John Edward, a resident of Chelmsford who earned his master’s degree at UMass Lowell and who teaches economics at Bentley University and UMass Lowell, contributes the following column.

Many Greater Lowell legislators made a big mistake in 2011. My State Representative, James Arciero, was one of them. In this column, I will offer them a chance to do something right in 2012.

People who should be saving for the future are instead gambling on their future. The state legislature can help solve that problem.

The savings rate in the United States is too low. After the Great Depression and through the mid eighties the personal savings rate was around 10 percent. In subsequent years, the rate fell sharply. During brief periods it even went negative – we were spending more than our income.

During the Great Recession, the savings rate increased, but only to 5 percent. Despite the recovery being weak, people are again saving less. The personal saving rate was only 3.5 percent in November.

Insufficient saving is bad for individuals and bad for the overall economy in the long run. Unfortunately, but not surprisingly, the problem is most severe for low-income families.

Among other reasons, the poor do not save because:
– they often have nothing left to save after spending on necessities,
– they know a modest hard-saved bank account can be wiped out with just one unexpected financial hardship,
– they typically get much lower returns or negative returns after bank fees,
– saving implies thinking about the future whereas the poor are struggling to make it through the present,
– they are encouraged to spend by both Madison Ave. and Pennsylvania Ave.

Consider a household with an annual income of $350,000 (the cutoff for the top 1 percent). It should be very easy for them to save 10 percent of their income. If they use a workplace 401-K, they may get matching contributions. If their investments do well they could be millionaires within a decade. If they are cautious it will take two decades.

Now think about someone making $35,000. It puts them well above the poverty level but becoming a millionaire seems like a fantasy. Assume they somehow manage to put aside 10 percent of their income. Assume they somehow avoid excessive bank fees on accounts with low balances. Assume they get an interest rate of 2 percent. It will still take them about 100 years to accumulate a million dollars.

I think about this when I see people spending their hard-earned money at Tedeschi buying lottery tickets like they are candy. They would be better off buying a little candy and saving the rest. However, even with almost impossible odds, getting rich quick seems more plausible for low-income earners than building a nest egg through a disciplined saving program.

There is a non-profit based in Boston called the D2D Fund (Doorways to Dreams – see www.d2dfund.org). Their goal is to help low-income earners save.

One technique they use is prize-linked savings. People like winning prizes (see the lottery above). If savings institutes link a raffle or lottery to making deposits, people are more likely to save. Participants cannot lose their savings, but they can win a bonus. Prize-linked savings programs have been successful in the United Kingdom, South Africa, and recently in the United States.

A program called “Save to Win” debuted in Michigan in 2009. By depositing only $25 in an interest-bearing account, savers qualify for prizes. The program has expanded significantly with 50 credit unions now participating. The idea is spreading to other states.

The problem: prize-linked savings accounts would violate Massachusetts state law. It is not because we need to protect investors from banks running gambling operations. It is because the state wants to protect its control over lotteries.

Yes, the Commonwealth that generates about $900 million in “profit” per year via lottery sales, and the state legislature that last year authorized three resort casinos, will not allow a Boston-based non-profit to offer savings accounts that have prizes attached.

Massachusetts is not the only state to prohibit prize-linked savings. However, some states, including Rhode Island and Maine, have changed their laws.

In the recently released book Poor Economics, MIT researchers study incentive systems that help fight poverty. One issue they focus on is the time inconsistency problem: “we think about the present very differently than we think about the future.” They offer that: “incentives can push individuals to take some action that they themselves consider desirable but perpetually postpone taking… the key challenge is to design ‘nudges’ tailored to the environment.”

That is the idea behind a savings match program offered by Community Teamwork here in Lowell. By opening an Individual Development Account (IDA) and meeting savings goals, members can get matching funds for buying a home, paying for education, or starting a business. An important component of the program is financial literacy.

Federal funding and private funds raised by Community Teamwork have helped many of the 46 IDA participants buy a home, go back to school, or save enough to put themselves in a position to do so. As program director Christina Santos-Gordon says, “people’s lives are forever changed.”

Programs like those offered by Doorways to Dreams could forever change many lives without the need for outside funding.

There are already an estimated three hundred thousand people with a gambling problem in Massachusetts. (I just went to the mass.gov web site and the top item under most requested links was the lottery results.) In a UMass-Dartmouth poll, 51 percent of respondents thought casinos would increase gambling addiction. The answer should have been 100 percent. A National Gambling Impact Study Commission found that people are twice as likely to get addicted if they live within 50 miles of a casino. Wouldn’t it be better to get people hooked on saving?

Lotteries, and soon casinos, are an extremely regressive form of taxation. A study by the National Center for Policy Analysis reports that high-income earners spend less than 1 percent of their income on gambling. Low-income earners spend over 10 percent. Shouldn’t the state do something progressive for those most vulnerable to the lure of compulsive gambling?

Representative Arciero has agreed to file legislation to enable prize-linked savings. I suggest you contact your state legislators and ask them to support it.