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Saving Money to Win Big

Kearney: Prize-linked savings accounts could be a big incentive for Americans to save more

New federal legislation passed in December allows banks to offer lottery-like incentives to encourage people to deposit more in their savings accounts. Advocates are hopeful that the passage of the bill will lead to increased access to prize-linked savings programs across the country, which could help boost savings rates. According to MPRC faculty associate Melissa Kearney, prize-linked savings accounts may be particularly appealing to low-income people, who spend a disproportionately high share of their income playing the lottery.

“It’s often thought that people are irrational when they play the lottery. But I would challenge that assumption,” said Kearney. ”If you’re a low income individual, how else can you potentially win enough money to buy a house, or really change your life?” Prize-linked savings programs work by entering people in a monthly drawing each time they make a deposit. Each month, a few winners receive cash prizes. Though the prizes are smaller than in the lottery, the chances of winning something are much higher.

Kearney did an experiment to find out whether prize-linked savings accounts were actually likely to change savings behavior. “The results were quite striking,” she says. “What we’re able to say at the end of the day is that for a given amount of interest payment, they can actually entice a lot more deposits, and more savings, if they structure the interest to have some lottery or prize link component to it.”

Read or listen to the story on PBS News Hour

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