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Sunday, July 24, 2011

Savings Bonds' shift to digital-only marks end of era

Old-timers might call it the end of an era. Youngsters won't care.

But U.S. Savings Bonds, which have endured for more than 75 years and played a notable role in winning World War II, soon will no longer be available in paper form.

The Bureau of the Public Debt says it will stop making Savings Bonds available for purchase through banks or credit unions, ending the paper option. The only purchase method will be through the government's bond website, treasury direct.gov. Investors also can redeem bonds through the website.

It's all part of an effort to save the government $70 million over the first five years in reduced printing, mailing, storage and other costs, including fees paid to financial institutions for processing transactions.

"We're looking everywhere we can for financial savings in government," said Joyce Harris, director of public and legislative affairs at the Bureau of the Public Debt. "It's a lot less costly to go the electronic route."

It's not a headline-grabbing announcement, especially since there are more pressing topics out there involving government debts.

But the new policy does say something about changing public tastes and the gradual demise of these once-popular investments.

For starters, the shift to paperless Savings Bonds is just one more sign that electronics are taking over the financial world.

Stocks are bought and sold in electronic form, bank and credit-card accounts feature online statements and payments, and most income-tax returns now are filed through the Internet, so why not Savings Bonds?

In addition, the paperless option reflects slack demand. Savings Bonds, which once occupied a special place in the public's heart, have become just one more item in a crowded investment cupboard.

"There are a lot more things competing with Savings Bonds," said Harris. "Many are things that didn't exist years ago."

Since the first Savings Bond was sold in 1935, we've seen the advent of municipal bonds, money-market funds, 401(k) retirement plans, investment-based life insurance, no-load mutual funds, gold available for personal investment, inflation-protected Treasury bonds, section-529 college accounts, exchange-traded funds and a lot more.

Savings Bonds got a new lease on life with the introduction of inflation-protected Series I bonds, but sales have since fizzled.

Some 6.8 billion paper bonds have been sold since inception, but only 4 percent of that has come over the past decade despite rising wealth levels and a growing population.

One problem is that many of the rules for Savings Bonds are surprisingly tricky, such as those on early withdrawal penalties and Series-I rate calculations. The government hasn't done a good job explaining the intricacies, and most financial advisers can't earn anything from the bonds and thus don't have incentive to tout them.

Perhaps more than any other investment, Savings Bonds have a legacy of patriotism. This reached a peak during World War II.

In 1944, Uncle Sam sold $16 billion worth of bonds, with marketing campaigns led by celebrities such as actress Carole Lombard and songwriter Irving Berlin.

Bond sales didn't exceed $16 billion until 1992; on an inflation-adjusted basis, no year since has come close to matching 1944. In fact, one thing not commonly known about Savings Bonds was their role in sopping up excess cash and keeping a lid on inflation while the economy was in overdrive and consumer goods rationed during World War II.

"The danger of price inflation was growing as defense spending poured money into the economy and diverted consumer goods from the market," noted a government booklet written in 1991 to mark the 50th anniversary of Series-E bonds.

"This was a key factor in the successful financing of World War II and in keeping the pressures of inflation under control."

As noted, the new paperless policy doesn't end the Savings Bond program but takes it in a new, and perhaps diminished, direction. It could, for example, discourage the use of Savings Bonds as gifts because donors would need to set up accounts for both themselves and recipients and include a recipient's Social Security number.

Many people buy and forget about Savings Bonds. That's notable because they'll eventually stop earning interest, typically after 30 years.

I recently found a $25 Savings Bond that my grandfather purchased in June 1944, around the time of the Normandy invasion.

It's one of 45 million paper Savings Bonds worth $16.2 billion that matured and stopped paying interest but remain outstanding. Such bonds still can be redeemed at financial firms, and that will continue even after issuance goes paperless next year.

For whatever reason, my grandfather never cashed in that bond. Nor did my dad, who was listed as co-owner even though he was stationed in India at the time, helping to direct planes flying over the Himalayas in support of Chinese troops fighting the Japanese.

I don't intend to redeem the bond anytime soon. It's more valuable to me as a keepsake, and I'm probably not alone in that.

More on this topic
Slipping sales


Sales of U.S. Savings Bonds have slumped since hitting a record in 2005.

Year: Bond Sales

2005: $22.4 billion

2006: $6.3 billion

2007: $3.6 billion

2008: $3.4 billion

2009: $2.9 billion

2010: $2.6 billion

Source: Bureau of the Public Debt

by Russ Wiles The Arizona Republic Jul. 24, 2011 12:00 AM



Savings Bonds' shift to digital-only marks end of era

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