Obama’s Former Budget Director Pushing National Prize-Linked Savings Program
February 1, 2011
February 17, 2011
The former director of the US Office of Management and Budget under Barack Obama and current vice-chairman of global banking at Citigroup this week enthusiastically endorsed prize linked savings (PLS) as a way to increase savings among low-to-middle income Americans.
Peter Orszag wrote in his Financial Times piece published on Wednesday, Feb. 16, that “In the quest to raise saving rates, this allure of lotteries may be quite helpful,” and cited a recent paper by the National Bureau of Economic Research that lists point after point why coupling the opportunity of winning a large prize with a savings vehicle is a good idea. http://www.nber.org/
“One way to think of these “prize-linked” accounts is that they can offer an expected market return, but in an innovative way,” Orszag writes in the piece. “They pay a guaranteed return below market interest rates, but also provide a lottery ticket whose value makes up the difference.”
Two weeks ago a story picked up internationally focused on the Northwest Credit Union Association’s Washington state effort to pass legislation encouraging non-savers to sock away a short term nest egg through PLS.
Headlined Prizes for thriftiness? WA eyes savings lotteries and written by AP Olympia reporter Curt Woodward, the piece outlines the simplicity of this innovative idea that gives consumers chances to win monthly prizes in the lead up to a chance to win a very large grand prize at the end of the savings term.
While in his piece Orszag generalizes on individual states’ PLS programs—apparently not realizing that in Michigan participating financial institutions offer their over-the-counter savings rates—his point is loud and clear: Savings rates will only rise if financial institutions innovate on a grand scale.
Prize linked savings programs hold tremendous promise, but Orszag has a problem with the current structure of PLS programs in the United States—they tend to be small and limited.
“In the US, modest pilots have been tried, for instance in Indiana, by the Doorways to Dreams non-profit,” he writes. “Yet the basic concept is tested, and it seems time to try it more aggressively to see if it can grow and also if this form of saving merely displaces other forms, rather than actually raising the total too. In short, in the coming decade we need a comprehensive effort to raise household savings. As part of that push, let’s give savings accounts linked to lotteries a chance.”
Essentially, Orszag argues for a national prize linked savings program. And who better to create a national program than credit unions?
There are four states that currently offer a PLS provision in the law, four states that may already allow credit unions to offer a PLS program in their current laws, and seven states, including Washington, that have PLS provisions pending in their state legislatures. No two programs are the same and none of the pending legislation addresses specifics of the administration of a PLS program.
Because credit unions are currently the only US financial institutions participating in PLS programs, there may be an opportunity this year for credit unions chartered in different states to team up and work cooperatively to create a national prize linked savings program.