Treasury outlines huge changes for U.S. Savings Bonds

By Sandra Block
USA Today

Savings Bond sales have exploded — up 98 percent since 1999 as savers flock to inflation-adjusted I Bonds, now paying 4.66 percent in a world of paltry interest rates.

But Treasury officials and some Republican lawmakers say the program is cumbersome, costly and due for a massive overhaul.

As a result, Treasury officials have slashed a $20 million marketing program, increased the minimum holding period for Savings Bonds, and chipped away at investors' returns. Next year, the department will stop selling HH Bonds, wiping out a popular tax-deferral strategy for bond investors.

Bigger changes lie ahead. By the end of 2005, the Treasury hopes to stop issuing paper bond certificates, replacing them with electronic Savings Bonds. Instead of buying bonds at a bank or credit union, investors will purchase them online at www.treasury direct.gov. Like Treasury bills, notes and bonds, Savings Bonds will be stored electronically.

Shifting longtime Savings Bond holders to the Internet won't be easy. But Treasury officials say the government can no longer afford the administrative cost of tracking millions of paper Savings Bonds.

"The future is going to be about electronic securities," says Van Zeck, commissioner of the Treasury's Bureau of the Public Debt. "We see a time when our customers will not only want this, they'll demand it."

Much has changed since Hollywood celebrities urged Americans to fight Hitler by investing in War Bonds. According to this year's estimates, Savings Bonds account for just 3 percent of all federal debt, down from 26 percent in 1945.

Costing government money

Keeping track of more than 700 million Savings Bond certificates saps resources at a time of rising federal deficits, government officials say. This year, it is estimated that the program will cost the Treasury about $154 million.

"Savings Bonds no longer help Uncle Sam; instead, they cost him money," says Rep. Ernest Istook, R-Okla., who heads the House subcommittee that finances the Treasury.

Despite the changes in the program, investors are plowing more money than ever into Savings Bonds. Sales of EE and I Bonds topped $9.3 billion for the first 10 months of fiscal 2003, vs. $7 billion for all of fiscal 2002.

Sales of Savings Bonds have soared because they deliver much higher returns than other conservative investments, such as certificates of deposit and money market funds, says Daniel Pederson, author of "Savings Bonds: When To Hold, When To Fold and Everything In-Between."

He predicts sales will fall off when yields on certificates of deposit and money market funds rise. The Treasury's decision to stop promoting Savings Bonds could hasten that decline, he says. Later this month, the Treasury will close 41 regional marketing offices.

Zeck says the government has no intention of eliminating Savings Bonds and predicts that any drop in sales as a result of the shutdown will be short-lived. He says many investors already use the Treasury Direct Internet site for information.

Reluctance expected

But the Treasury's increased reliance on the Internet to market and sell Savings Bonds could disenfranchise investors who aren't online, Pederson says.

Many senior citizens don't have Internet access, and those who do are reluctant to conduct financial transactions online, Pederson says. About 28 percent of Savings Bond investors are age 55 or older, according to Treasury.

Some investors are eager to switch to online Savings Bonds. Bob Herndon, 42, of Centennial, Colo., a longtime Savings Bond investor, says his other investments are stored electronically, and he uses electronic tickets when he travels.

"For my age on down, we do everything online," he says.

But Paul Kranz, 74, of Kansas City, Mo., says he won't buy any more if the entire program goes online because he doesn't want to rely on his daughter to keep track of his bonds.

Americans have a deep, emotional attachment to Savings Bonds. Older Americans remember participating in War Bond campaigns to support soldiers fighting in World War II. Baby boomers recall buying savings stamps in school that were redeemed for a $25 Savings Bond. And millions of Americans receive them as holiday and birthday gifts.

For some, an electronic Savings Bond doesn't generate the same sense of pride as a paper certificate.

Zeck at the U.S. Treasury says he understands the strong feelings Americans have for Savings Bonds, which is why Treasury will take its time moving to a paperless system.

"At the same time, you have to move on," he adds. "That's what we're trying to do."