Harvard prof suggests reinventing Savings Bonds

Thursday, July 6th, 2006
Categorized as: Savings Bond news

Harvard Business School’s publication Working Knowledge for Business Leaders published an article yesterday by Julia Hanna called Reinventing the Dowdy Savings Bond.

The article describes a proposal by Harvard Business School’s Professor Peter Tufano for minor changes to tax law and the U.S. Savings Bond program that would offer the option of investing tax refunds in Savings Bonds.

The program is meant to give low and moderate income families a method of planning for the future that doesn’t require a bank account or high investment minimums.

“So let’s think about what the characteristics of a universal savings vehicle might be,” Tufano says. “It’s low cost, low risk, portable, available in small denominations, and has some liquidity. What’s being described is the Savings Bond program.”

From the article:

Unfortunately, recent changes to the program have made it a less attractive, less accessible product for LMI families. In January 2003, for example, the Department of the Treasury increased the minimum holding period for bonds from six to twelve months. Marketing for the program was also eliminated. While all banks sell bonds, the $.50 to $.85 they earn for each transaction gives them little financial incentive to make the process easy for consumers. Finally, the Treasury’s preference to migrate the sale of bonds to its online Web site will exclude customers without Internet access or a bank account.

Tufano suggests a few adjustments to “reinvent” the savings bond program, such as allowing small withdrawals in case of emergency before twelve months. More substantively, he proposes adding a line to the 1040 tax form that would allow filers to invest a part of their refund directly in the savings bond program, making it simpler for people to buy bonds.

“We don’t need any budget appropriations or new social programs,” he says. “The money is there at refund time. We just need to help families try to save some of it.”

Other recommendations Tufano offers include marketing the program through volunteer tax preparers; the creation of a bond-based retirement product, or “R-bonds;” allowing bonds to be rolled over into private sector retirement accounts; and generally making it easier to purchase bonds by expanding distribution to outlets such as the post office and Wal-Mart.

“The federal government spends $350 billion each year on asset support policies that benefit the top 20 percent of the American population,” observes Tufano. “What we’re talking about is a little replumbing of the IRS code and the Bureau of Public Debt to help the remaining 80 percent of American families to save. That strikes me as a relatively small investment to make for a relatively large number of individuals.”

In discussions with the Treasury, Tufano says he encountered healthy skepticism to the idea that such changes would create real demand for savings bonds. To further test the concept, he and his team offered filers the option of investing part of their refunds in savings bonds at fifteen H&R Block offices north of Chicago in March and April 2006. This pretest was designed to pave the way for more substantial experimentation this coming year.

“It’s too small a sample to draw conclusions, but initial indications would suggest that savings bonds might be as attractive to as many savers as on-site funding of an IRA,” says Tufano, who plans to return for more on-the-ground testing in early 2007.

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FDIC Insured Certificates of Deposit can pay 1 or 2% more than savings bonds when held for a similar length of time. See top CD Rates Below:

4 Comments

On July 6th, 2006 Weiwen said:

To further test the concept, he and his team offered filers the option of investing part of their refunds in savings bonds at fifteen H&R Block offices north of Chicago in March and April 2006. This pretest was designed to pave the way for more substantial experimentation this coming year. “It’s too small a sample to draw conclusions, but initial indications would suggest that savings bonds might be as attractive to as many savers as on-site funding of an IRA,” says Tufano, who plans to return for more on-the-ground testing in early 2007.

Savings Bonds would be a much better investment than those money-market IRAs that H&R is getting sued by Spitzer over.

On July 9th, 2006 Mario said:

Here is what would increase the demand for savings bonds … increase the rates they pay to match other available market rates!

While we’re at it … Tom, back when the EE bond was changed to fixed for its life, the conclusion was that it’s a bad investment in a rising rate environment. Now that the Fed is almost done, is it good instead? (But I believe it’s tied to the 10 yr bond which doesn’t correlate much with Fed action?) The current EE’s still pay much less than my variable EEs based on 90% of the 5 year bond …

On July 9th, 2006 Mario said:

Sorry I spoke too soon! Variable EE @ 3.61 and new fixed at 3.70. First time the new is higher. Sorry for going off-topic. 🙂

On July 9th, 2006 Tom Adams said:

Mario – it’s a good question and you didn’t speak too soon. The older variable rate Savings Bonds will earn 4.11% during their six-month rate period that begins after May 1, while the new fixed-rate bonds are at just 3.70%.

I still think the EE could be an interesting opportunity someday, but the fixed-rate would have to be 6% or higher, so we’re not there yet.

Comments Closed

June 1, 2010

After six years, over 400 posts, 3,680 real comments, and over 90,000 spam comments (thank you, Akismet, for making managing a blog with comments possible), I am closing public comments on Savings-Bond-Advisor.com. I will contine to update the main articles on this site, but not the comments.

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Tom Adams

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