Change law to incentivize savers
By Joe Hearn
Dupaco President/CEO
Editorial published by the Telegraph Herald on March 28, 2019
A recent study of 381 metropolitan areas across the United States determined that Dubuque County residents have the best saving habits in the country.
As reported in the Feb. 26 Telegraph Herald, the Dubuque metropolitan area earned the top “savings score” in the study, which was conducted by financial education firm MagnifyMoney.
Despite this positive news, there is a stark reality that many residents are living paycheck to paycheck and struggling to save.
According to the Federal Reserve, 44 percent of Americans cannot cover a $400 emergency expense.
One of the most important things individuals can do to ensure financial wellness is establishing and utilizing savings accounts. What the Federal Reserve study reveals, however, is that while savings accounts are being set up, they aren’t being used effectively if at all.
One possible reason is the lack of immediate benefit from putting money into savings. Interest accumulation takes time and lacks the instant gratification that comes with spending money. It also is not extraordinarily enjoyable.
Credit unions like Dupaco always are searching for new ways to encourage savings. In that spirit, there is a program that could result in people saving more and building wealth through instant results and added excitement: Prize-linked savings.
More: How are credit unions different?
Started by Michigan credit unions in 2010, prized-linked savings programs were created to encourage better saving habits. The program offers individuals a chance to enter drawings for cash prizes each time they deposit money into their savings accounts.
This is how it works: An individual opens an account and makes deposits at any time. The credit union or bank combines the interest payments it would have paid on the accounts and offers larger payouts to a few winners of random drawings. The final prize is not a grand prize, but rather drawings every month and quarter. Prizes range from $25 to $5,000.
So far, 29 states have allowed these prize-incentivized programs. Over the last 10 years, these programs have helped more than 80,000 people save $190 million. The average participant has saved $2,400. Such an emergency fund would be vital in helping families prepare for unexpected expenses, such as a health scare, home repair or that new set of tires.
One of the key elements that makes this program so appealing is that the money saved is never at risk. If someone doesn’t win the cash prize, they still keep all of the money they’ve saved, along with any interest earned.
In order for our community to benefit from such an effort, legislation is needed. That’s because these programs meet the Iowa Code’s definition of a “raffle” — and credit unions and banks can’t hold raffle licenses. Traditionally, requiring a consumer to open a savings account — and make a deposit — to receive a chance to win a prize would constitute a lottery.
Iowa law legalizing prize-linked savings accounts opens the door for financial institutions to conduct these games of chance with prizes — even though they are requiring the consideration of opening an account and making a deposit.
Two bills to legalize prize-linked savings, SSB 1191/HSB 62, were introduced in the Iowa Legislature this year, but they didn’t clear the first legislative funnel and won’t receive further action this session. Nevertheless, we hope the legislation will progress much further in the next session.
When saving can be so difficult for so many, it only makes sense to provide more avenues that result in better savings habits. A program like the prize-linked savings account can help establish those habits and assist in filling that gap on emergency savings at a minimum.
