You won’t walk away with $1.6 billion if you win the lottery today. In fact, the estimated prize pool — the amount you’d actually win, before taxes, assuming you don’t have to share the jackpot with anybody else — is less than half that amount, at $782 million.
Why it matters: Billion-dollar jackpots are good at whipping up excitement — so the lottery has always exaggerated the amount of money winners stand to get.
- Thanks to the bond market, the size of the exaggeration right now is bigger than it has been in well over a decade.
- The headline jackpot this week is $1.6 billion. That figure includes the $782 million in the prize pot, plus more than $800 million in future interest payments that the winner almost certainly won’t choose to receive.
How it works: In theory, lottery winners can choose an “annuity option” instead of just taking the amount of money in the prize pool.
- The annuity option is an annual payout over 30 years, with the sum paid out rising by 5% each year. The headline jackpot size is not the amount in the prize pool but rather the size of all those 30 payments, added together.
- No one has chosen the annuity option since 2014. And if it takes 30 years to pile up your $1.6 billion, by the time you’re done, its purchasing power will be noticeably less than $1.6 billion.
By the numbers: The jackpot exaggeration ratio — the amount by which the headline jackpot size exaggerates the actual amount of money in the prize pool — has spiked from 1.2 in April 2020 to more than 2 today.
- That’s because in order to create the annuity, the money in the prize pool is divvied up into a series of Treasury bond investments. As the interest rate on Treasury bonds rises, the future value of those bonds goes up.
The bottom line: By raising interest rates, Fed chair Jay Powell has also increased the size of lottery jackpots — and therefore has also increased the amount of public participation in the lottery.
Go deeper: Powerball jackpot now biggest lottery prize ever at $1.6 billion