How inflation makes the Powerball jackpot so big

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How inflation — and resistance to tax hikes — drove the Powerball jackpot to a record $2 billion

Why it’s a good bet nationwide lotteries are here to stay and will only get larger.

How inflation — and resistance to tax hikes — drove the Powerball jackpot to a record $2 billion
THE NEWS

After an overnight delay due to security protocols, Powerball finally picked the numbers for its largest-ever jackpot, totaling over $2 billion. That’s more than the GDP for the country of Belize. The winning ticket was sold in California.

If you think this Tuesday’s Powerball pot was huge, there’s bound to be a bigger one in the future. The reason is the same one that made your Halloween candy cost more: inflation. But while the Powerball pots may be getting bigger, inflation could also dull what your winnings are worth.

THE CONTEXT

Powerball has become the juggernaut of the lottery system. Tickets are sold in 45 states, the District of Columbia, Puerto Rico and the U.S. Virgin Islands. It regularly breaks its own records in number of states participating, number of people playing — and yes, the number of dollars in the jackpot. This is the second time in its history that the pot has broken the $1 billion mark; the last time was in 2016, when the pot was split among three winners.

States are often convinced to participate in the Powerball program because they get a cut — shifting the tax burden away from their wealthier taxpayers.

Your chances of actually coming away with the jackpot? Slim. For any given one ticket, which costs $2, the chances of winning were about 1 in 292 million, making the expected value of that $2 ticket $1.16 after taxes, according to Brent Donnelly, president of Spectra Markets, a financial markets media company.

ECONOMY LENS

How inflation makes Powerball more powerful

The pot awarded Tuesday morning was so big thanks in part to high interest rates.

“The advertised jackpot is the future value of the prize after being invested in government bonds over 30 years. Higher interest rates mean bigger lottery jackpots,” the Wall Street Journal reported.

There are really two types of lottery winnings. Winners have the choice between picking the lump sum payment or an annuity — a series of annual payments over 29 years.

According to the latest Powerball data, the lump sum payment is over $900 million while the jackpot is just over $2 billion.

That means that if the winner chooses to take the annual payments, they’d get to take advantage of the Federal Reserve’s current target for the federal funds rate, the interest rate it controls, which is between 3.75 percent and 4 percent, compared with between 0.75 percent and 1 percent in May, six months ago. The Federal Reserve has been raising interest rates over the past year in order to counteract inflation, now running at near its highest rate since the early 1980s.

“The higher the interest rates, the higher the advertised Grand Prize,” Powerball said on its website.

Still, many winners traditionally take the lump sum, thinking they can do better on investments than the stream of annuity payments offered.

But interest rates now are not interest rates forever. If they continue to rise to above 5 percent, that would drive future Powerball jackpots even higher. The other consideration is that inflation could also erode the value of future winnings, as could changes in tax rates.

— Matthew Zeitlin

HISTORY/DATA LENS

Powerball got its start when states realized they could make more by teaming up

While this jackpot made headlines for its shocking number, Powerball’s increasing popularity is no surprise.

Powerball was created in the late 1980s by two lottery officials in Iowa and Oregon, who realized they could offer bigger prizes if they pooled their ticket sales.

That evolved into multistate lotteries as a means for less-populated states to get in on the profits that more populated states were getting out of the lottery. It was only a matter of time before these lotteries evolved into Powerball and Mega Millions (which are for all practical purposes national lotteries with the exception of five states — Alabama, Alaska, Hawaii, Nevada and Utah) in the ’90s and early aughts.

Now more than 45 states participate in the Multi-State Lottery Association, the nonprofit that administers Powerball. (Idaho is the only state to leave the association.)

For politicians trying to make budget numbers, the lottery is a win-win. They realized early on that if people were going to gamble, states could get in on it and use the winnings to maintain services without raising taxes, according to a New Yorker review of historian Jonathan D. Cohen’s book, “For a Dollar and a Dream: State Lotteries in Modern America.” Powerball was just a culmination of years of trying to figure out the best way for states — especially the smaller ones — to make the most profit.

— Anna Deen

POLICY LENS

The lottery isn’t always a boon to state governments

According to the National Conference of State Legislators, lottery money is largely devoted to education and makes up about 1 percent of state budgets. About half of the lottery proceeds — lottery ticket sales — goes to prizes and half goes to the costs of running the lottery and to the states themselves that run the lotteries. States can again raise money from lottery winners by charging taxes on their winnings. Participating states essentially get to double dip on the lottery.

In 2020, according to data collected by the Urban Institute, the 45 states that operate lotteries received almost $21 billion in revenue. About a quarter to a third of “gross lottery revenue” (i.e. ticket sales) goes to the states, the rest goes to administration of the lottery, payments to vendors and the lottery winners.

This is why lotteries are so popular with state governments: They’re a source of revenue where the people who get “taxed” either sign up for it themselves by buying tickets or are the winners of massive windfalls. This means there is less political backlash compared with other ways states raise revenue, like income, property and sales taxes.

That makes it good for states when it comes to how much they could make without the lottery by raising taxes.

— Matthew Zeitlin

Thanks to Lillian Barkley for copy editing this article.

  • Matthew Zeitlin
    Matthew Zeitlin

    Domestic Economics Reporter

    Matthew Zeitlin is an economics reporter at Grid focused on the domestic impact of major stories such as coronavirus, the supply chain and economic volatility.

  • Anna Deen
    Anna Deen

    Data Visualization Reporter

    Anna Deen is a data visualization reporter at Grid.

  • Suzette Lohmeyer
    Suzette Lohmeyer

    Senior Editor

    Suzette Lohmeyer is the senior editor at Grid, where she focuses on daily news.

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