Lottery fever is surging again within the United States. But buyer beware. The advertised jackpots are nowhere near as big as they appear.
On March 26, someone in New Jersey won a jackpot that Mega Millions advertised on its website as $1.13 billion. And Powerball says its current jackpot is $935 million.
Those lottery grand prizes are a fortune, there is not any doubt about it. But to be honest, these delicious jackpot numbers designed to entice people to purchase tickets are misleading. Thanks to the magic of rising rates of interest, the advertised numbers have increased while the actual value of current lottery winnings is just not even half as high. And that’s even before taxes are taken into consideration.
The money you possibly can receive immediately should you win is shown in smaller font below the so-called jackpot – but this money option is the true option. This is the actual value of the jackpot.
“It’s outrageous – we’ve all bought into the way the lotteries are portrayed – and it’s wrong because it gives the impression that the jackpots are much bigger than they really are.” Victor A. Mathesena sports economist on the College of the Holy Cross in Worcester, Massachusetts, said in an interview last week.
What lotteries call jackpots is an odd and self-serving phrase that inflates the supposed winnings – a phrase that has been repeated so repeatedly that individuals accept it as normal. It’s like bragging about having a $1 million job when in point of fact you are paid $1,000 per week and expect to maintain working for the following 20 years.
According to major U.S. lotteries, there have been ten jackpots with an announced value of greater than $1 billion. But that’s misleading. Despite all the joy, the United States has yet to even receive a $1 billion grand prize based on cold, hard money.
But should you look closely on the numbers and take inflation and rates of interest into consideration, you get a rating of the best lottery winnings that’s different from the normal lists of the lotteries themselves. Some prizes that had a money value of lower than $1 billion once they were originally awarded are value more today, after years of inflation, they are saying Calculations by an independent statisticianSalil Mehta.
It’s tough to know these numbers. I cited Mr. Mehta’s work in a 2016 column wherein he suggested that the lottery rules were deliberately redesigned to realize larger prizes and entice people to purchase tickets.
“When the prizes look really big, more people buy tickets, which makes the prizes even bigger and increases revenue for the states that host them,” he said in a recent conversation. “But the odds against winning are so great that people are throwing their money away. It’s a tax on people who maybe don’t really understand what they’re doing.”
If you wish the cash, there is not any doubt you mustn’t waste it on a lottery ticket. Use it to pay your bills or put it aside and invest it.
Still, I’m not against lotteries. It could be wonderful to dream of fabulous riches. From time to time I actually have bought tickets myself – often as a part of a gaggle and each time the lottery winnings have reached mythical proportions.
But numbers are vital to me. And the more I checked out them, the more severe they looked.
It’s not only that my odds of winning the highest prize in Mega Millions or Powerball are about one in 300 million.
Although I accepted these terrible odds, as I started to look at the prizes closely, I started to have questions on how jackpots were presented to the American public.
What exactly is a jackpot?
Defining what lotteries call jackpots is a lie. That’s what they are surely: the sum of money flows that winners can receive in the event that they decide to keep their money over a period of 29 or 30 years. (In fact, that is the term “secure pension”.)
The money option reflects the actual money that states participating in the most important lotteries collect, after deducting expenses and revenues put aside for purposes equivalent to education.
The jackpots advertised are only an estimate of the sum of money flows that could be purchased with the prize pool and these depend upon the rates of interest on the federal government bonds used to form the annuity. The higher the rates of interest, the upper the payouts.
J. Bret Toyne, executive director of the Multi-State Lottery Association, which operates the Powerball game from its location near Des Moines, explained these basics in a lengthy telephone conversation in December. And he acknowledged the impact of high rates of interest on each pensions and advertised lottery jackpots.
“Yes!” he said. “High interest rates are good for pensioners and for lotteries.”
But easy pensions aren’t advertised that way. The claims made for it are likely to be limited and boring: for a specific amount, you get a certain payout every month for a certain variety of years, perhaps with an adjustment for inflation. It is usually considered unreasonable to say: buy this annuity and get a $100,000 jackpot, when in point of fact you’ll only receive a small fraction of that quantity every month for 30 years.
Mr Toyne agreed, but said: “That’s how jackpots were described before I started, and that was in 1988.”
I asked 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 from the start, modern lotteries have described their winnings as “the numerical sum of the years of payout.” He added: “Nobody would allow you to state it in that form if it was a financial product.”
Jonathan D Cohenthe writer of “For a Dollar and a Dream: State Lotteries in Modern America” said it was only within the Eighties and Nineteen Nineties that lump sum money payments – reflecting the actual value of the prizes – became common.
“Lotteries are operated by state authorities and are exempt from the truth requirement in advertising laws,” he said. In fact, I checked with federal agencies that handle such matters and was told that they don’t have any jurisdiction over lotteries.
Stephen M. StiglerProfessor of statistics on the University of Chicago, investigated this Story of lotteries, including in Great Britain and France. “The tendency to advertise with the largest possible numbers goes back many hundreds of years,” he told me. “Choosing the largest plausible number and claiming it as a lottery win” is an old tradition, he said. If lotteries can get away with it and it helps generate business, they often do it.
Jackpots and Interest Rates
Rising rates of interest lately have significantly increased the distortions related to jackpot promoting.
Consider that the money value of the Mega Millions prize as of March 26 was $526 million – just 48 percent of the announced jackpot of $1.1 billion. (In other words: the so-called jackpot was 2.1 times the money prize.)
In January 2021, nevertheless, the advertised jackpot for Mega Millions was $1.05 billion – barely lower than the March 26 jackpot. But the money value of the 2021 prize was $777 million, 74 percent of the announced jackpot and far more than the March 26 money prize.
What happened? Well, the yield on the 10-year Treasury note is currently about 4.1 percent and lottery organizers estimate that the quantity within the lottery’s money prize pool – about $526 million – if converted to bonds over 30 years might be about $1.1 billion -dollars will usher in. In 2021, the yield on the 10-year government bond was just 1.1 percent. Lottery fever continued in 2021, and the money prize pool then was even larger than it’s today – $777 million. But at that low rate of interest of 1.1 percent, the announced jackpot was “only” $1.05 billion — still plenty of money, but only a small fraction of what it could be at the upper rates of interest currently prevailing.
Likewise, the announced Powerball jackpot on March 28 was $935 million. Its money value was just $449.7 million, 48 percent of the announced jackpot. In comparison, Powerball’s advertised jackpot in January 2021 was $731 million, with a money value of $547 million – 75 percent of the 2021 advertised jackpot and far more than the present Powerball money value.
In other words, the 2021 prizes were more beneficial than the present ones, despite the joy surrounding the present jackpots.
To get an accurate list of the best lottery winnings within the United States, you truly have to start out with the money prizes and bear in mind inflation, which has risen sharply lately. Mr. Mehta did all this tough work.
In my estimation, these are the most important lottery winnings in U.S. history, with present values in 2024 dollars:
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Powerball, January 2016, now $1.295 billion. The announced jackpot was $1.586 billion.
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Mega Millions, October 2018, now $1.083 billion. The advertised jackpot was 1.537 billion.
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Powerball, November 2022, now $1.046 billion. The announced jackpot was $2.04 billion. Based on nominal jackpots advertised, it ranks No. 1 on traditional lists, but its inflation-adjusted money prize ranks third.
I admit that this looks like an argument to me. The money prizes in Powerball and Mega Millions are so high and the percentages of winning so slim that distinctions like these may appear irrelevant, or worse.
Fine. I get that. When you purchase a lottery ticket, don’t search for a superb deal. You are buying fun and this evaluation is a downer.
But I’ll keep my eye on the money prize and the miserable odds. At least that’s my intention.
At some point, when the lottery jackpot gets really big, I’ll probably get the lottery bug like everyone else. But at the least I know the way big the jackpot is that I won’t win.
