Is America Ready for a “No Lose Lottery?”: A lottery-linked savings account might do wonders for our sad savings rate.

The Gates Foundation has just pledged $500 million to a cause that seems quite different from typical problems like disease, famine or illiteracy. That $500 million is going to help poor people learn to save money.

“We think really that poverty stops where savings starts,” Chris De Noose of the World Savings Bank Institute told the L.A. Times.

The new Freakonomics Radio podcast (download/subscribe at iTunes, get the RSS feed, read the transcript, or listen live via the link in box at right) explores an idea that the Gates Foundation may want to look into: Prize-Linked Savings (PLS). In a nutshell, PLS is a kind of savings account that pools some of the interest from all depositors and pays out a big lottery prize every month or so. It combines the thrill of the lottery with the safety of a savings account. It’s sometimes called a “no-lose lottery,” since a depositor is automatically entered into the lottery but can’t lose the original money she deposits.

And while PLS might play well in the poorest parts of Africa and Asia, there’s a group of researchers who feel that PLS is very badly needed right here in the U.S.

Peter Tufano is a Harvard Business School professor who specializes in consumer finance. He recently helped conduct a survey in several countries, including the U.S., which asked people if they could come up with $2,000 in 30 days if they had to. It turns out that nearly half of Americans couldn’t — “which means,” Tufano says in the podcast, “that they stand only one emergency or crisis away from really quite dire circumstances. This isn’t picked up in the national economic statistics.”

The facts are simple. Americans have a low savings rate; and Americans love to play the lottery. Last year, we spent more than $58 billion on lottery tickets, or roughly $200 per person. As entertainment goes, the lottery is pretty cheap – a dollar and a dream and all that. But as an investment, it offers a dreadful return. States typically withhold about 40 percent of the ticket money from the prize pool for overhead costs and, often, education funds. That’s a far worse return than casino gambling or horse race betting. Which is why the lottery is sometimes called “a tax on stupid people.”

That’s why people like Tufano and University of Maryland economist Melissa Kearney are interested in bringing PLS plans to the U.S. (Here’s their paper on the topic, well worth a read.) PLS accounts have been successful in other parts of the world for years. In the podcast, you’ll hear from Tufano and Kearney, as well as from the folks who started a successful PLS program in South Africa – and the folks who got that program shut down.

Why? Because the National Lotteries Board of South Africa sued the bank that offered the PLS. It turns out that the biggest obstacle to offering a lottery payout with a savings account is … the state-run lottery.

And that may be the biggest barrier to making PLS happen in the U.S.: it is, for the most part and in most states, illegal.

Dave Trumpie of Trumpie Photography

There is, however, one exception already – in Michigan, where the “Save to Win” program has been offered among several credit unions, and recently paid out its first $100,000 prize (to an 87-year-old woman who had deposited $75). You’ll hear about the Michigan program in the podcast as well.

Melissa Kearney sums up the argument best:

“So we know Americans like gambling. They always have, the majority of them do it, and they’re going to keep doing it. And so what we do is take seriously the idea that people want some small chance of winning a large sum of money. That market, that asset is missing from the American landscape. Low-wealth individuals, the only asset available to them that gives them some chance of accumulating a large amount of money is the state lottery. In fact, a recent national survey of a thousand adults, one in five American adults said their greatest chance of accumulating hundreds of thousands of dollars is through the lottery. That number jumps to forty percent for folks making less than twenty-five thousand dollars a year. So a lot of Americans think the lottery is their only chance at winning big sums of money, why don’t we take that appetite for gambling, for a product like this and attach it to a savings vehicle that offers some positive return? It’s a win-win situation.”

Except, of course, for state lotteries.