November 25, 1994
One of my favorite gifts is the savings bond. Unfortunately, our government is now quietly lowering the rate of return on this investment, thus forcing the middle class into the hands of a burgeoning class of financial advisers who often steer them into riskier investments.
The savings bond is the gift of choice for nephews, nieces and grandchildren because it cannot be used immediately. Dolls break and cash is squandered on cars, clothes and Bon Jovi CDs. The savings bond is merely thrown into the safety deposit box, where it slowly but surely pays compound interest so that college tuition bills can be paid. There is no need to peruse the financial pages, subscribe to Money magazine, or speak with a financial adviser who is telling you that investing in an Alaskan surfboard company is your key to retirement.
Savings bonds always increased in value and could be forgotten. Over the past two generations, savings bonds have dispensed at baptisms, graduations, birthdays and bar mitzvahs. This is about to end.
A savings bond is basically the same as any government note, a debt to be paid back at a future date. Since they are issued by the federal government, they are exempt from state and local taxes. Until November of 1982, the savings bond always paid a fixed rate so that a purchaser could look at a chart and know how much the bond would be worth in 20 years. At that time, it was decided that the bond would pay market rate, but there was still a guaranteed minimum return of seven percent. In March of 1993, the Treasury Department lowered the minimum return to four percent. This had the desired effect. Sales of saving bond plummeted 50 percent. In 1995, the minimum rate will disappear entirely and the bonds will pay 85% of the five-year T-bill rate.
Presently the five-year T-bill rate is almost six percent but this is a recent phenomenon. Two years ago, it was three percent range. Without the guarantee of a minimum return, savings bonds sales will decline even further. Now the reader may why wonder why this is such a horrible thing given that one can always purchase government securities through a broker or directly from the government.
Savings bonds are convenient and can be purchased from the bank for as little as $25. To buy a security directly from the government requires a minimum of $1,000. Aunt Millie may be generous, but she can’t afford $1,000 for every graduation. As for brokers, not everyone has one and those who do often find they have to joust with the broker over the latest investment du jour – cable companies in the Antarctica, pork franchises in Hasidic neighborhoods etc. Even supposedly safe investments can lose money.
Working people need a safe sure investment that is not subject to the whims of Wall Street or the chairman of the Federal Reserve. The demise of the savings bond is just another nail in the coffin of America’s middle class that is slowly rendering the United States to a Third World status – with huge income gaps between the rich and poor.