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Lotteries: Extra tax on the poor and the stupid

Tara Siegel Bernard | New York Times (http://www.nytimes.com/) | August 12, 2013

http://www.nytimes.com/2013/08/10/your-money/win-a-lottery-jackpot-not-much-chance-of-that.html (http://www.nytimes.com/2013/08/10/your-money/win-a-lottery-jackpot-not-much-chance-of-that.html)


When those exceedingly lucky people come forward to claim this week's Powerball lottery jackpot, which swelled to $448 million on Wednesday, it's hard not to think: Somebody is winning these things, right? It could be me.

This is exactly the sort of logic that, over the last year, led millions of people to spend $5.9 billion of their hard-earned dollars on Powerball alone. They spent nearly $69 billion on all lottery games in 2012, according to two lottery trade groups.

It is also precisely the kind of mental trap the Powerball people want you to fall in; they tweaked the game rules last year, doubling the price of tickets to $2 to raise more revenue and create more eye-catching jackpots.

And the state agencies running the games advertise heavily that it could be you making off with millions of dollars.

The odds of winning, however, remain infinitesimal: Powerball players, for instance, have a 1 in 175 million chance of winning. You have roughly the same chance of getting hit by lightning on your birthday.

Even though some people may be able to intellectually grasp what that means, the Multi-State Lottery Association can predict with clocklike [sic] certainty that on Saturday night, with a jackpot worth about $40 million, 13 million to 15 million people will buy tickets. Those ticket buyers are all thinking they have a shot of defying the odds.

That is why the lottery is called a tax on people who don't understand math. Lower-income individuals who play but don't win are hurt the most because they're wasting a greater share of their income on the games. That's also why the lottery is often called a regressive tax on the poor.

Sure, last year the games returned $19.41 billion to the states that sponsored them, according to the North American Association of State and Provincial Lotteries, which represents 52 lottery groups. But that's not why anyone plays them.

What's the big motivation to volunteer to pay this tax? Psychologists say it has more to do with our all-too-human propensity to run with the dreamlike possibilities it creates in our minds.

"For emotionally significant events, the size of the probability simply doesn't matter," said Daniel Kahneman, the Nobel-prize winning psychologist. "What matters is the possibility of winning. People are excited by the image in their mind. The excitement grows with the size of the prize, but it doesn't diminish with the size of the probability."

So ticket buyers allow themselves some momentary escapism since it costs only $2, thinking about what they would do with all that money.

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Plugging some numbers into this dream provides some perspective. Winners wanting to be able to safely spend $1 million a year for 55 years (adjusted for inflation) would need about $36 million, after taxes, to invest, according to calculations by Northern Trust. (Those numbers also factor in annual taxes and investment expenses.) They would need to set aside nearly $15 million in high-quality bonds to know they would always have 15 years of spending in stable investments. To cover the remaining 40 years, they would need to put another $21 million in a diversified stock portfolio.

So in thinking about it, it's not even worth playing unless the jackpot is more than $75 million, because the state and federal government take about half in taxes.

{SNIP}

Buying more tickets improves your odds, but not by much.

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It would take centuries of ticket buying before you even make a dent. If you purchased roughly 126,000 tickets a month for the next 80 years, for example, you could improve your odds to 50 percent, explained Gary A. Lorden, emeritus professor of math at California Institute of Technology (who, for the record, has bought a single ticket three times over the last decade; he split the last one with his grandson).

"The difference is like moving from a big house to a small house to make it less likely a meteor will strike your roof," he said.

Good luck with that. [more ... (http://www.nytimes.com/2013/08/10/your-money/win-a-lottery-jackpot-not-much-chance-of-that.html)]