Gambling with Retirement Savings

In FY 2005 the average resident of a state with a lottery spent close to $200 on lotteries, with many spending considerably more. Studies have shown that the poor spend a disproportionate amount on lotteries. At the same time, Americans are not saving enough for retirement.

A recent Forbes.com article proposes a solution to both problems: a personal retirement savings account lottery. The profit—the portion of the ticket price that the state currently keeps and spends on programs such as education and historic preservation—would instead go into a personal savings account:

Some 20 million Americans spend at least $1,000 a year on lottery tickets. For these heavy purchasers the new tickets would increase their personal savings by $500 a year. Invested over 40 years, these savings tickets would generate an expected retirement nest egg of $200,000.

While this plan would remove the implicit tax from the lottery and therefore decrease tax complexity and increase transparency, it would probably not be popular with pro-lottery politicians. In FY 2003 lotteries provided 2% of total state own-source general revenue, and legislators would be reluctant to give this up.

Even in states that earmark lottery revenue for specific projects, legislators can simply shuffle funds and use lottery revenue for their preferred programs. Reliance on lottery revenue allows them to avoid raising politically unpopular income, sales or property tax rates. Lotteries would likely lose much of their political appeal if legislators were constrained by laws requiring them to deposit revenue into personal accounts.

However, this plan is still better than the current system:

Yes, it is true that we’ve robbed Peter to pay Paul. We’ve taken money generally earmarked for education and put that into retirement accounts for the lottery players. We think this is reasonable. The lottery is a strongly regressive tax, and the earmark for education is really a chimera. The government has to pay for education in any case. So the state lottery business is just a disguised tax, levied on people whose share of the national tax burden is already high enough.

Lottery players’ best bet, though, is to skip the lottery entirely and instead save or invest their money for retirement. As Tax Foundation Fiscal Fact No. 45, “Lottery Taxes Divert Income from Retirement Savings” shows, the payoff will probably be much higher—for individuals and for sound state tax policy.