Lottery Bonds

In an article, Investing in the Poor, Prof Robert Shiller talks about the work done by Peter Tufano, a finance professor at Harvard Business School, who has been doing nonprofit work with the foundation he created, Doorways to Dreams, to help low-income people improve their financial prospects. He writes,

"According to Tufano, the fundamental problem in encouraging low-income people to save is that they need the money not just to manage their lives years in the future, when they retire, but also to deal with short-term crises. But if government programs designed to promote saving by low-income people don’t tie up their money for many years until retirement, they will often succumb to temptation and spend the money frivolously.

Tufano approaches the problem with real sympathy for these people, and a realistic idea about how to help them: premium savings bonds. In addition to normal interest payments, these bonds have an attached lottery – an enticement to keep the money in savings. Low-income people manifestly enjoy lotteries, and they will acquire the habit of looking forward to the lottery dates, which will deter them from cashing in their bonds. But if a real emergency arises, they can get their money.

In fact, lottery bonds have a long history. In 1694, the English government issued a 10% 16-year bond called “the Million Adventure,” which awarded prizes randomly each year to its holders. Likewise, Harold MacMillan’s government created a lottery bonds program – called premium bonds, or “saving with a thrill” – in the United Kingdom in 1956. The program was controversial at first: many viewed it as immoral, because of its connection with gambling. But the program has grown, and today premium bonds have a place in the saving portfolio of 23 million people, almost 40% of the UK population. Sweden, too, has such bonds, as do other countries."

Such "price linked accounts" may have an important role to play in promoting long-term savings among the poor people. Instead of providing unsustainable direct assistance through revolving funds, interest subsidies and the like, the Government can attach lottery bonds to Self Help Group (SHG) accounts. This will encourage SHGs to save for the long-term, and not utilize all their savings for consumption and other short-term needs.