Savings Bonds Aren’t Sexy but They’re Sound
U.S. savings bonds, which everyone, including children, bought during World War II to support the war effort, are now billed as “the Great American Investment.” Times have changed: “I never thought they were anything special as an investment,” says Martha Bial, a New York social worker. “People bought them just for tradition and patriotism.”
Some still do. As investments, they’re best described as “solid,” says David Liebschutz, spokesman for the Bureau of the Public Debt in the Treasury Department. “They don’t pay top dollar, but they accumulate over time, they’re affordable, and they’re backed by the full faith and credit of the U.S. government.” They also offer tax advantages--even some new ones under the new tax law--and they’re easy to buy in a variety of denominations, if not well advertised.
Savings bonds had forerunners in the liberty bonds of World War I, and the bonds issued in the 1930s to finance work programs, but they really hit their stride with Series E first issued in May, 1941--a defense bond that after Dec. 7 became a war bond. Series E bonds were purchased for 75% of their face value, accumulated interest at 2 1/2% annually until maturity in 10 years. They were available in denominations as low as $25, making them perfect for patriotic small savers. From 1941 through 1945, 85 million people bought close to a billion bonds with a cash-in value of $33 billion--each year accounting for almost 20% of the national debt.
Now Competitive
Over the next two decades, savings bonds sold more quietly--about $4.5 billion worth a year. The most popular form of purchase was by payroll deduction, especially as more corporate executives got involved in drives to sign up their employees.
Savings bonds were more popular in the early 1970s, making it all the more distressing when their appeal almost disappeared at the end of the decade. Interest rates were rising, especially on certificates of deposit and money market funds. The 5% to 6% rates paid on savings bonds, “which for years had been measured against those paid on credit union and passbook accounts,” were now uncompetitive, says Ken Butler, savings bond program adviser in the Bureau of the Public Debt.
By the early 1980s, there were periods when savings bond redemptions ran higher than purchases, which sank below $4 billion a year. The decision had to be made, says Liebschutz, whether the program “should be saved or junked.” The result was a new format, introduced at the end of 1982, to make savings bonds “reflect the real market.”
Good Interest Rate
The Series EE bond, introduced in 1980, sold at half of face value, maturing when the investment had doubled. These bonds guaranteed a minimum rate (7.5% annually at the time) if the bonds were held five years, but also bore a “market-based” rate, adjusted twice a year to 85% of the average rate paid on the Treasury’s five-year notes at the time. If held five years, they paid the guaranteed yield or the market-based rate, whichever was higher, and depending on the market rate, could double and mature sooner.
The result was that savings bonds made a comeback, as a different bond with a different appeal. It was now comparable to other investment options, and people who knew those other options were selecting it: In 1985, says Liebschutz, more savings bonds were bought over the counters of financial institutions and Federal Reserve branches than through payroll deduction, a more passive acceptance.
At one point, savings bonds even bettered those options on rate alone. In October, 1986, when in terest rates had sagged, savings bonds still had a guaranteed minimum rate of 7.5%--higher even than their own market rate of 7.02% at the time--and Treasury announced that the guaranteed rate would drop to 6% that November. The resulting run pushed sales for fiscal 1987 (which began in October, 1986) to $10.5 billion from $8.1 billion in fiscal 1986.
The incident illustrates a dichotomy that is the basis of a common criticism: at the rates it pays on the money it has borrowed from all those savings bond investors--$101 billion currently outstanding--the government is getting a real bargain. On the other hand, so is the investor.
After all, the minimum investment required is truly populist--$25 for a $50 bond--and the maximum investment ($15,000 per person per year) is reasonable. The risk is also minimal, on both principal and paper: savings bonds are not negotiable by bearer, and each is registered and replaceable if lost. They’re also easy to buy, with no service charge or commission fees to the buyer. Once bought, moreover, they require no attention--one reason perhaps that $1.5 billion worth of matured savings bonds are still uncashed.
Untouted Investment
Finally, they have significant tax advantages. They are, of course, subject to estate and gift tax, although they have named beneficiaries and needn’t pass through probate. They’re also exempt from state and local taxes, and federal tax on the interest is deferred until they’re cashed. This makes them a particularly good savings vehicle for children, given the new “kiddie tax” that taxes investment income over $1,000 of children under 14 at the parent’s rate. Today’s savings bonds, with their 6% guaranteed minimum rate (7.17% market rate), and 12-year maturity, can be redeemed when the child is 14 and taxed only at his or her own lower rate. They also can be rolled over--principal and still-untaxed interest--into Series HH bonds, which pay interest (taxable at the holder’s rate) twice yearly.
The program’s biggest problem is less the product than the promotion, which is a lot quieter than in more patriotic days. In fact, says Boston artist Judith Marriner, “If nobody buys them, it may be because they don’t know about them. Banks may sell them, but they certainly don’t push them--they have their own products--and they’re not well-advertised. You have to be aware of them to buy them.”
