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Making a virtue out of a vice

Posted by Richard on May 18, 2006

Alex Tabarrok at Marginal Revolution endorsed a suggestion by Ian Ayres and Barry Nalebuff in Forbes (registration required; use BugMeNot) to channel some of the short-sighted, get-rich-quick thinking that’s so prevalent among poor people into long-term retirement planning: lottery savings tickets. They’d work just like today’s scratch lottery tickets, except that 50% of the purchase price would go into the purchaser’s personal retirement savings account. The benefits are not trivial:

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. This is a lot of money for the mostly not very prosperous crowd who buy lottery tickets every week.

I can’t help but note that, if these folks gave up this foolish habit completely and put the entire $1,000 a year into savings, they’d have a $400,000 nest egg.

But, hey — if I’d saved what I’ve spent over the years on cigarettes, beer, Dish Network, CDs, DVDs … not to mention single malt Scotch …

It’s pointless to speculate on how much better off people would be if human nature were different (and it’s downright dangerous, too; just look at the history of communism). Most of us have our little vices, weaknesses, and guilty pleasures, and we’re often willing to trade a large reward in the future for a smaller one today. So why not work with human nature instead of rail against it? As Tabarrok noted:

It is incredible that many poor people spend more on lottery tickets than on retirement.  My non-bleeding heart libertarian friend would point out that this shows how much poverty is due to irresponsibility and he would probably be right.

Nevertheless, Adam Smith said the goal of social policy is to create institutions like the market that channel self-interest in ways that redound to the social interest.  Call me a libertarian paternalist, if you must, but I like how lottery savings tickets channel failures of reason and prudence in ways that redound to the individual’s self-interest.

I like the idea, too. In fact, I’d buy some lottery savings tickets, and I haven’t bought a lottery ticket in years.

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