" What sticks out to me is the,"the risk of loss rests with the prize winner.""
That part refers to the cash, not the annuity, and is connected to the part that says "The gross cash option will represent the sum of the first annuityinstallment plus the net proceeds from the sale of the governmentsecurities originally purchased to fund the annuity prize."
The risk they're talking about is that the value of the of the securities on the day of sale may be different than the original cost. That value can go up or down, based on interest rates and what buyers are willing to pay. Let's say that the amount of cash for the jackpot is 54 million and they use 50 million to buy the securities (to pay another $96 milion in 24 future payments). When the winner chooses cash some time later the securities that originally cost 50 million will be sold, and that cash will be added to the 4 million, and paid to the winner. Now let's say that on the day the securities were bought interest rates were 5%, but on the day they're being sold interest rates have gone up to 6%. If I can invest 50 million in something that pays 6% I certainly wouldn't pay 50 million for something that pays 5%, so the securities being sold by the lottery will be worth something less than 50 million. OTOH, suppose interest rates have dropped to 4%. Wouldn't you rather invest in something that pays 5%? In that case the lottery securities would have increased in value and will sell for more than 50 milion. In real life interest rates dont normally change rapidly, and the value of the securites will be close to what was paid.
As with other securities, you can't possibly lose (or gain) money unless you sell. If you take the annuity the securities won't be sold, so there can't be a loss (or again). The annuity payments are guaranteed; the state promises you that you'll get what you were told you'd get. The only way that won't happen is if the state and the government issuing the securities both default on their obligations.
"You can always buy a better annuity".
What's "better" is subject to an enormous amount of debate. The lottery isn't buying you a Yugo and paying enough money to buy a Rolls Royce. They're buying an investment that's extremely safe, but has a lower interest rate than some other investments. Some people who think they can buy a better annuity could have taken the cash and then bought an annuity from Madoff because he told them they'd make twice as much interest. Clearly that wouldn't be a better annuity. As a general rule, interest rates have an inverse relationship with risk. The only way to earn more interest is to take a bigger risk of losing money.
So, what's the better annuity that somebody is going to buy with the cash? They can buy one funded by the same government securities that the lottery can buy, but that's clearly not better. Maybe they'd buy one funded by the investments of a private company. Is an annuity promising 6% better than a 5% government backed annuity if the 6% is backed by AIG or GM? Basically, the government makes their choice of balancing risk and reward, and you can choose another balance.
The other thing that almost everybody ignores is the taxes you'll pay when you take the cash. Let's take the example above, assuming the securities are sold for the same $50 million that was paid. With the annuity you get $4 million now and $50 million is invested. With the cash you get $54 million keep $35.1 million after taxes. Keep $2.6 million (as much as the guy with the annuity kept after taxes) and you can invest $32.5 million. Your investment is 65% of what's invested in the lottery's annuity. To earn the same amount of money you'll need to get 53.8% more interest. If you could get that without additional risk, don't you think the lottery would already be invested in that deal?
Finally, let's get back to the possibility that you won't get the annuity the lottery promised because the state and the government guaranteeing the securities have both defaulted on their obligations. What are the chances you'd have done better with your own investment, when the US government isn't paying their bills? You thought of that and planned ahead by investing in gold? AIG isn't sending checks anymore and you've got no money, but a ton of gold. Who are you going to sell it to, and for how much? The other people in the US who aren't working and don't have money to spend aren't going to be buying much gold, so the value will go down. People in other countries? What are the chances of major economic collapse her that doesn't have a major impact elsewhere? Any investment you make is only as safe and stable as the society that makes any item valuable. If you're really worried about the value of a lottery annuity going down you should be investing in food with a really long shelf life, a means of keeping it safe, and some courses in farming and self sufficiency.