A Savings Account That Gets People Out of Poverty
An idea so good, it already exists.
Americans are hurting. The Federal Reserve says roughly half of the citizens in this country can’t afford an unplanned expense of more than $400. Many people are aware of that statistic; becoming part of it the hard way.
I have an idea: we should take the mechanisms of the lottery and implement them into savings accounts. Instead of buying a lottery ticket every other week, individuals could deposit money into a savings account that would reward them with a lottery ticket they could turn into a higher payout.
Good idea? It can’t entirely be a bad one. I know this because this idea already exists, to where the SEC and a number of states — including California — have legalized these types of accounts. They’re called Prized Link Savings Accounts and while they may exist, if you’re reading this far, I’m guessing you’ve never heard of them.
That’s problem number one: if this idea were being done right, it’s likely you’d be familiar with a lottery-based savings account. That’s because of problem number two: these accounts don’t make their customers enough money. Largely the most prominent example of a prize-based savings account is the Big Prize Savings account which gives out about one-hundred thousand in cash roughly seventeen times a year. These accounts don’t pay out interest, meaning the banks are experimenting with this mechanism to get your money without likely needing to pay you much (if anything) to obtain it. The Big Prize Savings Account by most recent accounts also charges you five bucks to open an account (full disclosure: I’ve never opened one).
I do feel many people are stigmatized for playing more (conventional) forms of the lottery — scratchers, Powerball, etc.–criticized for “wasting their money.” It’s worth noting why so many people are dependent on a quick hit: without the lottery or some other prize giveaway, most Americans live in a hole they will never get out of. The average credit card debt for an American in their 40’s is about eight-grand — that’s two grand a year in interest for someone with typical credit. That money should be allocated towards savings but is instead going toward keeping credit scores from dipping below 580. But this debt will be passed down to future generations to try and recover either by chance, by crime, or by a more direct government subsidy, to say nothing of the physical costs of debt; a Commonwealth Fund study said 43 percent of low-income US adults forego healthcare because they can’t afford it. This is the highest of any country (the UK was 8 percent FYI).
Are people supposed to go to school and gain more skills to get them a job that pays them $10k, $20k, maybe $30k more annually? Taking in more student debt in the process? Perhaps, but for many single parents, how exactly is that supposed to play out? For those already taking on two jobs, where does school come in?
Should we just give people money through a Universal Base Income (UBI)? Potentially, but where’s the savings incentive in that?
I’m proposing a government-backed prized-linked saving account for those making less than $35k a year and are over the age of thirty-years-old. It would have an interest rate of one percent and would not charge any fees for a minimum balance or lack of activity over a monthly period (something that could save $50-$100 annually in and of itself). This account would be created solely to improve the lives of people who are beaten down financially and don’t feel like there’s a way out. It would give them a realistic chance of escaping debt while encouraging them to save money.
The sole purpose of this savings account would be to allow more people to move into the middle class.
Here’s how it could work:
50 dollars would open an account, again with no fees to do so. Every 25-dollar deposit earns you a ticket; so a 50-dollar deposit earns you two tickets; one-hundred dollars earns you four tickets and so on. The lottery would draw every other week. If your number is pulled, the government would match your account, meaning however much money you have in your account would double (up to $10,000).
Once a month, any account with more than $1,000 in it would be eligible for a separate lottery, where your account would be tripled (again up to $10,000 max).
How realistic are the chances of winning? Is this something that would persuade an individual not to spend twenty bucks on Powerball and deposit their money into a savings account, instead? Would it provide something sorely lacking for those in the lower class:
…hope?
The pool of people who are over thirty years of age and under $35k in annual income is about 40 million. To make it worth the while, I’m proposing giving out 20,000 winning tickets every month to double an account. 2,000 chances would be given to triple an account. Assuming every one of the people eligible participates, you have a roughly 1 in 2000 chance of having your money at least double. That’s only if you make a single, fifty-dollar deposit i.e, obtain one ticket.
Meanwhile, money is also growing at a one percent rate without penalty. At the very least, those below the poverty line have a place to keep their powder dry without maintenance fees, with a possible kicker on the horizon.
This all offers two things: 1) hope for those severely burdened and 2) competition for the private marketplace to offer better savings products to consumers.
Can America afford to do this? Technically, America can’t really afford anything it’s doing right now — running up trillion-dollar deficits like money doesn’t matter — but let’s hold ourselves financially accountable. I’ve budgeted for thirty-six payouts a year and set a matching limit of $10,000 an account. This assumes every person participates in the program and every prize is maxed out.
Triple awards would total $20 million dollars a month.
Double awards would total $200 million dollars a month.
That’s about $2.6 billion in payouts annually. Interest costs would be a bit trickier to calculate, but if everyone has an account at say $2,500 — that’s about $100 billion — with one percent interest costing $1 billion a year.
So all told, this is roughly a $3.5 billion annual program. There is some revenue. Winnings would be taxed as income at 15%. That’s about $400 million a year. I also think it’d be a good idea to reveal the numbers on a bi-weekly TV program where you could sell ad-revenue and present ethical financial advice/products to as many as 40 million guaranteed viewers (who wouldn’t tune in to see if they won the bi-weekly lottery?). That’s $8 million for a half hour of TV programming or about $192 million more dollars per year.
Give or take, the plan has about $600 million in revenue to likely cover the cost of inflation or various operating expenses I haven’t baked into this. I’m not budgeting for marketing expenses because the money from the program would go to the people, something the lottery can’t say (they spend $6 billion dollars a year on ads to get you to pay an additional tax. Good for them).
But I also wouldn’t want to rob Peter to pay Paul — this isn’t a “tax the rich program—instead I’d shave the defense budget by .5%, which would create about $4 billion dollars in funding. Chances are the Defense Department wouldn’t even notice their budget has been shaved.
Hey, if even fifty percent of those eligible play, the government has over a billion dollars it can invest in the private marketplace, assuming we trust America to invest our savings…
Undoubtedly all these numbers could be adjusted in some fashion and my pencil might need to be sharpened. Perhaps the odds aren’t quite great enough or people would rather pay for rockets than provide incentives for those in poverty to save? I respect that opinion if it arises, but I hope it comes with an alternate solution that gives those in need—who are willing to contribute to their own financial recovery—a chance. The government is raising enough revenue to create this type of account: we shouldn’t have to re-allocate wealth, we could decide to just re-allocate spending.
The private sector is engineered to make money, not move the poor up a class. It’s allowed to do that, but the public sector is allowed to intervene, as well.
Isn’t the point of government to create competition? To allow a group of people to feel better about their chances to make a living? I believe this plan can do that.
Many of those in poverty are looking for a miracle. And right now, they’re playing the lottery, instead.
