The Powerball prize is nearing a record. Thank Fed Chair Jerome Powell
By Chris Isidore, CNN
(CNN) — The Powerball lottery’s advertised jackpot is up to a massive $1.7 billion, thanks in large part to high ticket sales and the lack of a winner since late May. But there’s another reason you might not expect: high interest rates.
But to explain why high interest rates are a factor, we need to first delve into how lottery winners actually receive their money.
Saturday’s drawing will feature what is being described as the third largest lotto jackpot in US history, but there’s very little chance someone will actually walk away with $1.7 billion. The only way to receive the full total is to agree to 30 separate payments spread out over the next 29 years. If you want to receive your winnings immediately, you’ll need to accept a lower lump sum.
(Don’t worry, that lower lump sum is still worth an eye-watering $770 million.)
The thing is, virtually no winner takes their prize money on that delayed payment option. In the last 15 years, only two winners of the large Powerball jackpots have taken the annuity payment, out of 140 winning tickets, according to records on the Powerball site. To put that in context, in the last 15 years, three holders of the winning ticket did not claim their prize at all. Figures from Mega Millions are similar, according to experts, but not as readily available from that game.
“All anyone ever talks about is the annuity prize,” said Victor Matheson, professor of economics and accounting at the College of the Holy Cross in Massachusetts. “It’s the number the lotteries market. It’s the number in the news story. But it’s the number that almost no one ever takes.”
How interest rates affect lottery prizes
The 30 payments over 29 years would come from an annuity purchased by the lottery sponsors. The current environment of high interest rates has opened the door to much larger annuity payments.
Before the Fed started raising interest rates in early 2022, advertised annuity prizes were typically around 50% or 60% bigger than the cash value.
Sometimes they were worth far less.
In 2020, for example, as the Fed slashed interest rates to support spending during the Covid-19 pandemic, the annuity prize went from being worth 43% more than the cash prize at the start of the year to only 20% greater than the cash prize come August.
The current advertised annuity prize of $1.7 billion is 121% greater than the $770 million lump sum prize. If the current interest rates were the same as they were in late 2020, and the annuity was only 20% greater than the cash prize, Wednesday’s prize would be would be only $924 million, or just more than half the value now being hyped.
And while the annuity prize is the third largest by that measure in US history, the lump sum prize is only the seventh largest.
The reason most people take the lump sum over the annuity payment also goes beyond the simple idea of “it’s my money, and I want it now.”
Even a conservative investor could likely do better by taking the money up front and investing it in the stock market, not withstanding its periodic swings. You would need to get just about a 6% return over the next 29 years to turn $770 million into $1.7 billion, Matheson said. But the S&P 500 has risen 888% in the 29 years since September 1996, or a compounded annual average growth rate of about 8.2%. And much of the nearly $1 billion gain would be taxed at a lower capital gains rate, not the higher income tax rate.
The impact on lottery prizes is probably the last thing that the central bank and the White House concern themselves with when clashing over what to do with interest rates. But it is another sign that the higher-than-normal interest rate of recent years has a cost for some Americans and a benefit for others, namely those with savings.
Why advertise a prize no one gets
While it’s unlikely someone will receive the full $1.7 billion, advertising a billion-dollar-plus prize does help bring attention and thus sell tickets.
A month ago, there were only 16 million tickets sold leading up to an August 11 drawing offering a mere $501 million annuity prize. In the days leading up to Wednesday’s drawing for a $1.4 billion prize, there were 10 times as many tickets sold.
The larger annuity prize associated with Saturday’s jackpot’s annuity prize might make it more attractive to the next big winner or winners, said Matheson. And he said there are advantages to accepting the annuity payment, including protection against investment risks and spreading out income taxes on the winnings over 29 years, rather than on the lump sum. Of course, this advantage only applies if tax rates on the wealthy don’t increase in the decades to come.
Then again, regardless of high or low interest rates, Powerball winners almost always go for the cash prize. It’s not like Americans to voluntarily defer accepting payments when they have the opportunity to get money up front.
After all, the Declaration of Independence doesn’t speak of “life, liberty and the pursuit of deferred gratification.”
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