Treasury Secretary Donald T. Regan, declaring "It has not served the purpose it was designed to do, so there is no need to continue it," has sounded the death knell for the All Savers Certificate.
The All Savers Act was passed by Congress at the behest of the savings industry over the objections of the Reagan administration. Industry lobbyists persuaded legislators that the bill would pump sorely needed funds into ailing savings and loans and mutual savings banks. When commercial banks grumbled, they were added to the list of eligible sellers. And the housing industry was won over by a provision that 75 percent of net new funds would be earmarked for the residential sector. Agricultural loans were also included for political reasons.
Individuals who buy these certificates are allowed to exclude $1,000 in interest payments from their income taxes; couples filing jointly may exclude $2,000. The program, which began Oct. 1, 1981, runs until Dec. 31 of this year, but a bill has been introduced in Congress to extend it.
The U.S. League of Savings Associations optimistically predicted sales of All Savers Certificates would reach $230 billion in 15 months. The Treasury estimated $120 billion, whereas the Joint Taxation Committee settled on $65 billion. The National Association of Home Builders and the National Association of Realtors predicted that sales would help finance construction of 400,000 to 450,000 new houses during fiscal 1982 and 1983, a 40 percent increse. Moreover, an additional five million households would be able to qualify for mortgages, thanks to lower interest rates made possible because financial institutions pay only 70 percent of the Treasury annual average investment yield on the certificates.
Sales during the first month reached $35 billion, but tapered off rapidly. By the end of January 1982, the Federal Reserve put the combined total sold by banks and thrift institutions at $45.4 billion. Reasons for the slowdown in sales include a decline in the interest rate paid on All Savers, competition from Individual Retirement Accounts, lack of a clear tax advantage to the middle income saver, and generally poor economic conditions. Moreover, the projections made by Data Resources Inc. for the construction industry were based on what proved to be an erroneously low interest rate of 13 percent.
That $45.4 billion total breaks down as follows: commercial banks, $19.7 billion; savings and loans, $20.9 billion; and mutual savings banks, $4.8 billion. For every new dollar customers put in, they simply moved three or four dollars from existing accounts at the same institutions into All Savers. But since the law specifies that the three-quarters of the funds to go to housing (and agricultural loans) come from net new funds, one has to calculate how much money was withdrawn from other accounts at the time of All Savers purchases.
Banks generally took in more deposits than they lost in the period between Oct. 1 and Dec. 31, 1981, but thrift institutions suffered terrible hemorrhages. (The law states that the 75 percent be calculated on the basis of interest credited to the accounts, so the figures are higher than would be expected if only net new funds were counted.) The banks' share of All Savers money for housing during the first quarter amounted to $8.1 billion; $5.6 billion for the savings and loans; and about $1 billion for the savings banks for a total of $14.7 billion.
The law allows the money to be invested in conventional or government-insured mortgages, home improvement loans, rehabilitation, cooperative apartments and mobile homes as well as securities issued by secondary market agents such as the Federal National Mortgage Association. There is no breakdown on how the funds are being allotted.