Lottery question?

Question

Why do they penalize lottery winners for taking the 'cash option' by effectively cutting it in half? When a big winner takes the 20 year payout they still don't get all the money...AND have to pay exhorbitant taxes, so why the 'other' deduction for a cash payout? I've never won anything but was reading about the latest big lottery winner in Michigan and again wondered about this fact. Anybody know?

Answer 1

because when they pay out over a number of years they get to make money (earn interest) off the money being held

Answer 2

This has to do with the time value of money and present value.

In Michigan (where I live) they used to pay the entire amount all at once.  But the folks running the government are always looking for ways to abide by the letter of the law and avoid the spirit of the law.

If someone won $20,000,000 for example.  Getting the entire amount up front is worth a lot more than getting it spread out over 20 years.   What the state does here, is figure out how much money they need to set aside so that with interest the full payment stream will be funded as needed.  Comes out to about half.  

In my mind, although they are technically correct, it is really a devious way to steal half the winnings back.  

Bottom line:  NEVER EVER trust the government to look out after your best interests.

PS - There used to be some joke printed lottery tickets that had a lot of sight gags on it.  The winning prize was a MILLION dollars, paid out $1 a year for a million years.  The present value of THAT stream of money is about $2 - $4.

Answer 3

It is just a common con trick with the American lotteries.

The fact is people are excited by large amounts of money in the jackpot.  So American lotteries (Powerball and Mega Millions) have made it harder to win in the past few years.  By adding a few extra numbers they have pushed the odds of winning well over 150m-1.  They do this to create more rollovers, which in turn pushes the prizes higher.

Thanks to someone at some point bribing some politician, the lottery is allowed to advertise a lie.  They are able to advertise this massive jackpot of a hundred million dollars or so.  The small print is that if you want the money right away, and after the government has its pound of flesh, you end up with nothing like what was advertised.

It's c**p really.  Imagine if you went to buy a Big Mac at McDonalds and when you got it, it was about three inches around, and the government took a bite out of it in tax.

Personally, I think that we should follow the lead of other countries that have a lottery.  The government should take their cut on the front end, from ticket sales.  And the lottery companies should be forced to advertise what the prize really is.  Not what it would be if they kept your money and invested it so they could earn interest on it over the next 20-25 years.

Answer 4

I have found an amazing site! www.lotteryprofit.com The biggest loophole in lottery history revealed :D:D:D:D:D:D:D

I'm gonna be riiiiiiiiiiiiiiiiiiiiiiiiiiiiiiiiiiiiiic... :D:D:D:D:D:D:D:D:DD:D::D:D:D:D:D:D:D::D:...

Answer 5

interest the bank looses

Answer 6

The CPA has the facts wrong.

It certainly involves the present value of money, but that money is not the announced jackpot; it is the lump sum cash option, which is about its half.

Let me elaborate with the help of a $50m jackpot as an example. The fact that the announced jackpot is $50m does not mean that the percentage of the sale of the lottery that is allotted for the jackpot is $50m; it is about $25m. The lottery agencies then devised a way to boost the jackpot amount so that it will excite the public (the power of advertisement!!), and maybe, to create a more convenient income for the winner.

Of the following two ads which one do you think works better?

"Ge your tickets now, $50M JACKPOT ($25m - cash option)"

or

"Ge your tickets now, $25M JACKPOT ($50m - 20 years pari-mutuel)"

The first one obviously generates more sales.

So, the fact is that the lottery agengy has only $25m to pay for the jackpot winner, but also tells him/her "let us keep your money and we will pay you annualy with a nominal interest of ~6% so that by the end of 20 years, you would have collected $50m". All in all, '$25m now' and '$50m paid over 20 years' essentially represent the same amount of money.

What the asker and the CPA got it wrong is the notion that the announced jackpot ($50m) is not the actually available money. If that were the case, all those greedy lawyers would not be sitting and watching. All the 43 states that play the lottery would have been overwhelmed by class action lawsuits. Don't forget also 'Consumer watch Groups'.