Note to FDIC: Lottery Tickets Can Spur Retirement Savings

Posted by: Mara Der Hovanesian on July 07

They say that buying a lottery ticket is like buying a dream for 24 hours: The chances for winning the jackpot are minuscule, but it’s not a bad short-term fantasy for the price of a buck. The problem is too many Americans spend far more than $1 for that fleeting moment. One report showed households with incomes under $12,400 spent an average of $645 on lotteries, or about 5% of their gross income every year.

So FDIC Chairwoman Sheila Bair has an idea. She’s directed her staff to draft a pilot program for a lottery-linked savings plan. How would it work? People would buy into savings bonds that have a lottery component to them. In other words, you make an investment in savings and simultaneously put a chip on the table for possibly winning a big pot in a drawing of sorts. The details are still to be ironed out.

But Marc Groz, a former risk officer at two multi-billion hedge funds and the author of Forbes Guide to the Markets, says he has a better idea.

Groz suggests that lottery-ticket buyers keep buying their tickets at their usual vendors. Then, he says, the states who are running the lotteries should earmark some of that money spent for tickets and put it in an account designated for the individual ticket-buyers' retirement years. (Presumably one would have to ante up a social security number.) Groz was granted a U.S. patent on this system, called Nu Lots, last August and says it’s a much better system than Bair is now proposing.

“I’m not forcing players to change their behavior,” explains Groz. “I think it's great that Sheila Bair sees the potential of lotteries as savings vehicles. But there's no need to get players to the bank. It's better to build savings and investing right into the game. I'm saying, let them do what their doing, which is buying a lottery ticket, and everything else is done behind the scenes. They become automatic savers."

Each state would manage the money, which Groz says could go into a brokerage or IRA that buys an index fund, for example. As the inventor, Groz says he’s agnostic about the implementation details. "The idea is that it’s a long-term investment and though you may have squandered $10,000 on lottery tickets, 45 years from now you might have $50,000 in your retirement account," says Groz.

Here’s a video of Groz explaining his invention.

Groz’s invention leaves room for some interesting possibilities. Many states, like Connecticut, have small lotteries that don’t get a lot of traction because the pool for winnings is small. So Groz suggests that hedge funds or other institutional investors might agree to help fund a bigger prize--for a price. States would pay, say, $.04 per dollar for assurance that hedge funds and other investors that are backing the prize would pay up when someone wins big. Groz argues the fee would earn hedge funds more than a fair return for taking the risk.

One reason such big investors may be enticed to seed lottery pools in the future, he says, is because the income streams they would get from the states as well as the big payouts that come along from time to time would be uncorrelated or unrelated to any other market risk. A true hedge, in other words, for hedge funds.

“It’s the nice, good kind of randomness that everyone learned about in high school,” says Groz. "If there's anything that people have learned in the last couple of years, it's the importance of avoiding investments that become highly correlated.”

Reader Comments

LaLa

July 7, 2009 10:53 PM

This has to be one of the dumbest ideas I have read in some time. Trust the states to manage your retirement savings? You're kidding, right?

Strategery

July 7, 2009 11:26 PM

This is a great idea! All income groups would have access to gambling/saving--not just investors!

(In case you fail to see the point I'm trying to make, just know that I consider Wall Street 'investments' nothing more than a glorified casino.)

Mara Der Hovanesian

July 8, 2009 08:33 AM

Marc Groz responds to comments:

"What a great idea: It transforms a game in which 99.9% of the players lose almost all of the money they wager during their lives into a new kind of game in which even the losers win... It may even improve average returns on money that gets invested, because it removes a large part of the timing element from the investment equation. (Left to their own devices, investors tend to chase returns, buying high and selling low. By putting the investment aspect into the background, this invention may alter this unfortunate dynamic.) Amazing!"

Squeezebox

July 8, 2009 09:49 AM

Why not just dump the savings portion of the lottery into the state employees' pension funds? Lottery players would have the advantage of having a professionally run savings program, the fund would have a larger captial base to invest, and players would get payments based upon what they paid into the system over the years. You wouldn't be stuck with index fund returns because professional money managers could potentially beat the index after taking transaction costs into account.

DanTe

July 8, 2009 02:41 PM

You want to force these people to save? Take away all their welfare freebies. All of the sudden, they would wake up.

Metrotomay3

July 8, 2009 06:08 PM

In the 1980's, I was in a lottery that had 10 - $1,000,000 Drawings a month with
all the secondary payouts, it became about 1-in-5 odds. I felt like I was a part of something and good odds.
The powerball could do this with several $5,000,000 Drawings
a Month with the same secondary winnings for each $5,000,000 Drawing.
Most of us would be happy with a lot less then 100 or 200 Million dollars. Think of all the additional Millionaires each year.and happy winners
Thank you Tom.

LuckyLou

July 14, 2009 03:08 PM

Sheila Bair, _please_ just do your job; protecting depositors. The lottery idea is probably technically unworkable, and may have unintended consequences.

For instance, a normal lottery can pay out big prizes because the game manager sets the payout at a fraction of the forecasted buy-in. When the prize is awarded, a proportion of the buy-in is paid out, with the remainder going toward a safety buffer to protect against future fluctuations in buy-in (which could cause more pay-out than buy-in). Any money left over is profit.

Now consider the differences between buying a lottery ticket and depositing in a bank. When a person buys a lottery ticket, they concede any rights to the money they spent on it. They are effectively buying 'a chance'. In contrast, a person depositing in a bank expects EVERY CENT remains theirs, and to be available at their whim. So where are you going to get the money for the pay-out? You're going to have to take it from someone if you are going to keep an honest monetary system.

The logical place to get the pay-out is from a percentage of the participating deposi-gambler's deposi-wager. If you take money from depositors across the board, the people who do not need the incentive will stop depositing because you are effectively taxing them without benefit.

Assuming that you do build the pay-out from a percentage of the deposi-wagers, it is clear that you will not be able to pay out a sum that is competitive with a lottery. The reason is that in the deposi-wager system, only a small percentage (say 10%, because we are running a bank account first and foremost, to help the poor, aren't we?) is available for payout. In the lottery system, a large percentage is available for payout (near %100) because the wagerer waives all right to their buy-in.

So, considering that the Bair's lottery will payout say $1,000,000 a month, with 1:250,000,000 odds, and Powerball will pay out $250,000,000, with 1:200,000,000 odds, which would you play?

(Oh, and Groz, feel free to stop patenting useless and obvious ideas. Maybe you could buy some CDOs for your hedge fund; I hear there are some great deals to be had these days.)

Thank you for your interest. This blog is no longer active.

 

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BusinessWeek's Adrienne Carter, Jessica Silver-Greenberg, and David Henry deconstruct the mysteries of high finance, Wall Street, and hedge funds for pros and ordinary investors. E-mail them directly if you've got tips about big deals, a hedge fund, or even securities industry gossip.

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