Should prize-linked savings accounts be legal in the United States?

I like it!

Call your local District Attorney and ask them if it is illegal. Sometimes they only act on complaints. If not illegal, than I’m all for it.

A link: http://blogs.wsj.com/economics/2010/10/15/can-lotteries-help-poor-save-more/

Correction: The sub-prime financial crisis is an example of legalized gambling and had a corrupting influence on financial corporations.

Argument Against: Many people would save less since they wouldn’t get interest.

Argument For: Sometimes less savings means a better economy.

I think in the US the savings rate is generally considered too low though.

My main fear is not that “gambling is bad” but that it might lead to ways to manipulate the system more. Unpredictability can mask cheating.

If I have this correct, prize-linked savings accounts still generate some interest, but not as much as other savings accounts. In exchange for getting less interest, one is entered into monthly drawings for prizes. As such, I’m not entirely convinced this passes the threshold for gambling. Someone with a prize-linked account is not at risk of losing the money placed into the account, is not at risk of losing the money generated by the low interest rate, and is not at risk of losing anything else already owned. The element of chance here is found only in the fact that you may never get anything extra out of the account, whereas gambling comes with a risk of loss.

One might think that the lower interest rate is a loss. If it is, though, it is not a loss from risk. It is a known factor going into the arrangement, which is more properly called a “cost.” My checking account has a lower interest rate than my savings account, but it is not gambling for me to put money into it—even if I transfer money into it early because there is a chance one of my scheduled payments might drop before expected. Nor is it gambling for me to put money into my checking and savings accounts rather than accounts with a higher yield. Thus the argument against that this is gambling seems to be surmountable.

I don’t know that I want to call these sorts of costs “losses,” however, as I’m not really paying anything out just because I have an account with a lower interest rate. Moreover, a person whose will actually be choosing between “save nothing and get no interest” and “save money and get some interest” is not really thinking of accounts with a higher yield as a live option. Relative to the situation, then, there isn’t really any loss at all—just less of a gain than might be possible. This might also go to answering the argument against raised by @roundsquare.

This leaves the worry that the element of chance found in the prize lottery could be used to mask cheating. It’s a genuine worry, though one might wonder what its effects are supposed to be. Depending on how many of these accounts there are, the average person might never win a prize over the course of an entire life even under perfectly fair conditions. If the system is manipulated such that a person will never win a prize—perhaps because the actual winners are chosen by collusion among bank managers—the practical difference is nil. This does not make it acceptable, of course, but it does make the possibility of cheating less fearsome.

We could require some sort of review of the winners, though, or the process by which winners are chosen. That might reveal whether or not the prizes are being awarded to a particular demographic at a suspicious rate. I’d need to hear more about what kind of manipulation the system could be subject to before declaring this issue fully resolved, but it seems less worrisome so long as everyone is still keeping their money and interest. The prizes are an incentive, after all, not a guaranteed benefit.

@SavoirFaire Good points. I was assuming all accounts become lottery accounts, but if thats not true than my fear of savings going away becomes less of a problem. Though not entirely since some people will have less savings since they opt out of the regular account in favor of the prize-linked account. That’s fine in some sense because its a matter of personal choice. However, it may have bad macro economic effects.

As for cheating not being a problem, I see your point but I still disagree. Let’s say it is collusion. By definition we are talking about corrupt people. Giving corrupt people more money is a bad thing.

As for a system of checks. if its possible maybe we’re good to go on this point. But, I’m not sure if its possible. Maybe we can solve the problem by dispersing the randomness (e.g. have 10 different people/organizations each pick one digit in a 10 digit account number). If we do this, we require more people to be corrupted and this makes it harder to do. Maybe there are other ways.

So, assuming we have a way to solve (mostly) the corruption problem, my only fear is the economic effects.

Oh yeah, I’d also probably want some way to protect people so that they know what they are getting into.

@roundsquare I do not doubt that too many people signing up for the prize-linked accounts could have (bad) macroeconomic effects. I wonder how many people who already have savings accounts would switch over, though. I certainly wouldn’t. My mother might open a prize-linked account, but I doubt she would get rid of her normal savings account—and she’d certainly keep her 401(k). Insofar as the accounts would be aimed at people who otherwise would not have savings accounts (or who would not put much into them), they seem like they could help increase saving.

Regarding cheating, note that I never said it wouldn’t be a problem. What I said was that the practical difference to the average account holder would be nil. If I live my entire life without ever winning the lottery because I am incapable of picking winning numbers, that life is no different from my perspective from one in which I never win the lottery because someone is manipulating the game so that my numbers never come up. The latter situation is bad, but it doesn’t change the course of my life relative to the first scenario.

I do agree that giving corrupt people more money is a bad thing, and I do agree that a means of reducing the potential for corruption is desirable. If you think ordinary lotteries are sufficiently fair, perhaps a similar system could be used. The dispersive method could work, too. Regardless, I think we can agree that this is a problem of implementation rather than a reason for objecting to the idea itself.