Nearly a dozen states believe they’ve found a way to encourage people to save more money – and have fun doing it. And the idea costs not a dime in state funds.
Four states – Michigan, Nebraska, North Carolina and Washington – now allow credit unions to offer cash prizes as an incentive to encourage people to save more. Five other states – Connecticut, Indiana, Maine, Maryland and Rhode Island – have enacted laws clearing the way for prize-linked savings, and in New York, a bill is awaiting Democratic Gov. Andrew Cuomo’s signature. Similar measures were introduced in Arkansas last year and in Oregon this year.
People know they should save more money, but nearly half of all U.S. households are “liquid asset poor,” meaning they have less than a three-month cushion of savings, or $5,887 for a family of four, according to the 2014 Assets & Opportunity Scorecard, published by the Corporation for Enterprise Development, a nonprofit organization that works to expand economic opportunity.
By opening a 12-month share certificate with as little as $25 – far less than the minimum for most bank certificates of deposit – participants in prize-linked savings programs earn an entry into that month’s drawing and become eligible for a yearly grand prize. For each $25 added to the account (up to 10 deposits per month), a participant earns another entry. Savers are allowed to withdraw money before the end of the 12 months, but they typically have to pay a $25 fee to do so.
Since 2009, thousands of people have won prizes, ranging from $15 monthly payouts to a $100,000 grand prize in Michigan in 2012. Michigan credit unions have since changed the rules, and now award six $10,000 grand prizes a year instead of a single annual prize. Credit unions in other states also top out at $10,000.
“Most of the things we do in the legislature are so abstract, and it’s hard to see the benefits,” said Nebraska state Sen. Amanda McGill, a Democrat. “But this really gets people happy and engaged, and they are saving.”
In 2011, McGill introduced the bill allowing credit unions in Nebraska to offer “Save to Win” raffle promotions. The program has been called the “no-lose lottery,” because even savers who don’t win prizes keep their principal – and earn interest.
Between January 2012 and January 2014, Nebraskans opened 1,462 accounts and saved a total of $2.3 million. Last year, participating credit unions paid out $43,000 in cash prizes, including one $25,000 grand prize.
“I’ve heard zero complaints,” McGill said.
Indiana Rep. Gail Riecken, a Democrat, said her eyes opened to the need for prize-linked savings when she talked to a friend who has so little money as to be forced to turn to high-interest commercial loans when an emergency expense – such as a car repair – arises.
Credit unions pick up the cost of running the program and the prizes; no state funds are involved.
“It’s not a government program. It’s not a safety-net program. The only role for the states is to allow the credit unions to do it,” said Qiana Flores of the National Conference of State Legislatures.
Another idea to encourage people to save by offering them prizes is to sell lottery-style “savings tickets” at the same locations that sell traditional lottery tickets. The payouts for savings tickets would be less than in the traditional lottery, but savers who didn’t win a prize would still keep their principal. The plan isn’t designed to raise revenue for the state, as traditional lotteries do, but rather to encourage more people to save.
“The challenge is getting people to understand it,” said Oregon state Rep. John Davis, a Republican, who has proposed a bill that would allow savings tickets to be sold alongside lottery tickets in his state. “It’s hard for people to wrap their heads around the concept that (a) prize-linked game like a lottery can help people save.”
Forty-three states and the District of Columbia have lotteries, but none yet offer no-lose savings tickets as a lottery alternative. To implement it, some barriers would have to be overcome. For example, a person buying a savings ticket would have to register the ticket and link it to his or her individual account, requiring paperwork either in person, online or via mail or text messaging. Some retailers are worried about the time it would take.
“Savings tickets are a more complicated model to explain,” said Joanna Smith-Ramani of D2D Fund, which works on savings innovations for lower-income consumers. “The lottery is a very sophisticated network. Can we give it another job?”
States or nonprofits do have to pony up for Assets for Independence, the major federal program that helps low- and moderate-income people save. The $19 million program matches savings up to $2,000 per person in Individual Development Accounts for specific purposes and duration: a home, education or to start or expand a business. Participants must qualify for Temporary Assistance for Needy Families (TANF) or meet income and asset limits. Participants receive financial education as part of the program.
Since the program began in 1999, about 84,000 people have opened accounts and 36,000 have used the accounts for purchases, according to the U.S. Department of Health and Human Services.
Forty states, the District of Columbia and Puerto Rico have created IDA programs, but only 16 states are currently funding them, according to Jennifer Medina, state and local policy manager at the Corporation for Enterprise Development.
Another strategy states use to spur low-income people to save is to raise or eliminate the asset limits for benefit programs. Three dozen states have eliminated the limits for the Supplemental Nutrition Assistance Program (SNAP), formerly known as food stamps. Eight have scrapped the limit for Temporary Assistance to Needy Families (TANF).
“We believe having an asset limit discourages people from being able to save,” Medina said. “The message behind lifting the asset limits is that we’re not going to penalize you if you save.”