The Mega Millions jackpot makes this the week to talk about lottery economics, so here’s a whopper: Households earning less than $13,000 a year spend a shocking 9% of their money on lottery tickets, Henry Blodget reports. Are they clueless? Are they desperate? Are they economical? Maybe, probably, and possibly.
For the desperately poor, lotteries perform a role not unlike the obverse of insurance. Rather than pay a small sum of money in exchange for the guarantee of protection that you’ll need in the future, you pay a small sum of money in exchange for the small probability that you’ll win money to help your lot right away. It is, for lack of a better term, a kind of aspirational insurance.
As it turns out, the typical U.S. family spending spends nearly the same share of its money — 10.8% — on insurance and pensions, including mandatory insurance programs like Social Security. The poorest working families also pay Social Security. But approximately 10% of households, most of them in the bottom decline, pay net zero federal taxes (including Social Security) due to tax credits in federal income tax code that bring their total federal burden past zero.