How to promote savings? The humble savings bond is part of the answer
When President Barack Obama announced four measures to encourage savings, one of them represented a victory for a non-profit group that’s trying to find ways for low-income Americans to save. Since 2005, the Doorways to Dreams Fund has been saying that the savings-bond system should be tweaked to make it more useful to low-income families, and Obama adopted one of D2D’s key ideas: Beginning next year, you’ll be able to get your tax refund in the form of a U.S. Savings Bond.
At first glance, the change may not seem very significant. Taxpayers already were able to direct their refund into a bank or mutual fund account, including an Individual Retirement Account. Will adding savings bonds really make much difference?
It will for low-income folks, Doorways’ research shows. Some of them don’t have bank accounts, and if they’re in a low (or zero) tax bracket they don’t get much of a tax benefit from opening an IRA. Furthermore, most of them can’t afford to tie their money up in anything that’s illiquid. U.S. Savings Bonds are the poor person’s ideal savings vehicle: They’re simple, liquid and safe and they come in small denominations.
During the last three tax seasons, D2D ran pilot projects where people were allowed to turn their tax refund into a savings bond. The results were promising, a report on this year’s pilot says:
D2D and its VITA partners have seen a three-year pattern of growing demand for Series I U.S. Savings Bonds: from tax seasons 2007 through 2009, 3,025 VITA clients have bought 5,004 U.S. Savings Bonds worth $630,000, resulting in a 3-year take-up of 4% (against those with sufficient refund) to 6% (against those who had sufficient refund and direct deposit). In the 2009 test, sales rose 50% to 87% over 2008. Despite the toughest economic conditions in a generation, take-up is strong.
I don’t know if 4 to 6 percent is a strong take-up rate, but if simply changing a line on a tax form can help some people save, it’s worth it. By the way, D2D points out, this change is hardly revolutionary: The IRS offered a savings-bond refund option from 1962 to 1968.
(4 votes, average: 2.75 out of 5)
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David Nicklaus has covered St. Louis business for more than 25 years. His column appears three days a week on the Post-Dispatch business page. 
I wonder how well the detail of the “I” bond are explained to these people before they buy them. Such as, if you redeem them before 5 YEARS you lose 3 months of interest. Also currently through the end of October 2009 the bonds are paying 0% interest. Nice return.
I am glad someone recognizes the value of bonds,the last source of security in a shifting world.Accountants, many stock brokers and bond traders hate these instruments with good reason.There’s no fees.
You seldom hear about the US government defaulting on interest payments,or do you hear how they have been downgraded to junk bond status or do you worry your heirs will fritter away these bonds before they mature.
Good ideas, but why stop there? If we want to encourage savings among people at the economic margins, let’s make the program more incremental. When you’re paycheck to paycheck, savings come a dollar at time, not $50 at a time.
During World War II, we sold war savings stamps to kids. Acquire stamps one at a time, paste them in a album, and redeem a full album for a bond. The 21st-century equivalent might be a stored-value card.
And while we’re at it, maybe those coin-counter machines at the supermarket can be programmed to issue bonds as a redemption option.
Whatever we do, we would do well to start now. When China tires of buying our public debt, we’ll have to find someone else to buy it.
Any bonds today?