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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 to do so they typically have to pay a $25 fee.
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 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 saved he’s forced to turn to high-interest commercial loans when he has an emergency expense, such as a car repair.
“We in the legislature want to discourage high-interest loans and pay-day lenders, but (he) didn’t have other options. He needed that loan. Now, he’ll be able to save a little here and there,” she said. Her bill to allow Indiana credit unions to offer prizes for savings was enacted this spring.
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.
The concept of rewarding savers with prizes has been around for hundreds of years, but it has taken off slowly in the U.S. One reason, proponents say, is that it sounds like gambling, even though participants are not in danger of losing any of their own money.