Those Billion-Dollar Lottery ‘Jackpots’ Aren’t Even Half That Big

Lottery fever is rising again in the United States. But buyer beware. The advertised jackpots aren’t nearly as big as they look.

On March 26, someone in New Jersey won a jackpot that Mega Millions advertised on its website as $1.13 billion. And Powerball says its current jackpot is $935 million.

These lottery grand prizes are a fortune, no doubt about that. But truth be told, those mouthwatering advertised jackpot numbers aimed at tempting people to buy tickets are misleading. Thanks to the magic of rising interest rates, the advertised numbers have swelled, while the real value of the current lottery prizes isn’t even half that much. And that’s before taking the bite of taxes into account.

The cash you can choose to receive immediately if you win is depicted in smaller type, beneath the so-called jackpot — yet this cash option is the real thing. It’s what the jackpot is actually worth.

“It’s outrageous — we’ve all totally bought in to the lotteries’ framing — and it’s wrong because it gives you the impression that the jackpots are a lot bigger than they really are,” Victor A. Matheson, a sports economist at the College of the Holy Cross in Worcester, Mass., said in an interview last week.

What lotteries call jackpots are a strange and self-serving formulation that pump up the purported prizes — a framing that has been repeated so many times that people accept it as normal. It’s like bragging that you’ve got a $1 million job, when, actually, you’re paid $1,000 a week and expect to keep working for the next 20 years.

The big U.S. lotteries say there have been 10 jackpots with an advertised value of more than $1 billion. But that’s misleading. Despite all the ballyhoo, the United States has not yet had even one grand prize of $1 billion, based on cold, hard cash.

But when you look closely at the numbers and factor in inflation and interest rates, you get a ranking of the biggest lottery prizes that is different from the conventional lists put out by the lotteries themselves. Some prizes that had a cash value of less than $1 billion when they were originally awarded are worth more than that now, after years of inflation, according to calculations by an independent statistician, Salil Mehta.

Making sense of these numbers isn’t easy. I cited Mr. Mehta’s work in a 2016 column pointing out that the lottery rules had been deliberately re-engineered to produce bigger prizes, enticing people to buy tickets.

“When the prizes start to look really big, more people buy tickets, which makes the prizes even bigger, and that increases revenues for the states that run them,” he said in a recent conversation. “But the odds against winning are so great that people are throwing away their money. It’s a tax on people who may not really understand what they’re doing.”

Unquestionably, if you need the money, don’t waste it on a lottery ticket. Use it to pay the bills, or save it and invest it.

Still, I’m not against lotteries. Daydreaming about fabulous riches can be delightful. From time to time, I’ve bought tickets myself — usually as part of a group, and always when the lottery prizes have swelled to mythic proportions.

But I care about numbers. And the more I’ve looked at them, the worse they’ve looked.

It’s not just that my chance of winning the grand prize in either Mega Millions or Powerball is about one in 300 million.

Even accepting these terrible odds, once I started closely examining the prizes, I began to have questions about how jackpots have been presented to the American public.

What’s a Jackpot, Really?

Defining what the lotteries call jackpots is a mouthful. This is what they really are: the sum of the cash flows that winners can receive, if they choose to get their money over 29 or 30 years. (In effect, this is what is known as a term certain annuity.)

The cash option reflects the actual money gathered by states that participate in the big lotteries, after expenses and revenue put aside for purposes like education.

The advertised jackpots are just an estimate of the sum of the cash flows that the prize pool can buy, and that depends on the interest rates for the government bonds used to create the annuity. The higher the interest rates, the greater the payouts.

J. Bret Toyne, executive director of the Multi-State Lottery Association, which operates the Powerball game from its base near Des Moines, explained these basics in a long phone conversation in December. And he confirmed the effects of high interest rates on both annuities and advertised lottery jackpots.

“Yes!” he said. “High interest rates are good for retirees and for lotteries.”

But simple annuities aren’t advertised like this. The claims made for them are typically limited and boring: For a certain sum, you will receive a specified payout each month, maybe with an inflation adjustment, for a given number of years. It’s generally viewed as inappropriate to say: Buy this annuity and receive a jackpot of $100,000, when, in reality, you’re merely receiving a small fraction of that amount every month for 30 years.

Mr. Toyne agreed, but said, “That’s the way jackpots have been described since before I started, and that was in 1988.”

I checked with several economists and historians, searched newspaper archives, and got consistent answers.

Charles T. Clotfelter, a Duke economist who has studied lotteries for 50 years, told me that modern lotteries have been describing their prizes as “the numerical sum of years of payments” from the beginning. He added, “No one would let you state it in that form if it were a financial product.”

Jonathan D. Cohen, the author of “For a Dollar and a Dream: State Lotteries in Modern America,” said it was only in the 1980s and 1990s that lump-sum cash options — which reflect the real value of the prizes — began to be common.

“Lotteries are run by state agencies, and they’re exempt from truth in advertising laws,” he said. Indeed, I checked with federal agencies that deal with such matters, and was told that they have no jurisdiction over lotteries.

Stephen M. Stigler, professor of statistics at the University of Chicago, has studied the history of lotteries, including those in Britain and France. “The propensity to advertise with the biggest numbers you can get goes back many hundreds of years,” he told me. “Choosing the largest plausible number and claiming it as the lottery prize” is an old tradition, he said. If lotteries can get away with it and it helps generate business they often do it.

Jackpots and Interest Rates

Rising interest rates over the last couple of years have made the distortions inherent in the jackpot advertising stark.

Consider that on March 26, the cash value of the Mega Millions prize was $526 million — only 48 percent of the advertised jackpot of $1.1 billion. (Another way of putting this is that the so-called jackpot was 2.1 times the cash prize.)

In January 2021, by contrast, the advertised jackpot for Mega Millions was $1.05 billion — slightly less than the March 26 jackpot. But the cash value of the 2021 prize was $777 million, 74 percent of the advertised jackpot and much more than the March 26 cash prize.

What happened? Well, the yield on the 10-year Treasury note now is about 4.1 percent and the lottery organizers estimate that, converted into bonds over 30 years, the amount in the lottery’s cash prize pool — about $526 million — will generate about $1.1 billion. In 2021, the yield on the 10-year government bond was only 1.1 percent. There was lottery fever in 2021 too, and the cash prize pool then was even bigger than it is now — $777 million. But at that low 1.1 percent interest rate, the advertised jackpot was “only” $1.05 billion — still a heck of a lot of money, but a small fraction of what it would be at the higher interest rates that prevail now.

Similarly, the Powerball’s advertised jackpot on March 28 was $935 million. Its cash value was only $449.7 million, 48 percent of the advertised jackpot. That compares with a January 2021 Powerball advertised jackpot of $731 million, with a cash value of $547 million — 75 percent of the 2021 advertised jackpot and much more than the current Powerball cash value.

In other words, the 2021 prizes were more valuable than the current ones, despite the hoopla about the current jackpots.

In fact, for an accurate list of the biggest lottery prizes in the United States, you need to start with the cash prizes and adjust for inflation, which has been steep for the last few years. Mr. Mehta has done all that hard work.

In my estimation, these are the biggest lottery prizes in U.S. history, with their cash values stated in 2024 dollars:

• Powerball, January 2016, now $1.295 billion. Its advertised jackpot was $1.586 billion.

• Mega Millions, October 2018, now $1.083 billion. Its advertised jackpot was 1.537 billion.

• Powerball, November 2022, now $1.046 billion. Its advertised jackpot was $2.04 billion. It’s No. 1 on conventional lists based on nominal advertised jackpots, but its inflation-adjusted cash prize puts in third place.

I’ll admit that this may seem like quibbling. The cash prizes for Powerball and Mega Millions are so big, and the odds of winning so small, that distinctions like these may seem irrelevant, or worse.

Fine. I get that. If you’re buying a lottery ticket, you’re not looking for a good deal. You’re buying fun, and this analysis is a downer.

But I’ll be keeping my eye on the cash prize and the miserable odds. At least that’s my intention.

At some point, when the lottery jackpot gets really big, I’ll probably be swept up in lottery fever like everybody else. But at least I’ll know the true size of the jackpot I’m not going to win.