You have an interesting topic on tap for us this morning: lotteries.
Mellody: We are indeed talking about lotteries this morning, but not in a good way. You may have noticed that lately it seems like the major multi-state lottery jackpots have been getting larger and larger, with more frequency. And you would be right! Four of the 10 biggest jackpots in United States history have occurred so far in 2016 alone. That is intentional. But while it may seem exciting, these changes have caused much more interest in tickets, and it could be exacerbating the terrible negative consequences lotteries already have on millions of Americans. This morning, I want to highlight the bad financial effects of lotteries, and offer an alternative that will reap listeners big benefits in the long-term.
You say the large jackpots are no accident. Why is that?
They are definitely not an accident. In the wake of the financial crisis, the states were looking for ways to confront their financial shortfalls. Forty three of our states have lotteries and receive significant revenues from ticket sales. In fact, 11 states collect more revenue from lotteries than they do from corporate taxes! So, the nation’s two big multi-state government sponsored lotteries, Mega Millions and Powerball, were redesigned in 2013 and 2015, respectively, to generate larger jackpots by making your already minuscule odds of winning even smaller. The theory was that more frequent huge jackpots would generate more sales. And wow, did it work! Overall sales of state-run lottery games in the United States rose from $70.1 billion in 2014 to $73.9 billion last year, according to the North American Association of State and Provincial lotteries, and 2016 sales are expected to continue this upward trend
Help us understand the negative effect lotteries create.
To put it bluntly, these changes have made an already bad situation worse. Before the changes were made, in 2012, the average spending on lottery tickets for each adult living in one of the 43 states totaled $250. Since the changes were made, that amount has risen, clocking in at over $310 for every adult in living in participating states in 2015. And we arrive at these numbers by simply just dividing the total spending on lottery tickets by the total number of adults in those states. In reality, it is much worse.
In the recent New York Times article outlining this issue in detail, the author uses publicly available lottery and census data to estimate that “millions of adults, perhaps as many as 50 million, are swallowing net losses that average $1,000 a year.” That is because roughly 20% of lottery players account for two-thirds of sales. And its import to remember that lotteries amount to heavily regressive taxes. A study from University of Buffalo notes that those in the lowest fifth in terms of socioeconomic status had the “highest rate of lottery gambling (61%) and the highest mean level of days gambled in the past year (26.1 days).” Essentially, lotteries are a tax on lower-income people, exploiting their desire to escape their circumstances.
One thousand dollars a year for many people is a lot of money! What leads us to make these decisions?
It boils down to financial literacy and behavioral economics. Because the odds of winning are so small, it is difficult for people to put them into perspective. The average person has a very hard time wrapping their head around the actual likelihood that they face. And because of this, we are unable to accurately weigh the risk versus reward. Studies around financial literacy and behavioral economics tell us that we weigh the present much more heavily, and we don’t appreciate longer-term risk. So, spending money now for the minuscule chance of winning seems reasonable, because we don’t think about the costs of this choice over the long-term.
Give us a better option.
Think about these numbers again. $40,000 between 22 and 62! Consider what that could mean in retirement for a median income family, let alone for families on the lower rungs of the income ladder. If regular lottery players invested the $83 per week into a retirement account over 40 years, with a 5% annual return – much lower than the historical return over 40 years for 401(k) accounts – they would come out at the end of those 40 years with over $120,000! That is a big difference from losing $40,000 a year trying for a 1 in 292,000,000 chance of hitting it big.
I want to reframe this for everyone. You can play the lottery and lose (statistically) every time, or you can invest that in your retirement and essentially be guaranteed to win in the long-term. So your best bet is skipping the lottery and assuring yourself financial gains in the future.