’Prize-linked’ accounts offer cash prizes as incentive to save

WASHINGTON — A new type of savings account taps into the Powerball fantasies of Americans by giving customers the opportunity to win cash prizes every time they make a deposit.

Proponents of so-called “prize-linked” accounts hope that the prospect of a no-lose game of chance — account holders get to keep their money even if they don’t hit the jackpot — will entice Americans to save some of the $68 billion they spend on lottery tickets every year.

Marketed as special “Save to Win” certificates of deposit, prize-linked accounts already are available from 62 credit unions in Washington state, Michigan, Nebraska and North Carolina. But they aren’t likely to become widely available nationwide unless members of Congress change federal laws that prohibit banks and thrifts from participating in lotteries or gambling.

Legislation introduced by Republican Sen. Jerry Moran of Kansas and Democratic Rep. Derek Kilmer of Washington state would tweak the laws in order to create a narrow exemption for prize-linked accounts. The change would clear the way for states to authorize federally chartered financial institutions to offer such products.

Supporters of The American Savings Promotion Act say it will encourage more financial stability among Americans, only a quarter of whom said they could come up with $2,000 in 30 days, according to a 2011 study.

In a rare show of cooperation on Capitol Hill, the bill has united lawmakers who don’t often find themselves on the same side: In addition to Moran and Kilmer, co-sponsors include Rep. Tom Cotton, a Republican from Arkansas, Democratic Sen. Sherrod Brown of Ohio, and Elizabeth Warren, the liberal Democratic Massachusetts senator.

Moran said he sees prize-linked savings as a way to create stronger incentives for families to save, invest and navigate financial emergencies.

In his home state of Kansas, 32 percent of households do not have any savings account, and 34 percent are defined as being “liquid-asset poor,” meaning they lack savings to cover basic expenses for three months in the event of unemployment, a medical emergency, a car wreck or other crises.

The bill “is one bipartisan strategy we can all support to encourage higher personal savings rates, which enable increased financial security and upward mobility,” Moran said.

“The idea here is to make savings less of a chore, but also make it something people are excited to do,” said Kilmer, who passed a law as a state senator in 2011 that allowed credit unions to offer prize-linked savings accounts in Washington state.

The congressman said the idea appeals to Democrats because it’s an innovative way for people to save money, but also to Republicans, because it does away with what he considers an outdated government regulation.

“It kind of cuts across the partisan divide,” Kilmer said.

The basic concept is simple: For every $25 invested in a balance-building certificate of deposit, or CD, the account holder is entered in a drawing for a chance to win annual jackpots — last year these ranged from $5,000 to $100,000 — as well as smaller monthly prizes.

Participants can enter up to 10 times a month for the term of the CD, which also can accrue interest. Normal tax laws apply to the prize money.

The winnings are modest compared with Powerball’s Mega Millions. Even the biggest “Save to Win” grand prizes won’t make you an instant billionaire so you can quit your job, buy a yacht and move to Fiji.

But they can grow your nest egg exponentially overnight.

And unlike gambling or the lottery, your investment is never wasted: Win or lose, you keep your money.

“That’s why it’s brilliant: You still get the thrill (of playing the lottery), but you end up with savings at the end of the day,” said Ray Boshara, director of the Center for Household Financial Stability at the Federal Reserve Bank of St. Louis.

Since 2009, more than 50,000 people have saved a collective total of more than $94 million in prize-linked accounts in the four states where credit unions now offer them, according to Doorways to Dreams (D2D) Fund, a Massachusetts nonprofit dedicated to improving the financial security of low- and moderate-income households.

Five other states have enacted legislation to enable prize-linked savings accounts: Rhode Island, Maine, Maryland, Connecticut and Indiana. A similar bill in New York awaits its governor’s signature.

Until a federal bill passes, however, “Save to Win” accounts will be available exclusively from credit unions in a limited number of states, and not from banks or thrifts.

Despite bipartisan support, both the House and Senate versions of the bill have been stalled in committees since last year.

Congressional staffers tasked with rallying votes for the bill said it has been competing for attention with big-ticket items such as housing reform on Capitol Hill, where partisan gridlock has slowed the legislative process to a virtual halt. They said they’re hopeful the House version of the bill might move out of the Financial Services Committee for a floor vote later this summer.

Part of the reason for the legislation’s lack of traction may be because it hasn’t been endorsed by the American Bankers Association, the influential Washington-based trade association for the U.S. banking industry.

The banking association has yet to take a formal position on the bill, which would affect 14,000 banks and credit unions across the country, said James Ballentine, the association’s executive vice president of congressional relations and political affairs.

“It’s an interesting idea,” Ballentine said, but the concept hasn’t been proven to translate well from a few dozen state-chartered credit unions to a much bigger market nationwide, he said.

“I think you need to see some results before you implement it across the board,” he said. “It’s a huge leap to jump from an effort in two to four states to 14,000 institutions. I think the pilot concept, which is working state by state now, may be a better approach to this until we get some real feedback.”

Ballentine said banks are always looking for ways to encourage savings, and they likely would see prize-linked accounts as an attractive model, he said.

“This is another innovative idea which, once it gets some history behind it to determine if it is indeed effective or not, could be broadened,” he said, “but right now it’s an early concept.”

Economists point out that the prize-linked model has a long record of success overseas, where banks from Germany to Japan have been offering such products for years.

In Britain, 1 in every 4 households invest in premium bonds that pay out lottery prizes instead of interest. In South Africa, “Million a Month” accounts became so popular that the nation’s lottery board sued to shut them down as unlawful competition.

For Americans considering a “Save to Win” account, experts say it’s important to understand what you’re investing in. A prize-linked account typically charges a fee if you withdraw money before the CD’s full term expires, at which point you can roll over the funds or take them out.

“The concerns would be just how much liquidity you want to have without having to pay penalties,” said Boshara of the St. Louis Fed.

“Having the funds ready when you need them is really, really critical, so I can see them as a little bit of a barrier for families managing increased volatility on the income and expense side,” Boshara said. “Some people may not want penalties at all and prefer just a plain vanilla savings account.”

On the other hand, some restrictions on the money actually would be preferable for a lot of people who struggle to save, he said.

“If it’s too easy to withdraw, there’s a lot of temptations to get at the money,” he said.

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