Returning America to Thrift
The failure of most Americans to save adequately has profound national implications. Perhaps of greatest concern is the impact inadequate savings will have on lower income households. Families with little or no savings to protect them in case of health problems or job loss – or to invest in an education for a family member or a home to raise children – may experience more short and long-term pain than middle or upper income families with more resources. Yet research has shown that the poor can save. Changes to public policy that facilitate saving by improving access to high-quality savings products can be an important step in supporting saving for all Americans, especially those living on a lower income.
For several years, Doorways to Dreams Fund (“D2D”) has studied the use of US Savings Bonds as a tool to help lower income families save part of their tax refund. From late January to April 15, 2008, in cooperation with H&R Block and 32 community-based tax sites throughout the US, D2D offered US Savings Bonds to over 25,000 lower income tax clients.1
This paper presents results of this research, including policy recommendations. Key findings include:
- Demand for US Savings Bonds offered at tax time is strong, particularly compared to other savings products. Savings bonds have a higher degree of recognition--almost twice as high-- than other, less distinctive, savings products. Perhaps as a result, take-up rates for savings bonds are higher, in some cases five times as high, as other savings products offered at tax time, such as Certificates of Deposit and Individual Retirement Accounts.
- Savings bonds attract what appear to be many first time, small savers. While more research is needed, nearly two-thirds (64%) of bond purchasers reported no money saved or invested at the time of purchase. The availability of savings bonds may be prompting new boundary-crossing behavior for these tax filers.
- Lower-income bond purchasers express a preference for long-term saving, a preference borne out by redemption patterns for bonds held more than a year. Bond buyers surveyed reported they plan to hold their bonds for five years, ten years or more. Initial redemption data for 2007 purchasers suggests that buyer behavior matches stated preferences.
These findings support prior D2D studies and buttress the position that US Savings Bonds have a unique and important role to play in supporting saving for Americans – particularly lower income families and small savers. Savings bonds are easier to use and a more attractive long-term savings option for beginning savers, small savers, and those returning to savings practices.
Encouraged by these results, D2D and its partners propose a straightforward public policy change that will expand the reach and increase the sales of savings bonds:
Policy Proposal: The Department of Treasury should implement procedures to facilitate federal tax refund recipients ordering US Savings Bonds with a portion of their tax refunds while filing their taxes.
Under this proposal, refund recipients who wish to order a bond would follow an easy process to order bonds on Form 8888 while getting their taxes done. The information needed to order bonds is already on the tax return and would be available to the Bureau of Public Debt from the IRS. Further facilitating bond purchases, tax refund money would never leave Treasury, simply moving inside the Department from IRS to BPD.
Buying bonds with tax refunds is not new. From 1962 to 1969, federal tax refund recipients had the option to receive their refunds in the form of a savings bond. The recent introduction of IRS refund “splitting” means tax filers could now use just a portion of their refunds to buy bonds.
D2D believes that with a simple, administrative policy change, savings bonds could be offered on tax returns – and an attractive and time-honored savings tool could help millions more lower-income tax refund recipients save both for themselves and for future generations.
1 Average adjusted gross income of tax clients offered savings bonds was $17,000; for bond buyers it was $19,300 (see Appendix E).