In a rare display of bipartisanship last week, the U.S. Senate unanimously passed the American Savings Promotion Act (HR 3374), following passage in the House in September. The legislation removes legal impediments that currently prevent federally chartered banks and thrift institutions from offering “prize-linked savings” accounts (PLS). The legislation now goes to the President, who is expected to sign the measure.
PLS accounts differ from traditional savings accounts in that they do not pay interest (not that traditional accounts may much interest these days). Instead, the interest earned on PLS accounts is pooled and then distributed periodically as “prizes,” ranging from a few dollars to several thousand. A similar PLS system in the United Kingdom has payout prizes of up to one million pounds (about $1.50 million). The more you save in an account, the more chances you have to win. When the UK system, known as premiums bonds, was launched in 1957 it was dubbed “savings with a thrill.” While Americans have typically not been known to be “savers,” with a national savings rate of around 5 percent (or about half that of Germany, France and Belgium), PLS accounts could help change that, especially among current non-savers and modest-income households.
The PLS approach incorporates the strategies of behavioral economics. The appeal of PLS accounts is similar to that of lotteries – a chance to “win big.” The approach to savings recognizes that the emotional impulse of a large but uncertain prize can be stronger for many people than the incentive of a steady return on an investment. But unlike those who play and lose on the lottery, a “loser” with a PLS account ends up with a bundle of savings, so in fact, there are no losers at all.
The PLS savings tool has been widely analyzed, including by Melissa Kearney of The Brookings Institution. In addition, such organizations as The D2D Fund and the New America Foundation’s Asset Building Program have been promoting the idea.
In the United States, 10 states have enacted legislation to permit state-chartered financial institution to offer PLS accounts, including Michigan, Nebraska, and New York, and others are have bills pending in their legislatures. Michigan is one of the states with credit unions offering “Save to Win” accounts, and the evidence indicates the accounts are especially appealing to households who previously were non-savers.
Until now, federally chartered financial institutions have been prevented from offering PLS accounts by sweeping federal statutes and rules aimed primarily at organized crime. With President Obama’s signature on this legislation, these federal banks and thrifts will be able to join the growing number of state institutions offering this novel way of increasing savings.