Suppose a customer at your yard sale offers $20 for a lamp, then hands you 75 cents.
“You said you’d pay me $20!” you object.
“I will,” he says. “Over 25 years.”
“Forget it! I want my money now,” you insist.
“OK, OK, here you go,’ he says, handing you $12. “That’s the lump sum payout. Less my wallet-enrichment percentage,” he explains.
Feeling cheated yet?
So why do people accept the way lotteries advertise their top prizes? In big type is some gigantic sum claimed to be the “jackpot.” Really? What’s your idea of a jackpot? Is it an annuity based on the cash collected from ticket sales? Or is it simply that pool of cash?
Powerball and Mega Millions, with almost universal media cooperation, repeatedly point at the annuity (a figure inflated by a back-loaded payment schedule) and call that the jackpot.
In much smaller type, oh by the way, there’s a “cash option,” a lump-sum payment that’s substantially less.
This is the figure that should be quoted in the media for two reasons: It’s far and way the most common amount chosen by winners, so it’s really what people are playing for. And it fits the most widely accepted definition of a jackpot. Here’s Mega Millions’ description of its cash option: “equal to all the cash in the Mega Millions jackpot prize pool.”
All the cash in the pool? That’s the jackpot. The annuity is an investment (and temptation-resistance) “option.”
Adding to the deception is how neither of these numbers reflects (a) the chances of splitting the pot with other winners, and (b) the huge chunk lopped off by taxes.
A winner in New York City could forfeit more than half the winnings because of federal (39.6 percent), state (8.8 percent) and local (3.9 percent) taxes.
So suppose the advertised “jackpot” is $200 million. The cash payout would be about $136 million. Subtract federal taxes and about $82 million is left. Some states, like Pennsylvania, don’t tax lottery winnings, but in the ones that do, the amount would drop again. In Massachusetts (5 percent), $77.5 million could remain.
Split two ways, that’s about $39 million each, after taxes. Split three ways, you’re down to $26 million, 87 percent less than the original advertised figure.
Feeling cheated yet?
Keep in mind that lotteries are revenue-raisers (an “idiot tax,” some say) for governments, who keep a portion of sales proceeds. And yet some states want a percentage of the winnings, too.
A common comeback is that people know a lot of this, and, besides, who wouldn’t love to bank $26 million?
Any chance you’re trying to sell your house? I’ve got this big fake check right here for up to seven times the amount you’ll actually see.