A Consumer Federation of America/Primerica poll in October 1999 showed that a majority of Americans think it is easier to get rich by winning a lottery or sweepstakes than by saving and investing modest sums of money. It seems inconceivable that the little bit of money you could invest would ever turn into the millions a lottery jackpot offers. Might as well try to get lucky now, right?
Many people seem to think so. Millions of viewers tuned in on November 19th to watch John Carpenter walk away from Millionaire with one million dollars (before taxes, of course), the largest prize ever won on a television game show. How hard would it have been for John to accumulate that much wealth by investing? According to an upcoming Cato Institute study, if John put $2 a day into a stock fund that has the historical average return of 11 percent per year, it would take him only 50 years — the career-span of an average American — to amass just over one million dollars.
Other game shows don’t offer the big prize that Millionaire does, but we often feel that the winners on those shows are rich and enviable because of the amounts they win. But when you look at how modest their winnings truly are, it makes you wonder why we should be impressed.
The biggest all-time winner on Jeopardy!, Bruce Seymour, won a total of $305,989 by 1990. If Bruce were to undertake a $2-a-day savings plan and build up equity in a mutual fund, he would have the same amount after 30 years. And his odds of achieving that would be orders of magnitude greater than his odds of winning on Jeopardy! Wheel of Fortune’s biggest winners, Peter Agryropoulos and Deborah Cohen, won a total of $146,529 in cash and prizes during Sweetheart’s Week in 1996. Saving $2 a day in a mutual fund that tracks the market would yield that amount in about 20 years.
Perhaps most people don’t save because the government taxes away most of the gains to be had by saving. Someone in the 15 percent tax bracket (for instance, a single person making roughly $30,000 a year) who saves $1,000 a year for 20 years would lose 30 percent of the potential gains from saving thanks to the income tax’s bias against saving. Saving for longer — say, 50 years — brings the tax loss to 50 percent. A worker’s realization that the current income tax code double-taxes savings — the money earned as income is taxed, and then the earnings of the saving are taxed — may be part of the reason so many people don’t save very much. Also consider the Social Security payroll tax, which takes 12.4 percent of every worker’s earnings to support a government pension system that is careening toward insolvency in 2034. What if our Millionaire winner, John, put 10 percent of his income over the course of his lifetime into a personal retirement account? He obviously would not face poverty after retirement. He’d be practically guaranteed a nest egg that would make his recent winnings seem much less than impressive. And if he died before he depleted his savings, he’d still get to pass on all that wealth to his heirs. The only thing Social Security passes on is debt to future generations.
Game shows and lotteries are dreams come true for few. Saving and investing can be a reality for all Americans. The government should encourage the accumulation of real wealth by turning Social Security into a personal savings plan and scrapping an income tax code that punishes saving. With a little discipline and some long-term planning, almost anyone can be a winner in wealth. And you don’t even have to know which U.S. president appeared on Laugh In.