How the payoff decisions of lottery winners have shifted the income distribution
When I posted the photo of people lining up for Powerball Mega Millions tickets in New York, I did it mainly out of guilt that I hadn't posted anything yet today. But I learned a few minutes later, from Joel Slemrod of the University of Michigan, that it was highly relevant.
The relevance is that lottery winners have been increasingly choosing the lump-sum distribution over the 20-year payout. "There's been a secular change in how people take these things," Slemrod said. "And that's having an effect on the apparent income distribution."
It's not just lottery winnings. Stock option exercises are often concentrated into a particular year. Employees taking buyouts often opt for a lump-sum pension payment, etc. In these cases it's not so much that income distribution is becoming more unequal between people as that it's becoming more unequal from year to year for a particular individual. It's sort of the flip side of the high-earners have more volatile incomes argument I made yesterday.
Slemrod is no Alan Reynolds--he doesn't think the lump-sum phenomenon explains all or even most of the apparent rise in income inequality over the past quarter century. "But I do believe that's part of what's going on," he said. I'll buy that. Heck, I'll buy lots of things after I get that lump-sum Powerball Mega Millions jackpot.
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1
More than anything else, I think the ridiculous amounts of people lining up for that thing coupled with everyone's choice for the lump sum is a pretty damning indictment of us as a people. We live in a Deal-or-No-Deal world, where years of mediocre living can be wiped away by the luck of the draw. And not only that? We want it NOW. Like addicts looking for their next fix, we live in misery waiting for someone to save us.
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2
John just said it all.
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3
Lump sum is not a want it now, it is a I don't trust you to make your payments x years from now.
How many pensions that people depend upon go belly up? Don't those people wish they'd taken a lump sum, because they are not going to get thier money now. Its a completely reasonable lack of faith in companies or states to pay their obligations in the future. Honestly how many states have gone back and tampered with their retirement obligations to state workers? Almost all? What is that, a broken promise, that creates a financial burden, and we all know someone who lost a pension, or had it reduced after a buy out of a company, or the companies financial problems.
You'd have to be living in a hole, to think any option but the lump sum was a good gamble.
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4
I think John should kill himself. It would spare you of the bleak life it sounds like you have.
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5
While the incremental payments are nice to live off of, if you want to do some serious investing in a business, real estate, or some other large ticket items, the lump sum payment is a far more attractive option. I'm sure that's not the motivation behind everybody's decision to take the lump sum, but it could have something to do with it.
One might also want to look at the ages of those winning, and consider that they don't really care to get yearly payments every year after retirement, and would prefer to have more capital to work with in their prime earning years.
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6
I think some people are taking money up front now because they can do more with it now, even if it is a lower amount, than if they get it later. This is called the time value of money.
As an example, say you have a mortgage with a $1,000 monthly payment, and inflation is at 3% per year. Inflation eats away the purchasing power of money. Because of this, the value of that last payment, in thirty years, will be only $412.00 in today's money.
Looking at it another way, you would only have to deposit $412.00 today at 3% interest, and in thirty years, the interest earned plus the $412 original deposit would equal the $1,000 payment.
Take a $100,000 amount they have to pay out in thirty years. At 3% inflation, it will only cost them $41,199. If inflation is higher, it will cost them less. If inflation rises to 5%, it would only be worth $23,138 to the winner in thirty years.
Most winners should be able to find secure investments that will beat the long term payout. Now if we can just solve the problem with the relatives...
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7
Brian is useing his brain
- foxjust About to walk to LA Public Library for this http://bit.ly/7LgRu6 Am told only a nobody walks in LA - 1 day ago
- foxjust just took first ride on LA metro. Totally disorienting not to have car to park here - 2 days ago
- foxjust Thanks to Bama fans for reminding us we needed to buy TP! (Turns out we're fine on detergent). Oh, and nice game #ironbowl - 1 week ago
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