Revitalizing the U.S. Savings Bonds Program

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.