Get Lucky or Get Rich Trying

by on May 15, 2006 at 7:17 am in Economics | Permalink

The Why Not? guys, Ian Ayres and Barry Nalebuff, have another great idea (Forbes, reg. req.).  Instead of earmarking lottery revenues to education (which is mostly a charade since money is fungible), why not earmark the revenues to private retirement accounts?

A lottery savings ticket would look just like
a lotto ticket, scratch like a lotto ticket, cost a buck and pay out
the same prizes. The only difference would be that half the revenue
would be earmarked for a personal retirement savings account rather
than for education. There would still be about a third for prizes and
the remainder for administering the game.

Setting up a personal retirement account would
be no more difficult than setting up a mutual fund. Players would
receive a swipeable card that would automatically credit a portion of
each losing ticket to the player’s retirement account…

Some 20 million Americans spend at least
$1,000 a year on lottery tickets. For these heavy purchasers the new
tickets would increase their personal savings by $500 a year. Invested
over 40 years, these savings tickets would generate an expected
retirement nest egg of $200,000. This is a lot of money for the mostly
not very prosperous crowd who buy lottery tickets every week.

The biggest defect of the idea is that by lowering the price of lottery tickets it will increase the quantity demanded.  Nevertheless, I don’t think the elasticity is that high and I am confident that savings would go up.

It is incredible that many poor people spend more on lottery tickets than on retirement.  My non-bleeding heart libertarian friend would point out that this shows how much poverty is due to irresponsibility and he would probably be right.

Nevertheless, Adam Smith said the goal of social policy is to create institutions like the market that channel self-interest in ways that redound to the social interest.  Call me a libertarian paternalist, if you must, but I like how lottery savings tickets channel failures of reason and prudence in ways that redound to the individual’s self-interest.

Thanks to Carl Close for the pointer.

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