Why the Powerball Jackpot is $1.9 billion? The annuity or lotteries market, or the number that almost no one ever takes
There were no winning tickets sold for Saturday’s drawing of an estimated $1.6 billion, already the highest lotto prize offered. The last drawing of the lottery was on August 3.
The amount the lottery will cost in the future depends on whether you buy an annuity or a lump-sum payment. The current environment of rising interest rates has opened the door to ever-larger annuity payments.
Yes, that means the cash value of the current “record” $1.9 billion jackpot is less than the cash value of the $1.586 billion jackpot six years ago. Thanks to the recent interest rate hikes, that discrepancy has been fixed.
The game is played with tickets that cost $2 each, with the players choosing five white balls and a red ball between the numbers 1 to 69. If a player gets all six numbers correct, they win the massive jackpot.
One of the reasons for the record $1.9 billion jackpot for the Powerball drawing Monday night is something you wouldn’t expect — the recent run of steep interest rate hikes from the Federal Reserve.
But the thing is, the real prize is far more likely to be a much smaller lump sum, the “cash value” – in this case $929.1 million – that never gets any attention.
According to Victor Matheson, a professor of economics and accounting at the College of Holy Cross, everyone talks about the annuity prize. The number is the lotteries market. It’s the number in the news story. But it’s the number that almost no one ever takes.”
The advertised annuity price was not much bigger than the cash value, even in a low interest rate environment.
That advertised then-record annuity prize was 61% greater than the cash prize. This time, the estimated annuity prize is 104% greater than the cash prize. The annuity prize on Monday would only be a small amount if the ratio was the same as last year.
But even a conservative investor in stocks could likely do better by taking the money up front and investing it, not withstanding the swings in the stock market. The Standard & Poors 500 has risen over 700% in the 29 years since it was founded, or an average annual growth rate of about 7.5%. Matheson said the big annuity prize may make it more attractive to the next big winner or winners.
Then again, a disinclination to accept deferred gratification could overcome any investment assumptions or tax planning that goes into the winner’s calculations.