TIL…I did not know that. Ouch.
Part of figuring out the numbers is you can’t just look at this one lottery where 26,000,000 tickets were sold and a $95,000,000 was given out. As the OP pointed out, if this had been a one-time lottery then the prize would have been $13,000,000 (and there would have been no point in buying up all the tickets).
But this is a rollover lottery were unwon prizes from past lotteries get added to future lotteries. So this $95,000,000 prize represents around 164,000,000 tickets that were sold in previous lotteries. Looking at the overall run, Texas sold 190,000,000 dollar tickets and paid out a $95,000,000 prize.
CA doesn’t tax lottery winners as State income tax. It takes a cut that funds education.
Illinois takes 23% of every dollar played on the lottery for education.
What seems to happen though is it just means they spend less tax money on education. If Illinois wants to spend $1 million on education they can say $230,000 came from the lottery. But it wouldn’t change if there was no lottery.
Dollars are fungible and they can do all sorts of accounting that, while it sounds good, I do not think really changes anything. Now Illinois has $230,000 they might have spent on education free to spend elsewhere.
This is 100% correct and it was obvious to me in the mid 80s when I voted against the lottery in California. It was the main objection against it aside from those who were against gambling in general. It would have been more honest to just tax the winnings like earnings but then it might not have passed. The tag line was something like “The Kids Win Too”.
The jackpot is known, what is not known is how many people will share the jackpot. The probability of multiple winners is a function of the number of tickets sold.
If there are multiple rollovers, the expected payout per ticket bought can be more than the ticket price, even after taxes, assuming the number of tickets sold does not explode.
As long as the ticket buyers are locals buying at a physical POS terminal the number of tickets sold cannot explode. If on the other hand they are selling ticket by some special process to some syndicate or syndicated by the millions, the revenue will explode even though the payout will not increase. The expected payout for a winning ticket will fall because it becomes certain that you will be sharing the jackpot.
The headline number is meaningless if you don’t know what fraction of that you will get.
The payout rules for every lottery are easily found. In Texas 65% of the ticket sales goes into the payout pool. The rest goes to fund state programs like schools.
Some to overhead as well.
That has nothing to do with it.
The prize is actually the lower cash amount. If you want, they will take 100% of that cash and go buy you a 20 or 30 year (depends on which lottery) annuity on the open market from an insurance company. To the lottery the cost is exactly the same: the entire prize pool. Then the lottery pays you zero and instead the annuity company will pay you $X every year for 20 or 30 years.
The “trick” is that the lottery will advertise the sum of those 20 or 30 payments as the headline jackpot amount. And the sum of any annuity’s payments is always more than the cash price to buy it. Due to time value of money while the annuity has and invests the cash price they received for years while dribbling out to you some of their principle and most of their earnings.
As a further form of exaggeration they will buy an increasing annuity, where each year the payment goes up a few percent. Advertised as ostensibly offsetting future inflation. But really simply flattering how big the total sum of payments will be versus the cash they have available to buy your annuity.
For VERY round numbers, and this varies with interest rates, $1M cash will buy a 30 year level annuity whose payments total $1.7M, and will buy a 30 year 4%/year rising payout annuity whose payments total $1.8M.
Then they advertise that this week’s Jackpot is:
$1.8M Jackpot (Cash payout $1M)
Either way they have $1M to give directly to you or give to the annuity company on your behalf. And in theory your own outcome should be the same over 30 years if you invest as well as the annuity company does.
I’m having trouble googling what percent of people take the annuity but it’s under or well under 5%. At my age I probably wouldn’t live long enough to collect the last few payments. The only way it makes sense to me is if you are young-ish and know that you are so horrible with money that you need to be self governed.
FWIW it is part of your estate so whoever is a beneficiary of your estate can still collect. Doesn’t do you much good but the money isn’t gone either.
I agree though. Taking the annuity really only makes sense when young (and maybe not even then). Although, I have seen articles about many lottery winners going bankrupt within a few years after winning. That much money is easy to squander in a binge of living large. An annuity might be better for many people.
Well sure. I bet my investments over 30 years would do better than the annuity though.
Exactly.
Saying the lottery benefits education is nonsense window dressing that sells the idea to voters considering approving a lottery. But does diddly for education as such.
The one thing you can say about lotteries as a form of general taxation is that it’s a voluntary tax. Each of us can choose to pay it or not. In that sense it’s a good thing.
Of course the reality is that most people make bad decisions with most of their money and most of their lives. The nature of a lottery encourages the least judicious people to make the worst decisions.
So in addition to the jokey truism that it’s a tax on folks who’re bad at math, it’s also a real truth that it’s a highly regressive tax on poor people.
Not sure that follows. Like you I’m unlikely to live to collect the last of a 30-year payout, and maybe not even a 20 year payout.
OTOH, had I won a 30-year payout back at e.g. age 25, that would have run out at age 55. If I had been living large-ish the whole time, more or less annuity paycheck to paycheck, I’d be facing a rude awakening at age 56. Would suck to have a big boat and house and other expensive stuff that costs money to own even if paid off and suddenly be looking at no magic income to cover it.
Of course the smart thing is to live beneath your annuity-powered means and bank enough to keep the good times a-rollin’ afater the annuity runs out. The smart thing with the cash payout is not to blow that either.
People in general suck at doing the smart thing with hefty money.
I bought one scratcher the day that they became legal in the mid-80s and lost. I have bought fewer than ten regular lottery tickets in my life. One was when I was early into dating someone and was absurdly smitten and we walked by a liquor store and I said something cheesy like, "I’m so lucky that I met you that I need to buy a lottery ticket: (also lost).
When I was working and the prize got over a certain amount someone would take a collection, I’d kick in five bucks to the pool. I don’t care if the odds were one in ten billion, it was fun to take part and there is no way I was going to be the one guy who didn’t play while everyone else was chilling in Cancun.
For lottery winners who aren’t good with money, an annuity will probably work out better in the long run. A cash prize can be squandered away in no time and leave the person in a lot of debt. That’s harder to do with an annuity. Also, in case of a lawsuit, the future annuity payments of the annuity might be protected from garnishment. So even if a cash payment is objectively better, an annuity might be better for a specific person based on their real world situation.
This is mainly why I play the lottery. I am under no illusions about my chances. I am buying a dream for a few days daydreaming about what if I did win?
But, I only buy them when they get crazy big so, overall, I doubt I have spent $100 in my whole life on them (call it 40 years…I’m older than that but wasn’t buying them as a kid).
The (IMO quite valid) point is that the total spent on education in any state with a lottery most likely does not change, so no real benefit to that particular area. It’s just that the dollars are coming from a different source, freeing up tax dollars to go into something/someone else('s pockets).
And your point is valid.
I was more answering the question about how not all money that gets paid in gets paid out in prize money.