Lottery fever is on the rise again within the United States. But buyer beware. Advertised jackpots are not as big as they appear.
On March 26, someone from New Jersey won a jackpot that Mega Millions advertised on its website as $1.13 billion. Powerball claims its current jackpot is $935 million.
These big lottery prizes are a fortune, there is no doubt about it. But truth be told, these mouth-watering advertised jackpots designed to trick people into buying tickets are misleading. Thanks to the magic of rising rates of interest, advertised numbers have increased, and the actual value of current lottery prizes is not even half that. And that’s before you are taking the tax bite under consideration.
The money you possibly can receive immediately after winning is marked in smaller font, under the so-called jackpot – but this money option is real. This is how much the jackpot is admittedly price.
“It’s outrageous – we’ve all come to believe in the lottery framework – and it’s wrong because it gives the impression that the jackpots are much bigger than they actually are.” Victor A. Mathesona sports economist on the College of the Holy Cross in Worcester, Massachusetts, said last week.
What lotteries call jackpots is a wierd and self-serving phrase that inflates the supposed prizes – a phrase repeated so persistently that people assume it’s normal. It’s like bragging that you might have a million-dollar job when in point of fact you make $1,000 every week and hope to work for the following 20 years.
Major US lotteries say there have been 10 jackpots with an advertised value of over $1 billion. But that is misleading. Despite all of the hype, the United States has yet to win a single $1 billion jackpot based on cold, hard money.
But whenever you take a better take a look at the numbers and think about inflation and rates of interest, you get a rating of the largest lottery prizes that differs from the traditional lists published by the lotteries themselves. Some prizes that had a monetary value of lower than $1 billion once they were awarded are now price greater than that after years of inflation. calculations by an independent statisticianSalil Mehta.
The meaning of those numbers is not easy. I cited Mr. Mehta’s work in a 2016 column, stating that lottery rules were deliberately redesigned to offer larger prizes and encourage people to purchase tickets.
“When the prizes start to look really big, more people buy tickets, which makes the prizes even bigger, and that increases revenue for the states that host them,” he said in a recent conversation. “But the odds of winning are so high that people are throwing money away. “It’s a tax on people who may not actually understand what they’re doing.”
Without a doubt, if you need money, don’t waste it on a lottery ticket. Use it to pay your bills or save and invest.
Still, I’m not against lotteries. Dreams of fabulous riches can be delightful. I buy tickets myself from time to time – usually in a group and whenever the lottery prizes have grown to mythical proportions.
But I’m interested in numbers. And the more I looked at them, the worse they looked.
It’s not just that my chance of winning the Mega Millions or Powerball jackpot is about one in 300 million.
Even accepting these terrible odds, as I began to take a closer look at the prizes, I began to have questions about how jackpots were presented to the American public.
What really is a jackpot?
Defining what lotteries call jackpots is difficult. That’s what they really are: the sum of the cash flows winners can receive if they choose to take the money over 29 or 30 years. (This is actually what is called a “certain annuity” term).
The cash option reflects the actual money raised by states participating in large lotteries, after taking into account expenses and income set aside for purposes such as education.
Advertised jackpots are only an estimate of the amount of cash flow that can be purchased from the prize pool, which depends on the interest rates on the government bonds used to create the annuity. The higher the interest rates, the larger the payouts.
J. Bret Toyne, executive director of the Multi-State Lottery Association, which operates the Powerball game from its headquarters near Des Moines, explained these basics in a lengthy telephone conversation in December. He also acknowledged the impact of high interest rates on annuities and advertised lottery jackpots.
“Yes!” he said. “High interest rates are good for retirees and the lottery.”
But easy annuities are not advertised this fashion. Claims for them are often limited and boring: for a certain quantity of cash, you’ll receive a certain payment every month, perhaps adjusted for inflation, for a certain variety of years. It is often believed that it’s improper to say: buy this annuity and receive a jackpot of $100,000, when in truth you simply receive a small portion of that amount every month for 30 years.
Mr Toyne agreed, but said: “That’s how jackpots were described before I started, which was in 1988.”
I contacted several economists and historians, searched newspaper archives, and got consistent answers.
Charles T. Clotfelter, a Duke economist who has studied lotteries for 50 years, told me that modern lotteries have, since their inception, described their prizes as “the numerical sum of years of payouts.” He added: “No one would allow it to be given in this form if it was a financial product.”
Jonathan D. Cohenwriter “A Dollar and a Dream: State Lotteries in Modern America” stated that it was not until the Nineteen Eighties and Nineties that lump sum money options that reflected the actual value of prizes became common.
“Lotteries are administered by state agencies and do not reflect the truth contained in advertising laws,” he said. I actually contacted the federal agencies that cope with such matters and was told that they haven’t any jurisdiction over lotteries.
Stephen M. Stiglerprofessor of statistics on the University of Chicago, researched history lotteries, including within the UK and France. “The tendency to advertise with the highest numbers you can get goes back many hundreds of years,” he told me. “Choosing the highest probable number and claiming it as a lottery prize” is an old tradition, he said. If lotteries can handle it and it helps generate business, they often do.
Jackpots and rates of interest
Rising rates of interest over the previous couple of years have made the distortions inherent in jackpot promoting obvious.
Consider that on March 26, the Mega Millions prize money was $526 million, which is just 48 percent of the advertised $1.1 billion jackpot. (Another way is to say that the so-called jackpot was 2.1 times the money prize.)
And in January 2021, the advertised Mega Millions jackpot was $1.05 billion – barely lower than the March 26 jackpot. However, the prize money value for 2021 was $777 million, which is 74 percent of the advertised winnings and significantly higher than the March 26 prize money.
What happened? Well, the yield on 10-year Treasury bonds is currently around 4.1 percent, and lottery organizers estimate that once converted to bonds, the quantity within the lottery’s money prize pool – about $526 million – will generate about $1.1 billion over 30 years. In 2021, the yield on 10-year Treasury bonds was just 1.1%. There was also lottery fever in 2021, and the prize money was even larger than it’s today – $777 million. However, at such a low rate of interest of 1.1 percent, the advertised jackpot was “only” $1.05 billion – that’s still a hell of numerous money, but a small fraction of what it will be at today’s higher rates of interest.
Similarly, the advertised March 28 Powerball jackpot was $935 million. His money value was just $449.7 million, or 48 percent of the advertised winnings. For comparison, the January 2021 Powerball advertised jackpot was $731 million and the money value is $547 million — which is 75 percent of the 2021 advertised jackpot and significantly greater than Powerball’s current money value.
In other words, the 2021 prizes were more precious than the present ones, despite the confusion surrounding the present jackpots.
In fact, to get an accurate list of the largest lottery prizes within the United States, it’s essential start with the money prizes and take into consideration inflation, which has been high for several years. Mr. Mehta did all this tough work.
In my opinion, these are the biggest lottery prizes in US history, with monetary values in 2024 dollars:
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Powerball, January 2016, currently $1.295 billion. The advertised jackpot was $1.586 billion.
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Mega Millions, October 2018, currently $1.083 billion. The advertised jackpot was 1.537 billion.
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Powerball, November 2022, currently $1.046 billion. The advertised jackpot was $2.04 billion. It’s No. 1 on conventional lists based on nominal advertised jackpots, but its inflation-adjusted money prize ranks third.
I admit this will appear to be a contradiction. The money prizes in Powerball and Mega Millions are so large and the possibilities of winning so small that such prizes could appear insignificant or even worse.
Thin. I see. If you are buying a lottery ticket, you are not on the lookout for a very good deal. You are buying fun and this evaluation is a failure.
However, I’ll keep watch over the prize money and the slim odds. At least that’s my intention.
At some point, when the lottery jackpot gets really big, I’ll probably get into lottery fever like everyone else. But no less than I’ll know the true size of the jackpot I won’t win.
