During the week before the National Summit on Retirement Income Savings in Washington, people in many locations waited in enormous lines to buy tickets for the Powerball super lottery. Except for the eventual winner -- a group of 13 players who will share a $161.5 million lump sum -- this was not a productive way to plan for retirement for all the other participants.
More than a third of all Americans in states with lotteries play them at least once a month. About half of those who play do so weekly. In 1995, 27 million people spent over $500 million weekly on lottery tickets, an average of $18.50 per person per week.
Many ticket buyers have modest incomes and can ill afford this expense. A study in Maryland, for example, found that 47% of residents with annual incomes under $20,000 play the lottery there.
Lotteries are clearly popular with both the public and politicians, although they are a form of regressive taxation. They seem to be here to stay, so our task is find a way to benefit the millions of people who play but do not win.
I propose that half the price of a lottery ticket continue to go into the lottery as before. The other half would go to an account like an IRA, or individual retirement account, which would be invested for each lottery participant. Because it would not be available without substantial penalty until the owner reaches age 59 1/2, it would establish an individual retirement savings account for every lottery player.
This would be a benefit for all lottery players; it would be especially meaningful for those with little or no savings. If half of the $18.50 per week that the average person spends on lottery tickets is invested and earns 8% interest over a 30-year period, that individual would have a pension of more than $5,000 a year upon retirement at age 65.
This use of lottery proceeds for individual savings would be good for low-income people not blessed with traditional defined benefit pensions or 401(k) plans. It would also help Generation Xers, many of whom have not yet begun to save for retirement.
The process should be simple. When buying a lottery ticket, the purchaser would write his or her Social Security number on it, or another number if confidentiality were to pose a problem. Lottery players would receive a statement every six months, showing the value of their accounts.
People not used to saving would soon see the magic of compound interest and might realize that it is more powerful than Powerball. It would create some base savings for those who gamble on the lottery and would boost America's low savings rate.
If people maintained their current level of lottery play, the states would have to find other sources of revenue to replace the half that would go to individual savings. But, a different scenario is more likely.
This new use of lotteries could increase play, and the states would be able to maintain their present revenues for education and other purposes. In any case, national savings would rise, and people now without private retirement funds would have a nest egg for the future.