Savings Bonds? Remove the limits!
Today, the U.S. Treasury announced the updated Series I and Series EE Savings Bond rates. Series EE savings bonds purchased between November 2009 and May 2010 will earn a 1.2% fixed rate. Series I Bonds purchased between November 2009 and May 2010 will earn a 3.36% annualized composite rate. The I Bonds composite rate consists of two components. The first component is called the Fixed Rate, which is 0.30%. The Fixed Rate remains the same for the entire life of the bond. The second component is called the Inflation Rate, and it is based on the actual change in the headline Consumer Price Index (CPI) between March and September (or September and March).
When I Bonds were first introduced in the late 1990s, there was much well deserved excitement about the new savings instruments. They are unique for several reasons. First, they provide investors an easy way to protect themselves against future inflation. Second, since the interest earned in I Bonds is accrued (not paid out), they provide a tax friendly way for investors to save for their future without incurring tax liability as in the case of TIPS (Treasury Inflation Protected Securities). Third, they provide much needed safety and security with their full faith and credit backing of the U.S. Government standing behind them. So, what when wrong with I Bonds?
For unexplained reasons, our previous Treasury Secretary essentially dismantled the Series I Bonds savings program by lowering the annual purchase limits nearly 80% to $5,000 per social security number per year. The previous limit had been $30,000. This $5k limit applies separately to electronic and paper I Bonds, effectively permitting $10k total per person or $20k per married household. The previous $30k limit permitted up to $120k per household applying the same purchase rules.
Here is the really confusing part. The U.S. Treasury has been issuing record amounts of debt via Treasury auctions on a regular basis. Since trillion dollar deficits are expected to continue for the foreseeable future, why are there ANY limits on savings bonds? Wouldn’t it make sense for the new Treasury Secretary to undo the damaging actions of his predecessor to the Savings Bonds program? He can either reset the limits at their previous levels, raise the limits to $50,000 per person, or better yet, remove the limits altogether. Why even have limits? Shouldn’t the government be issuing as many Savings Bonds as it can? Do we not need to borrow the money?
If you think this is a good idea, please forward it to your elected representatives.