As I was going through my daily list of websites I check in the morning, I came across this article on CNN about people who play the lottery (“Seduced Into Spending Thousands on Lottery Tickets“).
While the lottery is itself an interesting personal finance topic, what really caught my interest was a blurb at the end of the article about incentivized savings programs. A program developed by Peter Tufano from Harvard Business School plays on the “game” appeal of a lottery to encourage people to save money. This program has caught on in Detroit, MI, where a number of credit unions have joined the “Save To Win” program. Essentially how the program works is for every $25 you contribute to a 1-year CD you receive a lotto ticket. The winner of the lottery wins $100,000.
Using incentives to encourage “proper” behavior is nothing new within economics. So-called “Sin Taxes” work in the opposite direction: the idea that heavily taxing such vices as smoking and alcohol raises tax revenue as well as discourages those negative behaviors. This is also why we have first-time home owners tax credits, tax deductions for charitable donations and the like. The popular book “Nudge” by Richard Thaler outlines a system of nudges and incentives that can be used by a government to encourage positive behaviors from its citizens.
Peter Tufano and Daniel Schneider wrote an interesting paper outlining their ideas regarding incentivizing savers and the theory behind such financial innovations in their paper entitled “Using Financial Innovation to Support Savers: From Coercion to Excitement“, published as Harvard Business School Financial Working Paper No. 08-075 (the full paper can be downloaded from the link above). That paper basically surveys a whole series of financial programs designed to encourage low and middle-income families to save. The article does not derive any conclusions about which programs are the “best”, but rather lays out a number of programs in a number of different categories, such as “Making it Easy for People to Save” to “Making Savings Exciting or Fun”.
What I concluded from the article after reading it was that the most effective or popular programs weren’t necessarily the ones that required a lot of government action, and some did not involve government agencies at all, instead relying on charitable organization or other non-government entities. For example, the lotto program mentioned above is very easy to implement – assuming that each specific program meets certain legal provisions, which admittedly can be tricky – and is very effective at attracting new savers.
Also, Tufano and Schneider make a point of noting that no broad solution exists for the problem of getting low and middle-income individuals to save, the effectiveness of a program is dependent on the personality of the participants as much as any other factor. All too often it seems like the government attempts to create a one-size-fits-all solution to a problem. Alternatively, if government agencies can instead support a broad range of programs, the cumulative effectiveness of all the programs could possibly be more effective than a massive program designed to be the all-encompassing solution.
Readers: what do you think of the paper (if you read it) and these types of programs? Do you think they’re effective in the long-term? Is there a better way to approach the problem of getting people to save who otherwise wouldn’t?
Michael
Twitter: @michael_dink
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