D., and when they said it was only $25, I knew I could do that,” said Cindi Campbell. “I got addicted when I won $100, and I was thrilled to death.” She made those remarks when she was awarded the $30,000 grand prize at North Carolina’s Telco Community Credit Union in February.



One of the goals of such programs is to help change financial habits.



Economists have long complained that lotteries are lopsided taxes that eat away at poor people’s ability to save, noting that those with the least money tend to spend the most on lottery tickets. Yet with few other options, those mired in poverty often see lotteries as the only form of financial planning they have.



Policy makers also worry that saving too little is a problem not only for the poor but also for large numbers of baby boomers who potentially face decades of retirement without sufficient resources. The nation’s current 5.3 percent savings rate — the proportion one saves out of total disposable income — is higher than before the 2008 recession but about half what it was 40 years ago. More than a quarter of Americans have no savings at all.



Save to Win is open to anyone, but the program’s director, Joanna Smith-Ramani, described most depositors as “financially vulnerable,” with either low incomes or no history of savings.



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Gail Miller, 73, a retired Piedmont Airlines worker who lives outside Winston-Salem, N.C., said the prospect of winning a prize persuaded her to open a Save to Win account. She makes a $25 deposit 10 times a month — the maximum number of entries — to increase her chance of winning. In May, she won $25. “It was the first time I won,” she said, “but I keep trying.”



People with Save to Win accounts may withdraw money to buy Christmas gifts or fix a broken car, Ms. Smith-Ramani explained, but most then build their balances back up. “That kind of pattern and activity is more important than the total number of account holders,” she said. “People are learning how to save and to forecast. That’s a huge psychological shift.”



Seven credit unions in North Carolina joined the program last year after the State Legislature cleared the legal obstacles. Altogether, they counted 1,908 participants, who saved an average of $1,246 each, for a total of $2.38 million. The lure was 26 monthly prizes ranging from $25 to $100, a few quarterly prizes of $500 to $1,500 and one $30,000 jackpot.



Ms. Campbell, for example, said that before Save to Win, her deposits were mostly $10 or $15, but she raised them to $25 to earn a raffle entry. That pattern is not unusual. Researchers have found that prizes spur people to save at a higher rate.



Prize-linked savings programs, which can be found in about 20 other countries, achieve a “left brain, right brain balance,” a study released last year by the conservative Heritage Foundation reported, complementing “education and financial incentives and tools with approaches that have a more emotional appeal.”



Variations on the theme are emerging.



Doorways to Dream sponsors a prize-linked promotion tied to federal tax refunds; if people direct-deposit their refund, they can enter a sweepstakes. The program, which ran last year in New York and more than a dozen other states, is teaming up with low-income advocacy groups, United Way and credit unions.



A profit-making version of prize-linked savings is offered by Saveup. It links to participants’ retirement savings, credit card and mortgage accounts so that payments to any of those accounts can earn entries to various sweepstakes.



During the last school year, Propel Schools, which operates kindergarten through 12th-grade charter schools with 3,400 students in Pittsburgh, opened college savings accounts for every one of its students and raffled off gift cards worth $25 to $40 in places like T. J. Maxx, Red Lobster, Walmart and Giant Eagle supermarkets. Under the program, known as Fund My Future, every $10 deposit earns an entry in the monthly lottery (up to four entries a month).



“Our mantras are ‘Make it fun’ and ‘Make it easy,’ ” said Jeremy Resnick, a founder and the executive director of the Propel Schools Foundation. No one has to go to a bank. Students, most of whom qualify for free or reduced-price school meals, can make deposits every day with the “lunch ladies” in the cafeteria, he said.


These bank accounts carry no fees and do not pay interest. They require no paperwork from parents and do not count against any income-tested benefits. The Propel foundation serves as custodian of the accounts. Local philanthropies, including the Grable Foundation and the Benter Foundation, have put up an initial $450,000 to finance the program for two and a half years.



In the program’s first year, about 15 percent of the students deposited a total of $25,000, Mr. Resnick said. As with other college savings accounts, people can withdraw the money early for emergencies, but there is a penalty.



Propel, like the 62 credit unions in Save to Win, is tinkering with the formula, experimenting with the number and size of the prizes.



Next year, instead of having two to four monthly winners from each school, Propel will choose a single school winner each month and create a $5,000 grand prize raffle at the end of the school year. Bigger payouts create more chatter, which is important for success, Mr. Resnick said.



For Stephanie Graham, enthusiasm is catching on. She and her 7-year-old son Joey have saved $700 so far. “I only make a deposit when he takes the money in, and he loves doing it,” Ms. Graham said.

[peachdragon]

I love this.

[origami]

Great idea!

[AAM2012]

Neat concept!