Just as the first savings bonds ever issued have reached the end of their interest-earning life, the federal government is moving to make the bond program more competitive in the 1980s world of high-return investment.
The Treasury Department is drafting legislation that would permit the venerable U.S. Savings Bond to pay varying amounts of interest on top of a guaranteed minimum rate.
Angela (Bay) Buchanan, the new treasurer of the United States and chief of the Savings Bond Division, said the legislation will be ready for Congress when the budget battles are over. She hopes action will be completed by November to help her in the challenging job of convincing Americans that savings bonds are good for them.
Americans aren't buying. In fact, many are selling their savings bonds (which pay 9 percent) at an unpatriotic pace, and presumably are switching to higher yield investment such as money market mutual funds (which paid 16 to 17 percent last week) or using the money to meet rising living costs.
About $70 billion, or 7.2 percent, of the national debt is owed to holders of savings bonds. That's a decline from the all-time high of $80.5 billion reached in December, 1978, and is only the second downturn in savings bond holdings since World War II.
"The outflow has reduced dramatically in recent months," Buchanan said, "but there is still a new outflow, and we're trying to halt that."
A 1 percent increase in the interest rate every six months is the maximum change allowed savings bonds under present law, and Nov. 1 will be the next opportunity to adjust that. Bonds have been paying 9 percent only since May 1, when they were increased from 8 percent. That change has helped the bond program somewhat, but a 1 percent increase, as Buchanan noted, "is nothing these days."
She said the final details of a variable-return bond are undecided, but the concept is firm. The bond buyer would be guaranteed a minimum rate of return until the bond reached maturity. Each six months the Treasury would look at the interest rates available for a number of investments and assign a guaranteed bonus rate to the bond, to keep it attractive for the conservative, small investor. If there were no need for a bonus, the rate would not be increased.
Bonds would still be sold in simple-to-understand denominations ($25, $50 and so forth), and would nature in a specified time, complete with the extra interest gained because of the variable rate.
There are some early indications that the big outflow in savings bond holdings may be turning around. For example, a large New York City corporation with 18,000 employes just completed its annual buy-bonds campaign, and the percentage of employes who did jumped from 35 to 53. Three-fourths of those who were already buying bonds increased their allotment.
Such campaigns are supported and monitored by the Savings Bond Division's 170-member sales force, armed with such training aids as a film featuring most of the cost of television's "WKRP in Cincinnati." The station manager conducts a bond drive, and everybody buys except Loni Anderson, who plays the station's feather-brained blonde bomb-shell, Jennifer Marlow, Jennifer neither appeared in the film nor bought bonds because she was "out to lunch."
Bonds have their advantages, especially for the small saver, according to Steven Mead, deputy director of the Savings Bond Division. He noted that many banks discourage small savings accounts, but the savings bond people welcome regular, small contributions. Bonds also present some tax advantages because the interest on them is not taxable until the bond is cashed in.
The easiest way to save is to have money deducted directly from your paycheck "so you never miss it," Mead said, and the payroll savings plan offered by many employers provides that opportunity.
One-fifth of the military and one-third of other federal employes still participate in payroll savings plans. Many former U.S. servicemen will recall being pressued to buy bonds by their commanding officer, and then cashing them in at the first opportunity, in two months.
The minimum cash-in time has been changed to six months, and that has eliminated many short-term non-savers, Mead said. When that problem was at its worst, 38 percent of the bonds sold were cashed in as soon as possible. Now that percentage is down to 12.
Some people are still holding bonds from the original issue, in May, 1941, but those bonds stopped earning interest in May of this year, 40 years later. The interest-bearing period for bonds was originally 10 years, but it has been extended from time to time. A $25 bond purchased for $18.75 in July, 1941, can be cashed in today for $91.96, and that is all it will ever be worth, unless it turns into a collector's item.
"It is inappropriate for us to be hot money," said Mead. "But it is appropriate for use to be safe, convenient, and take care of the small saver."