Retirement 6/49

You don’t need to be a financial wizard to realize that expecting the lottery to finance your retirement is even more futile than expecting the Leafs to win the Stanley Cup. So why are Canadians doing it? According to a recent Harris/Decima poll for Scotiabank, five per cent of Canadians looked to a lottery windfall for their “Freedom 55″—one per cent more than those who said their children would help them out. A poll of Canadians aged 45 to 64 conducted by Environics Research for TD Waterhouse was even more mind-boggling: 32 per cent said they expected a lottery win to support them post-retirement—versus 34 per cent who said they had retirement savings plans with actual dollars in them.

Polls are an inexact science. But these two do reflect just how far lotteries have insinuated themselves into Canadians’ financial expectations since Quebec launched the country’s first provincial lottery in 1970. The 1982 roll-out of Lotto 6/49 with its “Just imagine” slogan made the lottery a national pipe dream; the 2009 arrival of the $50-million jackpot Lotto Max, which admonishes Canadians to “Live your dreams to the max!” serves to further stoke the frenzy.

Playing the lottery is the country’s most popular form of gambling, contributing some $8 billion in annual revenues to the five regional lottery associations. Not that lotteries are marketed as high-stakes gambling: they’re wholesome fun to be celebrated by a “happy dance,” an “instant thrill for a dollar,” the route to “freedom” on a sandy beach or sailboat, and an opportunity to realize “dreams” while helping to fund amateur athletics and other noble social programs.

More than half of Canadians play the lotto regularly, buying a ticket at least once every two months with plans to buy again. They’re so entrenched, financial institutions are referencing them in their marketing, even creating savings products with a lottery component.

A 58-year-old underground welder in Timmins, Ont., jokes that lottery tickets comprise “the high-risk portion of my investment portfolio.” He needs the bump, he explains, given that his employer-sponsored pension plan at the company where he has worked 31 years has “taken a s–t-kicking.” He’d planned to retire at 55, then 57. Now he hopes to quit by age 60, though he’s uncertain he’ll have enough socked away by then.

He contributes to three lottery pools at work where he and his work buddies fantasize about acting out a scene from a much-broadcast lottery commercial: “We all want to tweak the boss’s nose when we walk out.” He doesn’t track how much he spends on tickets, but figures it’s $100 a month. He has won small prizes over the years—the most being $100, which he reinvested in tickets. “I don’t think lotteries are a bad thing,” he says. “Where else can you dream for a buck?”

Financial adviser Gail Vaz-Oxlade, author of Never Too Late: Take Control of Your Retirement and Your Future and drill-sergeant host of the TV show Til Debt Do Us Part, says she encounters people who expect the lottery to solve their financial problems: “But I’m so dismissive of it that I won’t even get into a conversation,” she says. “I just say ‘You’re f–king delusional’ and walk away. It’s like ‘Really? You’re more likely to get struck twice by lightning driving to the store to buy the lottery ticket than you are to win the lottery’.”

She has a point. The odds of winning Lotto Max can run as high as one in 85 million, so close to zero as to be indistinguishable. But lotteries tap into a probabilistic oddity economists call “skewness,” the idea there’s a big payday out there that corresponds to a tiny, possible odd. People who buy lottery tickets, like an executive for a Quebec conglomerate who spends $16 a week ($832 a year) on Lotto Max, hang on to that hope. “You know you have almost no chance of winning, but as long as you don’t spend lots of money why not take the chance?” he says. “Like the ads used to say: ‘You can’t win if you don’t play.’ ”

For many, the lottery offers the only possibility for the kind of instant transformation seen on TLN’s popular reality show The Lottery Changed My Life. It may be a long shot, but so is the prospect of funding retirement. A C.D. Howe Institute survey found 21 per cent of Canadians approach retirement with no savings backup beyond CPP/QPP. The Scotiabank Harris/Decima poll found 38 per cent expected to work into their retirement years out of financial necessity. That could explain an October 2010 survey by Ontario Lottery and Gaming Corp. (OLG) that shows lottery players skew slightly older than the general population: 45 per cent are aged 35 to 54; 32 per cent are over 55.

The notion that the lottery could provide financial salvation is just part of a larger institutionalized financial delusion that has led to household debt sitting at a record high and the personal savings rate at an all-time low of 3.3 per cent. “A huge percentage of the population doesn’t think about consequences,” Vaz-Oxlade says. “It’s all about today.”

Though study after study from the U.S. shows lottery players concentrated among low-income individuals, hence their “tax on the poor” rap, growing evidence suggests that the lottery is a tax on everyone, particularly the embattled middle class. OLG spokesman Don Pister reports lottery players tend to have higher household incomes than non-players, witnessed in the recent example of $3.6-million Lotto 6/49 winners Shauna and David Newsham of Winnipeg (he’s a chiropractor, she’s a speech language pathologist). More than 64 per cent of lottery players work full or part time, 21 per cent are retired, while seven per cent are unemployed. Just over a quarter report household income of under $50,000, 31 per cent report $50,000 to $99,000, and 20 per cent report more than $100,000.

Neuroeconomist George Loewenstein, a professor of economics and psychology at Carnegie Mellon University in Pittsburgh, who has studied lottery purchasing patterns, says he finds the recent Canadian polls “amazing.” But they reflect another reality, he notes: “The middle class feels it’s falling behind.” His research has unearthed a subtle distinction that explains why lottery mania thrives amid financial uncertainty: feeling subjectively poor compared to peers, he discovered, can spur lottery purchases. One study, published in the 2008 Journal of Behavioral Decision-Making, found people who were convinced they were earning a low salary bought nearly twice as many lottery tickets compared to others made to feel more affluent.

Loewenstein sees purchasing lottery tickets as the equivalent of burning money: “Ignoring cost of marketing and administration, the government is taking about half of what people spend,” he says. Lotteries make most of their money on churn, he points out—the small winnings paid out being recycled into buying tickets.

Peter Kormos, NDP MPP for Welland, Ont., is a long-time critic of government-run gaming. “Advertising portrays gambling as recreation, a social activity, as entertainment—with that stupid ‘happy dance’ and the whole ‘freedom’ perspective,” he says. “This is potent stuff in an era in which people are losing pensions or don’t have them, and in which people’s savings have been trashed by collapses in the stock market.”

He has called for warnings on gaming products and in casinos, similar to those on cigarettes and alcohol, that say gaming can be bad for financial health. Last September, after the launch of Ontario’s daily Poker Lotto, he called for a moratorium on new gambling products pending a study of the demographics and consequences, a request that fell on deaf ears. He’s particularly concerned about the potential advent of Internet gaming, he says: “This stuff has a lot more impact than OLG wants to believe it has.”

That’s apparent in this week’s sentencing hearing of Wes McConnell, the 57-year-old London, Ont., man found guilty of funnelling nearly $80,000 from his employer, a regional athletic association, to support his $400 to $800 daily lottery habit. McConnell began spending $20 a week on lottery tickets in 1995 when he was a schoolteacher. As his gambling spiralled out of control, he spent more and more, hoping for the big payday that never came.

So entrenched is the idea of the lottery as financial fix that even financial institutions are tapping into it. President’s Choice Financial plays on it in its current “Play the lottery for fun. Plan your future for real” RRSP campaign. What inspired it was research that identified widespread worry about funding retirement, particularly the declines in employer-sponsored plans, says spokesperson Michelle Pennell.

South of the border, financial institutions are trying to harness the appetite for “skewness” to promote prize-linked savings accounts (PLS) that offer a lottery component in return for a lower, or no, interest payments. These have been around in various forms for decades: in the U.K., interest-free government-backed Premium Bonds, sold since 1957, give investors access to an annual tax-free £1-million jackpot and monthly cash prizes, based on how much they invest. Currently, 22 million people hold £41 billion of the bonds.

Harvard Business School professor Peter Tufano founded Boston-based advocacy group Doorways to Dreams to advance the concept in the U.S., where state regulations prevent anyone else from offering lotteries. But a loophole allowing non-profit credit unions to hold lotteries to encourage savings led to an Indiana credit union launching the first PLS in 2006. Michigan followed in 2009 with a “Save to Win” pilot which now encompasses 36 credit unions. Depositors buy a one-year certificate of deposit offering a low interest rate; cash prizes of $50 to $500 are paid out monthly and $100,000 is paid annually.

The pilot has been a success, says Dave Adams, CEO of the Michigan Credit Union League. Close to 17,000 accounts have been opened, netting more than US$28 million, or an average of US$740 per account. Household income for 44 per cent of participants is less than $40,000; for 16 per cent it was less than $20,000. More than half of depositors reported they’d never saved money regularly, though 59 per cent had bought lottery tickets in the last six months.

Adams says there’s been no opposition from Michigan Lottery of the sort that shut down a PLS account initiated by South Africa’s First National Bank in 2005. That attracted one million new customers, many who’d never had a savings account. But the South African Lottery Corp. quashed it last year, taking the case to the country’s Supreme Court.

Other states, among them Washington and Iowa, have shown interest in PLS. So has Sheila Bair, the chairwoman of the U.S. Federal Deposit Insurance Corporation, who has reportedly directed her staff to draft a pilot program. (Entrepreneurs also see possibilities: Marc Groz, a former hedge-fund risk officer and author of Forbes’ Guide to the Markets, has patented Nu Lots, a system that permits states running lotteries to earmark some of the money paid by lottery players and put it in an account designated for the individual ticket-buyer’s retirement years.) “It’s a great tool for encouraging financial literacy,” says Adams. “It gives people what they need—savings—as well as what they want, which is a game of chance.”

In Canada, there’s no indication PLS accounts are on financial institutions’ radar. Timothy Flacke, executive director of Doorways to Dreams, reports a colleague spoke at a conference of credit unions in Alberta last year. “She got a pretty skeptical reaction,” he says. Ken Whitehurst, executive director of the Consumer Council of Canada, has never heard of them. That said, he observes that the self-savings mechanism is effective: “Humans are creatures of habit,” he says.

Vaz-Oxlade isn’t familiar with the PLS concept either, but sees the merit: “It’s like saying to a kid, ‘I’ll give you a gold star for every dollar you save.’ ” Better that than taking a passive approach to finances by indulging in the pipe dream of a state-funded windfall. Such oblivion is the real problem, Vaz-Oxlade points out: “People are not conscious of what they’re doing with their money. They don’t have a clue.” Which of course is precisely what can make that lottery “dream” seem so real.