As the Obama administration advances a stimulus approach it hopes will reinvigorate consumer spending and restore lending, many households need to focus on an opposite strategy: how to break the cycle of debt and begin to build savings. In recent years, the U.S. savings rate has hovered at or near zero, as Americans and financial institutions have grown addicted to a borrow-and-spend economy. For low-income families, this trend has particularly dire implications: a job loss or health calamity may wipe out a child’s future educational prospects or, worse, lead to immediate homelessness.
Peter Tufano, Coleman professor of financial management at Harvard Business School, has proposed a public-policy change that would encourage poorer Americans to save by allowing them to purchase U.S. savings bonds with a portion of their federal income-tax refund. The suggestion results from several years of research conducted by the Doorways to Dreams Fund, a nonprofit research and development lab that Tufano founded in 2000 to develop creative ways to meet a range of financial-service needs among the poor. “Although low-income people have plenty of access to check-cashers and credit,” he says, “they have little access to savings products.” Even large mutual-fund companies, he points out, require a minimum deposit of $2,500 to $3,000.
In contrast, federal savings bonds offer an ideal vehicle for the small saver. They are available to anyone with a Social Security number (including those with poor credit), come in small denominations (starting at $25), charge no fees, may earn an inflation-adjusted interest rate, and guarantee no loss of principal. Their only limitation: they must be held for at least one year, and redemption before five years results in a loss of three months’ interest. Although widely available through much of the twentieth century, especially during wartime, savings bonds faded from view in recent decades as the Treasury pursued more efficient means of raising money.
Last spring, Tufano and his colleagues conducted a study to determine whether the introduction of savings bonds at tax-assistance sites would increase the likelihood and level of saving among low-income tax filers. The experiment focused on 31 H&R Block tax-preparation offices located in Schaumburg, Illinois, and in Boston. Four of the sites offered only standard H&R savings products (such as “Easy Savings” and the “Easy IRA”). The remaining 27 sites offered clients savings bonds alongside the company’s products.
The findings proved highly significant. The fraction of refund recipients who chose tax-site savings was 8.5 times higher in “treatment offices” than in “control offices.” The availability of the savings bonds not only produced new bond sales, but increased the demand for savings overall. Among those who purchased bonds, nearly two-thirds were first-time, small savers, who reported having no other money saved or invested at the time of purchase. Individuals with more dependents had an increased likelihood of saving when given the option of bonds, even though they had revealed low intent to save at the outset of the study. Moreover, many of the bond purchasers chose to “gift” savings to relatives (often a child) and expressed a preference for the bonds’ redemption constraints, indicating that they planned to hold the bonds for five to 10 years or more.
Based on their research, Tufano and his collaborators at Doorways to Dreams have called on the Treasury to reintroduce the savings-bond option on tax forms, to give low-income refund recipients a simple way to put money aside for the future. Filers would simply check a box directing the Treasury to keep a portion of their money. “Saving bonds have always offered a way for families to take care of themselves and, at the same time, to invest in the country,” Tufano says. “This certainly can’t be a bad thing in the current environment.”
