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A surprising number of low-income Americans — 38 percent — see the lottery as their best shot at achieving significant wealth, according to a 2006 survey by the Consumer Federation of America. It's easy to respond with derision to such attitudes. But when people think the lottery is their only way out of poverty, it says more about the desperate lack of financial security-building options in the United States than it does about the players' lack of judgment.
Arkansas's newest poverty-fighting tool, which looks like a combination between a Powerball ticket and a savings account, could change that. This new "prize-linked savings" option is open to anyone. If you save a little cash (and don't withdraw it), you are entered to win a prize. If you don't win, you still get to keep all of your money. Some call it a "no-lose lottery," and it has been a game changer for low-income families in states like Michigan and Nebraska. In both places, the vast majority of participants had never saved before, lived on modest incomes, or were asset poor. Nonetheless, participants' average year-end savings balance was over $2,000 and more than 90 percent continued their savings habits into the next year.
One successful, multistate prize-linked savings product called "Save to Win" allows credit union members to open yearlong share certificates for just $25. During that year, participants can't make withdrawals, but they can make as many deposits as they like. Every $25 deposit (with a limit of 10 per month) earns another entry into the raffle for prizes, which are awarded randomly every month and every quarter and which range from $25 to $5,000. Save to Win happens to use credit unions, but Arkansas banks can hold similar raffles. Banks and credit unions benefit by attracting new customers and can offset the cost of prizes by offering lower interest rates than normal savings accounts or acquiring grants.
As of 2014, over $115 million has been saved nationally in prize-linked accounts, with most of the participants being financially vulnerable families. In a 2015 study by the nonprofit Doorways to Dreams Fund, a 35-year-old police officer with a prize-linked savings account said, "I'm doing so much better. I have an emergency fund, I'm paying down my debt. ... It's changed how I feel about my future." These accounts are life changing: Because they are fun, they get people excited about building healthy savings habits. For a family living on a razor-thin budget, that financial cushion could mean being able to afford a major car repair, getting through a week without a paycheck, or finally catching up on household debts.
Without any guidance, building up cash for a rainy day is especially hard for many Arkansans, who are less likely to have a savings account than are residents of any other state, according to the Corporation for Enterprise Development. Despite a historic drop in unemployment, our jobs still pay too little: The Arkansas median hourly wage was about $1 behind Louisiana, Oklahoma and Texas in 2014. Job outlooks are even worse for minorities. If you are an African-American resident of Arkansas, you can expect to make about $4 an hour less than your white neighbors.
We make these problems worse by cutting taxes for everyone except the least well-off. A $100 million tax cut package in 2015 completely left out the bottom 20 percent of workers. Legislators also have repeatedly shot down an asset-building tool called the Earned Income Tax Credit that would help working families; Arkansas is still among the few states that don't have such a tax credit at the state level. Even gains from the economic recovery have gone almost exclusively to the wealthy — the bottom fifth of Arkansas workers are stuck with the same wages they had in 2009, while the top fifth have enjoyed a 2.4 percent bump in income. All of these factors combine to make prize-linked savings a unique opportunity to change the asset poverty landscape in Arkansas.
Unlike traditional lottery programs, prize-linked savings accounts entail no direct state involvement, but legislation is required to get around legal restrictions on gambling. In 2014, the American Savings Promotion Act cleared federal barriers to prize-linked savings programs, and in 2015 Arkansas passed a bill allowing our banking institutions to participate. However, it is up to banks and credit unions to get the ball rolling, and only a handful in Arkansas have so far taken the initiative on prize-linked savings programs. This innovative tool can't work unless we get the conversation started.
Eleanor Wheeler is a senior policy analyst for Arkansas Advocates for Children and Families.