Part 1 in a 3 Part Series on Savings Bonds By Marc Prosser
Savings Bonds are a great investment for those that pay attention to maturity dates and cash them in after they mature, but before they stop paying interest. If not familiar with savings bonds, you should read the article, “Why Purchase Savings Bonds?”
At the end of 2012, the government ended the practice of enabling US citizens to buy paper savings bonds through their local banking institutions. The reason given for this change was cost savings. The government predicted it could save between $70 and $120 million in processing costs over 5 years.
There is a flaw in the government’s math.
To explain this issue, I will use Groupon, the popular service that enables customers to purchase goods and services at massive discounts.
When you buy from Groupon, the typical price is 50% lower than retail. That 50% is split more or less evenly between the merchant providing the service and Groupon. The merchant gets somewhere around 25% of their normal price. In fact, the merchant is in many cases loosing money, assuming they provide all the services or products that were bought.
In many cases the merchant never has to provide the product or service bought with the Groupon.
I have heard that in some cases less than 60% of the people that purchase the item actually end up redeeming it. The average that I have heard is around 20% of purchasers don’t redeem the coupon. While this does not change the revenue the merchant receives, it does dramatically lower the cost of providing those services. This can transform Groupon from being an unprofitable business for the merchant to profitable.
Paper savings bonds are like the coupons that can be redeemed for products with Groupon.
Many don’t get redeemed. Check if your savings bonds have reached maturity!
There is one estimate that there is around $15 billion dollars of savings bonds past their final maturity date. These bonds have stopped paying interest and have not been redeemed. If the government had to raise this money through the market, it would have to pay an interest rate of around 2.0%, at current rates. Two percent of $15 billion dollars, is $300 million per year in interest payments the government does not have to pay.
Over 5 years, the treasury saves approximately $1.5 billion dollars.
By eliminating paper savings bonds, the government will be eliminating this source of revenue. In the long run, eliminating paper saving bonds will cost the government far more in interest payments than they are saving from eliminating the cost of processing paper US savings bonds.
Come back tomorrow for the next post in this series where we explore why there are all these unredeemed savings bonds?