Studies show that nearly one third of Americans do not have a savings account and half of them cannot come up with $2,000 within 30 days to cover an unexpected expense. That means that many people are a job loss, car repair or medical bill away from a financial crisis. Families can better weather unanticipated costs like these and more confidently invest in the future when they have savings.
Hard economic times have sent savings rates to near record lows and recovery is projected to be slow. With interest rates hovering at less than 1 percent, saving isn’t as attractive as it used to be, especially to those families who are trying to make ends meet as it is. With the intention of bolstering financial stability for families, some policymakers are asking, “How do we persuade people to save?”
Nebraska legislators attended the NCSL Opportunities for Working Families meeting and learned about several strategies to encourage families to save. One approach, called “prize-linked savings,” rewards people who make regular deposits in their savings accounts. After hearing about the success of this strategy in Michigan, legislators developed a plan to replicate the model in Nebraska in 2010.
The team talked with key stakeholders and educated their peers on this strategy to encourage savings. In 2011, Nebraska legislated and launched a statewide prize-linked savings account program.
Savings for a Chance to Win
A study showed that more than a third of people with incomes below $25,000 think that winning the lottery represents the most practical way for them to accumulate several hundred thousand dollars. In 2009, the Doorways to Dreams Fund (D2D), an organization that develops financial products for low-to-middle income populations, adapted an international model of prize-linked savings (PLS) to test whether or not the thrill of the lottery could entice Americans to save, using Michigan as their pilot site.
The Michigan Save to Win initiative allowed participants to earn a raffle entry for every $25 deposited into their PLS account. The initiative raffled off monthly prizes amounting to $415 and one annual prize of $100,000. People immediately took up the opportunity and as of 2012, 58 credit unions have served more than 40,000 people who cumulatively saved over $72 million. The average account balance was $2,873.65. Many accountholders had never saved before, made less than $40,000 or had less than $5,000 in financial assets.
Federal regulations explicitly prohibit banks and depository institutions from operating lotteries, a restriction that does not apply to credit unions. For some states, this regulation was an obstacle in legislating PLS as it sparked opposition from banking associations. With this in mind, Senator Amanda McGill reached out to state credit union and banking associations and invited their input on starting a Save to Win program in Nebraska. While banks in Nebraska would not be able to offer the product, Senator McGill wanted to ensure that they were part of the process and understood her goals in introducing the legislation.
In 2011, Senator McGill introduced legislation that would permit credit unions to offer PLS accounts. At the beginning of session, she organized an informational breakfast to explain the policy and its implications to legislators and other stakeholders. The bill advanced quickly out of committee, but she held the bill back from final debate to give the Nebraska Banking Association time to find a way around the federal restriction. After surveying states that considered this policy, the Association found that there wasn’t yet a way to include banks and decided to be neutral on the legislation. The bill received broad bi-partisan support and was signed by the governor in April 2011.
As of October 2013, Nebraska’s Save To Win program operated in 11 credit unions and served almost 1,500 people that collectively saved more than $2 million. Participants need $25 to open this prize-linked savings account and earn one entry into the raffle for every $25 they deposit. All deposits are guaranteed and earn interest. The program, including monthly and yearly prizes, is paid for entirely by the credit unions. As in Michigan, the Nebraska Save to Win program is proving to attract customers who might have a harder time saving. A 2012 survey of members showed that:
- 51 percent had little to no rainy day fund
- 43 percent never saved before
- 31 percent made less than $40,000
- 32 percent had less than $5,000 in financial assets
- 55 percent had above $10,000 in debt.
Early data shows that the program is retaining current accountholders while attracting new customers with a chance to win and save.
In 2013, Congressmen Derek Kilmer, former Washington state senator who sponsored PLS legislation, introduced the American Savings Promotions Act to remove the federal restriction that keeps banks from participating in PLS programs.
Of the eight states that have PLS laws, three of them (Nebraska, North Carolina and Washington) have launched programs solely in credit unions due to the federal regulation. In an effort to broaden the reach of the program despite the regulation, Maryland amended the law to offer PLS as a no-purchase necessary sweepstakes, encouraging banks to offer the product in 2012. Connecticut and Washington include community banks and banks, respectively, in their PLS laws in anticipation that the federal regulation would be lifted in the future and allow these financial institutions to participate.
Hear more about the American Savings Promotions Act in a PBS news special on prize linked savings, featuring Congressmen Kilmer.
Hear It From Them
Q and A: Nebraska Senator Amanda McGill
Hear from lawmakers and others who have been intimately involved with their state’s efforts to create opportunities for low-income working families. Legislators explain why they feel these issues are important. They also discuss the factors that helped them be successful – both in the statehouse and at home in their district.
NCSL: As a state legislator, there are so many issues out there that you could focus on. Why is it important to you to encourage people to save?
McGill: It’s a huge mistake that people are getting into as much debt as they are today. It makes them more dependent upon fishy loans. I tried for several sessions to put better regulations into payday lending so that people wouldn’t be as susceptible to getting caught in the cycle of owing lenders. But I wasn't finding any luck in Nebraska making those changes.
So, I asked, what do people need to do to avoid dependence on payday lenders? They need to have savings, in case they do fall into a need. I've seen the value in my own life of having that financial cushion. It allows me to have better options. I want everybody to have that cushion.
When you see how much people are spending on lottery tickets in comparison to their necessities, you know this [prize-linked savings strategy] is a good opportunity. At least out here in Nebraska, we value personal responsibility and this allows people to take responsibility while still having some of that fun they have by participating in a lottery.
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About the Opportunities for Working Families Meeting
Since 2003, the NCSL/AECF Partnership on Family Economic Success has held a yearly meeting to give lawmakers a chance to convene with their colleagues and discuss solutions to the challenges faced by low-income working families. Legislative leadership from 10 states send small teams of legislators to the forum. Participants hear from leading experts and practitioners and develop an action plan that is relevant to their state.