U. of I. News: Should states be in the lottery business?

By Newsroom America Feeds at 5 Sep 2017

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Should states be in the lottery business?

CONTACT: Phil Ciciora, Business & Law editor, 217-333-2177

A Massachusetts hospital worker recently claimed the record-breaking $758 million Powerball jackpot. The buzz surrounding the potential payout helped drive ticket sales, but at what cost to states and taxpayers? Craig Lemoine is an associate teaching professor at the College of ACES and director of the Financial Planning Program. Lemoine, also a certified financial planner, spoke with News Bureau business and law editor Phil Ciciora about lottery fever and its effects.

Lotteries sell the dream of financial freedom. Is it mostly harmless entertainment, or are there regressive effects?

A common criticism of state lotteries is that lower-income residents, along with those who have less financial literacy, tend to spend a higher portion of their income on tickets. It’s problematic socially because financial literacy is correlated with education and socioeconomic status. Lotteries take a disproportionate chunk away from those who need it most. And unlike lotteries overseas – the Spanish Christmas lottery El Gordo, for example, which has jackpots in the billions – we prefer lotteries with one big winner. What ends up happening is that money flows from poorer communities into the hands of one incredibly lucky person.

Is playing the lottery a gateway drug to more gambling – gambling on sports, gambling at casinos, gambling online?

Playing the lottery releases endorphins. It gives you a small high and dreams about the future. This can be a productive exercise when you are helping someone plan and think about their retirement – what does financial freedom look like, how would you live if you weren’t working. But it can also be very destructive. The lottery is gambling, and people often get addicted to gambling quickly with devastating consequences.

Does the lottery provide any sort of economic stimulus, or does it merely sell false hope?

Lotteries provide some economic stimulus back to state residents – though how much and where varies wildly by state. In Illinois, about $691 million in lottery revenue was transferred to the common school fund in 2016, which was 24.2 percent of lottery revenue. So while the lottery brought in about $2.8 billion, not all of it went toward school funding – about a quarter for each dollar in ticket revenue. Taxes on prizes help fill the coffers as well. A $393 million Mega Millions ticket was bought near Chicago this year. That prize, taken as a lump sum, would draw in about $8 million in additional state income taxes.

Just how comically astronomical are the odds of actually winning one of the big jackpots?

For Powerball, the odds are one in 232 million. That’s picking one winner out of 3,877 football stadiums each filled with 60,000 people. Your chances of being killed by lightning in the U.S. this year are 28 times higher (39 out of 323,500,000) than buying a winning ticket.

In other words, the odds are so wildly small that we have a hard time grasping how likely we are to lose.

We aren’t making rational decisions when we purchase lottery tickets. We are hoping for transformative financial freedom. That dream, when unchecked, can actually lead to the opposite happening. We spend $10 or $100 on a big jackpot, but the odds aren’t increasing in our favor by any significant measure.

Let’s suppose you actually win the jackpot. What’s the best strategy: lump sum or annuity?

If you actually win, take the annuity. The annuity offers protection in a way that a lump sum never will. Financial planners can show you that, mathematically, a lump sum will yield a higher return. But a higher return doesn’t stop impulsive decision making. The annuity option will save you from yourself.

Editor’s note: To contact Craig Lemoine, email craiglem@illinois.edu.

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