Assume you have 3 extra dollars each day. Would you use it for a lottery ticket or a savings account?
Most people would select the lottery ticket. Economists, though, hoping to elevate our nation’s savings rate, would like to encourage the banking alternative. And, they think they have figured out how.
First used in South Africa in 2005, Million-a-Month Accounts connected savings to a lottery. Because Million-a-Month Accounts could have low opening balances and no fees, lower income families were a target customer. The key, though, was that instead of getting interest, account holders had a chance to win a lottery. Each month, the number of lottery tickets you could receive depended on your account size. The larger the account, the more chances you got to win a lot of money. As described by Freakonomics co-author Steve Dubner, Michigan is experimenting with a similar concept through Prize-Linking-Savings Plans (PLS).
As always, though, there is an opportunity cost. If banks can offer their own legal lotteries, then municipal lotteries which had been monopolies will lose billions in revenue. In South Africa, supporting the National Lottery Board, a court declared the Million-a-Month Account was an illegal lottery.
The Economic Lesson
Households and businesses have a savings and investing connection. Households are the savers. Through banks and other financial intermediaries, businesses borrow the money that households save. Businesses then use borrowed funds to buy tools, build factories and offices, expand inventories, and grow.