Overview
U.S.
Savings Bonds are a convenient, secure, and low-cost product that facilitate
savings. Today, an estimated 55 million
people hold U.S. Savings Bonds. Bonds retain a reputation as an easy-to-use and
trusted brand– even though they have not been actively marketed since 2003. It
is a product that is especially attractive to small, first-time, or
shorter-term savers. Bonds may be
purchased for as little as $50 and redeemed as early as twelve months after
purchase. They are backed by the U.S. government– so there is no risk
of default or reduction in principal– and they provide market-rate returns. There are no additional fees, and a bond
purchaser is not required to have a bank account to buy, hold, or redeem a bond
and therefore is not subjected to the burdensome ChexSystem review.
Small savers usually opt for either of two types of
bonds: the Series I U.S. Savings Bond introduced in 1998, or the Series EE
bond introduced in 1980. Both are available for purchase at the Treasury Department
website, TreasuryDirect.gov
(electronic bonds only), at many financial institutions, and through select
employers (paper bonds only), with a valid social security number. The return
on Series I bonds (5.64% in early 2009) is currently outpacing Treasury Bills, affirming
bonds as a competitive and safe investment. Given the economic challenges
confronting many American families, U.S. Savings Bonds are a critical tool that
could be better deployed to support savings and improve financial stability. However,
the program faces a number of challenges that must be addressed to improve access
and maximize the effectiveness of this vital financial product.
Why Should Policymakers Save and Restore the U.S. Savings Bond Program?
Savings
bonds appeal to all income-levels and are particularly attractive for
lower-income populations, but Treasury policy is causing bonds to become
increasingly difficult to use. What
began as a program to help stabilize American households and the nation’s
balance sheet has evolved away from its original purpose. The current debt-led
recession has reinforced the important role for savings at both the household
and national levels. Revitalizing the
U.S. Savings Bond Program can contribute to a renewed culture of thrift and
savings in America.
A
multi-year pilot by the Doorways to Dreams Fund (D2D), H&R Block, and 32 community-based organizations has demonstrated that
bonds are in demand and fill an unmet need among low-income savers. In 2008 the
pilot offered over 25,000 low-income clients the opportunity to purchase bonds
with a portion of their tax refund; about 6% of those receiving a refund did so.
Results showed that over half of
purchasers had no other savings or investment at the time of purchase and almost
40% of those eligible chose to order bonds for a second consecutive year. Redemption
rates for bonds bought during the bond pilot (11.25%) resemble the redemption
patterns of bonds bought by the general public (10.3%) after one year. Lower-income
bond buyers wish to use bonds for longer-term saving, but also understand that they
can be accessed for shorter-term needs.
Current Challenges for the U.S. Savings
Bond Program
The U.S. Bond Program is underutilized, in part because
of its limited purchase options and low program visibility. Outside of pilot
programs such as described above, U.S. Savings Bonds are currently not
available for purchase at the time many low-income families are most able to
buy them-as they receive their federal tax refund. In 2005, more
than 65 million tax filers, earning less than $40,000, received an
average refund of $1,700. This sizeable lump sum payment is an ideal
opportunity to promote savings.
Between 1962 and 1969 tax filers could purchase savings bonds directly on their
tax return, but they had to use their entire refund to do so, leading to the
elimination of the practice. Since 2007, the IRS
has allowed tax filers to direct their
refund to up to three different accounts using Form 8888. This new split refund
flexibility removes the need to place the entire refund amount in a single
investment; however, direct purchases of savings bonds are currently not allowed.
Recent
policy efforts are undermining the potential of savings bonds as a valuable
product for this target population. In 2003, Congress eliminated the program’s
marketing budget, diminishing the prospect of adding new savers. In 2008, the
Bureau of Public Debt released a five-year strategic plan that called for the eventual
phase-out of newly purchased paper savings bonds, thus requiring all
prospective purchasers to buy a bond through the Treasury’s website, TreasuryDirect. Removing the in-person
purchase option will marginalize prospective buyers and disproportionately
affect lower-income persons who are less likely to use the internet to manage
their finances. Furthermore, to use TreasuryDirect,
buyers are required to have a
bank account to fund their purchase and eventually receive their redeemed
funds.
Policy Options to Revitalize the U.S. Savings
Bond Program
Reinstate the Option to Purchase U.S. Savings
Bonds on the Tax Form
The
option to purchase a U.S. Savings Bond could be added to the new IRS Form 8888. This change would “mainstream” the purchasing
process by integrating it into the tax filing process. It would ensure that
filers anywhere, using any tax preparation method, would be able to order bonds
and would capitalize on the potential saving “momentum” present at tax time,
when lower-income families often anticipate a substantial refund. The cost of this proposal is limited to
internal administrative expenses for the revision of forms and systems. This proposal would make possible the
purchase of savings bonds on tax returns and meet the demand by lower-income
tax filers, as the D2D pilot is demonstrating.
Promote and Expand the Payroll Savings
Plan
Between
WWII and the 1970s, the Payroll Savings Plan prospered as one of primary means for
selling and promoting U.S. Savings Bonds. Yet today, approximately fewer than
40,000 employers offer their employees the option to purchase bonds through post
tax-income payroll deductions. The National Bond and Trust Co. has demonstrated
the private sector’s ability to administer the payroll savings bond program for
employers at a lower cost to the government than “over-the-counter” bond
purchases at banks. The payroll plan is a feasible, low-cost benefit that links
working Americans with an opportunity to save, and should be more widely
promoted.
Explore Stored-Value Card Technology in
the Event of Total Elimination of the Paper Savings Bond
The
option to purchase paper bonds should not be eliminated unless alternatives for
lower-income buyers are available. One possible alternative lies with prepaid
or stored value card technology. Like
the Direct Express Program that issues Social Security benefits via prepaid
cards, the Department of Treasury should pilot the operational feasibility of
selling– and gauge the market’s interest in buying– savings bonds on prepaid
cards at retail outlets, post offices, and financial and non-financial
institutions.
Increase
Marketing of U.S.
Savings Bonds
To
increase awareness and take-up for U.S. Savings Bonds, the federal government
should restore the marketing budget. Renewed marketing of bonds would increase
their profile among a wider sector of the population, and lead to more sales. Sales
of Series EE and I Bonds have been stagnant for years, reaching a seven-year
low in 2007. The costs of restoring the marketing budget may be offset by the
potential increases in personal household savings levels and reduced dependency
on public sector supports during economic downturns.
More About the Authors
