Money Matters: Saving the savings of the asset poor

By Tucker Slosburg
The Daily Record Newswire

People from all levels of the socio-economic strata participate in lotteries. We also know that low-income families are least likely to enroll in traditional savings institutions or credit unions. Further, low-income families rarely use savings vehicles such as IRAs, 401(k)s, or even 529 plans. In short, low-income families have few savings mechanisms.

Implications for lack of savings affect health, nutrition, and education amongst other things. Consider that most children begin to aspire toward college around seventh-grade. A large part of that comes from parental expectations and even the hint of paying for college. No sign of savings often translates toward fewer incentives for a child to aspire to toward higher education.

Doorways to Dreams, the Filene Research Institute, worked with eight Michigan credit unions to implement the first fully functioning prized linked savings account in the United States (a pilot program was conducted in Indiana). PLS accounts have existed or currently exist in many countries around the world including South Africa, the United Kingdom, Sweden, and even some Middle Eastern countries as well.

For every certificate of deposit valued at $25, participants get a chance to win prize-money. Credit unions offer smaller interest rates than traditional CDs, pooling the forgone interest into prize-money. The monthly prizes range from $15 to $400, as well as a year-end grand-prize of $100,000.

Dr. Peter Tufano in a preliminary study noted that “alternative products with no principal loss and good liquidity are typically low-yielding demand deposit accounts. The power of compound interest provides little incentives to savers with short and uncertain savings horizons and small principal balances that generate meager amounts of interest. Instead of receiving a certain but small payout, the PLS saver gets a small chance at a large payoff.”

In other words, the savings rate is smaller, but at least people are now saving their money. And oh yeah, they might get a big payoff.

So what’s stopping something like this in other states? Laws about lotteries. Most states hold a monopoly on lotteries. In Michigan, however, under the Michigan Credit Union Act, credit unions may hold a lottery as long as it meets the qualifications of a savings promotion raffle.

Sure, this is a boon for the credit unions. But more importantly it’s a mechanism for non-governmental agencies to address serious problems facing our communities, namely asset building among low income families. In Michigan between January and August 2009, the credit unions increased account holders from roughly 2,000 to 10,000, with deposits totaling $4.67 million, up from half a million.

To give you an idea of how this might help, consider that in Michigan, 55 percent of the PLS depositors had never saved money in an institution before, 64 percent never had a certificate of deposit, 39 percent reported financial assets of $5,000 or less, and 44 percent report household incomes under $40,000.

Things we don’t know: will opening a PLS account reduce other forms of lottery purchases? Will families continue to save over time? Will parental savings influence student achievement on the long-term? Some of those broad based questions require intense data collection not available at the moment. Certainly, though, PLS accounts address low-income asset building in an innovative manner, and is something other states should consider this year.