Lottery fever is rising again in the United States. But buyer beware. The advertised jackpots are not as big as they seem.
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 big lottery prizes are a fortune, no doubt about it. But truth be told, those mouth-watering advertised jackpot numbers that aim to lure people into buying tickets are misleading. Thanks to the magic of rising interest rates, the advertised numbers have been inflated, while the true value of today’s lottery prizes is not even half that. And that’s before the bite of taxes is taken into account.
The cash you can choose to receive immediately if you win is depicted in smaller type below the so-called jackpot — however this cash option is the real one. It’s really worth the jackpot.
“It’s outrageous — we’re all completely wrapped up in the lottery — and it’s wrong because it gives you the impression that the jackpots are much bigger than they really are,” Victor A. Matheson, a sports economist at the College of the Holy Cross in Worcester, Mass., he said in an interview last week.
What lotteries call jackpots is a strange and self-serving concoction that draws the supposed prizes – a framework that has been repeated so many times that people accept it as normal. It’s like bragging about having a $1 million job when you’re actually getting paid $1,000 a week and expect to keep working for the next 20 years.
The major US lotteries say there have been 10 jackpots with an advertised value of more than $1 billion. But this is misleading. For all the ballyhoo, the United States still doesn’t have a single $1 billion grand prize, based on cold, hard cash.
But when you look closely at the numbers and factor in inflation and interest rates, you get a ranking of the biggest lottery prizes that is different from the conventional lists published by the lotteries themselves. Some prizes that had a cash value of less than $1 billion when they were first awarded are worth more than that now, after years of inflation, according to calculations by an independent statistician, Salil Mehta.
Understanding these numbers is not easy. I cited Mr. Mehta’s work in a 2016 column, pointing out that the lottery’s rules had been deliberately reengineered to produce larger prizes, enticing people to buy tickets.
“When the prizes start to look really big, more people buy tickets, which makes the prizes even bigger, and that increases revenue for the states that run them,” he said in a recent conversation. “But the odds of us winning are so great that people are throwing their money away. It’s a tax on people who may not really understand what they’re doing.”
Arguably, if you need the money, don’t waste it on a lottery ticket. Use it to pay the bills or save it and invest it.
Still, I’m not against lotteries. Daydreaming about fabulous riches can be enjoyable. From time to time, I have bought tickets myself — usually as part of a group, and always when the lottery prizes have swelled to mythical proportions.
But I care about the numbers. And the more I look at them, the worse they look.
It’s not just that my chance of winning the big prize in either Mega Millions or Powerball is about one in 300 million.
Even accepting these terrible odds, once I started looking closely at the prizes, I began to have questions about how jackpots are presented to the American public.
What’s a Jackpot, Really?
The definition of what lotteries call a jackpot is a mouthful. That’s really it: the sum of the cash flows the winners can get if they choose to take their money out over 29 or 30 years. (Actually, this is what is known as a term defined annuity.)
The cash option reflects the actual money raised by states participating in the major lotteries, after expenses and revenue set aside for purposes such as education.
Advertised jackpots are simply an estimate of the sum of cash flows the prize can buy, and this depends on the interest rates on the government bonds used to create the annuity. The higher the interest rates, the higher the payments.
J. Bret Toyne, executive director of the Multi-State Lottery Association, which operates the Powerball game from its base near Des Moines, explained those basics in a lengthy telephone conversation in December. And it confirmed the effects of high interest rates on both annuities and advertised lottery jackpots.
“Yes!” he said. “High interest rates are good for retirees and good for the lottery.”
But simple annuities are not advertised as such. The claims made for them are usually limited and boring: For a certain amount, you will receive a certain payment each month, perhaps with an adjustment for inflation, for a given number of years. It is generally considered inappropriate to say: Buy this annuity and receive a $100,000 jackpot, when in fact you are only receiving a small fraction of that amount every month for 30 years.
Mr Toyne agreed, but said, “That’s how jackpots have been described since before I started, and that was in 1988.”
I checked with 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 modern lotteries describe their prizes as “the numerical sum of the years of payouts” since the beginning. He added, “Nobody would let you declare it that way if it was a financial product.”
Jonathan D. Cohen, author of “For a Dollar and a Dream: State Lotteries in Modern America,” said it wasn’t until the 1980s and 1990s that lump-sum cash options — which reflect the true value of prizes — began to is common.
“Lotteries are run by government agencies and are exempt from truth in advertising laws,” he said. I actually checked with federal agencies that deal with such matters and they said they have no jurisdiction over lotteries.
Stephen M. Stigler, a professor of statistics at the University of Chicago, has studied the history of lotteries, including those in Britain and France. “The tendency to advertise with the biggest numbers you can get goes back many hundreds of years,” he told me. “Picking the biggest reasonable number and claiming it as the lottery prize” is an old tradition, he said. If lotteries can get away with it and it helps generate business, they often do.
Jackpots and interest rates
The rise in interest rates over the past two years has accentuated the distortions inherent in jackpot advertising.
Consider that on March 26, the Mega Millions prize money was $526 million — only 48 percent of the advertised $1.1 billion jackpot. (Another way to put this is that the so-called jackpot was 2.1 times the prize money.)
In January 2021, by contrast, the advertised Mega Millions jackpot was $1.05 billion — slightly less than the March 26 jackpot. But the 2021 prize money was $777 million, 74 percent of the advertised jackpot and far more than the March 26 prize money.
What happened? Well, the yield on the 10-year Treasury note now is about 4.1 percent, and lottery organizers estimate that, converted into 30-year bonds, the amount in lottery prize money — about $526 million — would yield about 1 .1 billion dollars. In 2021, the 10-year Treasury yield was only 1.1%. There was lottery fever in 2021 as well, and the prize money then was even bigger than it is now – $777 million. But at that low 1.1 percent interest rate, the advertised jackpot was “only” $1.05 billion — still a lot of money, but a tiny fraction of what it would be at the higher interest rates now prevailing.
Similarly, the advertised March 28 Powerball jackpot was $935 million. Its cash value was only $449.7 million, 48 percent of the advertised jackpot. That compares to an advertised January 2021 Powerball jackpot of $731 million, with a cash value of $547 million — 75 percent of the advertised 2021 jackpot and far more than Powerball’s current cash value.
In other words, the 2021 prizes were more valuable than today’s, despite the commotion over the current jackpots.
In fact, for an accurate list of the largest lottery prizes in the United States, you have to start with the prize money and adjust for inflation, which has been steep in recent years. Mr Mehta has done all this hard work.
In my estimation, these are the largest lottery prizes in US history, with their monetary values ​​in 2024 dollars:
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Powerball, January 2016, now $1.295 billion. Its advertised jackpot was $1.586 billion.
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Mega Millions, October 2018, now $1.083 billion. Her advertised jackpot was 1.537 billion.
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Powerball, November 2022, now $1.046 billion. His advertised jackpot was $2.04 billion. It’s No. 1 on conventional lists based on nominally advertised jackpots, but inflation-adjusted prize money ranks third.
I will admit that this may seem like a fake. The prize money for Powerball and Mega Millions is so large, and the odds of winning so small, that accolades like these can seem irrelevant or worse.
Fine. I understand. If you’re buying a lottery ticket, you’re not looking for a good deal. You buy entertainment, and this analysis is devastating.
But I’ll be wary of prize money and crappy odds. At least that’s my intention.
At some point, when the lottery jackpot gets really big, I’ll probably get swept up in lottery fever like everyone else. But at least I’ll know the true size of the jackpot I’m not going to win.
