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Tuesday, May 30, 2006

Hitting It Big for Retirement

Given the amount of tax revenue that states raise regressively through legalized gambling such as lotteries and video poker, I thought this was an interesting table. It compares the expected earnings in constant dollars from investing various amounts in an S&P 500 index fund versus using the money to play the lottery. The reason for looking at this is that, according to the Tax Foundation article:

A recent survey conducted by Opinion Research Corporation ... and ... reported in a MarketWatch article, found that Americans are, for the most part, pessimistic about their ability to save for retirement—so pessimistic, in fact, that 21 percent of respondents said playing the lottery is “the most practical strategy for accumulating several hundred thousand dollars” for retirement.

The MarketWatch article continues saying "...with 38% of those who earn less than $25,000 pointing to the lottery as a solution." This table looks at the expected losses from pursuing such a strategy over a 40 year time period:

Table 1. Rate of Return on Lottery vs. Rate of Return on Stocks over a Forty-Year Period in 2006 Dollars

Average Amount Spent or Invested per Month
Total Spent or Invested over 40 Years Expected. Return from Lottery(a)
Expected Return from S&P 500 Increased Retirement Savings from Investing Rather than Playing Lottery
$1 $761.37 $178.14 $1,622.17 $1,444.03
$5 $3,806.85 $890.72 $8,110.85 $7,220.13
$10 $7,613.70 $1,781.44 $16,221.69 $14,440.26
$25 $19,034.26 $4,453.59 $40,554.23 $36,100.64
$50 $38,068.52 $8,907.18 $81,108.46 $72,201.29
$100 $76,137.03 $17,814.35 $162,216.92 $144,402.57
$150 $114,205.55 $26,721.53 $243,325.39 $216,603.86
$200 $152,274.07 $35,628.70 $324,433.85 $288,805.14
$250 $190,342.59 $44,535.88 $405,542.31 $361,006.43
$300 $228,411.10 $53,443.05 $486,650.77 $433,207.72

Note: Calculations assume a constant 2 percent inflation rate, 7 percent return on S&P 500 average, and monthly compounding. Lottery spending is not adjusted for life cycle or income cycle.
(a) Based on a 53% cumulative payout rate for all lotteries from 1964 through 2003. ... [Source: Tax Foundation]

Interesting difference in expected returns, but I'm not convinced that people would invest much more if lotteries and other forms of legalized gambling did not exist. The more important concern is, of course, the highly regressive nature of this form of "voluntary" taxation that provides false hope for those in dire economic conditions. Lotteries are easy politically, but they impose large and inequitable costs on some segments of the population. The state should get out of the gambling business and raise taxes by some other means. Nobody has to pay a dollar more and no services have to be cut, just levy the taxes directly so that the tax burden is clear rather than having it obscured through lotteries and other devices.

    Posted by on Tuesday, May 30, 2006 at 05:55 PM in Economics, Saving, Taxes | Permalink  TrackBack (0)  Comments (13)

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