Just Keep Our Money
The government's ever-evolving rescue of the financial sector has already demanded enormous sums. It will cost even more if Congress acts on the second economic stimulus package that Fed Chairman Ben Bernanke proposed yesterday. While a stimulus would lead to spending that boosts the economy, we also need to help families save to withstand economic shocks. Lawmakers should consider an option by which they could help quell the recent chaos, raise as much as $250 billion a year, strengthen families and enhance civic engagement. It's simple:
Just keep our money. Instead of sending us tax refund checks, allow us to ask for IOUs in the form of savings bonds instead.
Last year, the federal government distributed tax refunds exceeding $250 billion to more than 100 million filers. Businesses have long capitalized on these refund dollars, which average $2,345 per recipient. Retailers and advertising campaigns encourage us to spend this "free" money on everything from tropical getaways to electronics to cars (some dealers prepare tax returns gratis to capture down payments).
But refunds are many families' best opportunity to put away a few dollars for their children and their futures. For the past three years, a team comprising researchers, the nonprofit Doorways to Dreams Fund (which I co-founded), community groups doing free tax preparation, professional tax preparers at H&R Block, banks and credit unions has worked to determine the appeal when people are offered the opportunity to instantly direct a portion of their tax refund to savings. We have found, after working with about 25,000 participants, that more than 7 percent of tax refund recipients like the idea of "paying themselves first" by pre-committing a portion of their refund to savings.
U.S. savings bonds hold particular appeal. Savings rates at tax-preparation sites that offer bonds are 8.5 times higher than those where bonds are not offered. Especially among low- and middle-income families, this instrument, whose Series I form also protects against inflation, sells well. And in our experiment, the offer of bonds did not crowd out private-sector savings.
Our success in offering bonds at tax time has led a coalition of grass-roots organizations, companies and policy analysts to urge the Treasury Department to make it easy for refund recipients to buy bonds. A new Internal Revenue Service Form 8888 allows filers to electronically send refunds to up to three accounts. If savings bonds were added as an option, refund recipients could instruct the government to simply convert some of their refund into these familiar, low-risk instruments.
We found demand for savings bonds even before banks looked risky, stock market gyrations were so extreme or money-market funds started breaking the buck. And by helping Americans put some of their refunds aside in convenient, inflation-indexed savings bonds, the Treasury would be better off too: For each 1 percent of refunds that filers ask to be held in savings bonds, the government sends out as much as $2.5 billion less in cash and raises the same amount in new securities held by patient domestic investors -- most likely American families saving for their children. Supporting tax-time bond purchases would help boost household savings from the current low levels and could encourage civic involvement by building a populace with a greater stake in the government.
The Treasury should also loosen limits on savings-bond purchases by individuals and make it easy for taxpayers to buy bonds. Making it simple for refund-savers would involve some changes in financial "plumbing" within the Treasury to build a pipe between the IRS and the Bureau of the Public Debt, but it would not require a new bureaucracy, a new annual budget item or even congressional action.
Savings bonds have always allowed ordinary citizens to support the country in crisis, usually in wartime. In the present economic calamity, we can help the government, and the government can strengthen American families. Just keep our money, please. The correct policy response is surely "Thank you."
The writer is a professor of financial management at Harvard Business School.