US Treasury Considers Dropping The `Floor' From Savings Bonds

Small savers and the middle class would feel the effect of the changes

MOVES are afoot in Washington that may send a chill through the nation's 55 million Americans who own United States savings bonds.

The US Treasury Department is considering making major changes in the 53-year old US savings bond program, perhaps starting in the spring of 1995. Uncle Sam proposes: Dropping the current guaranteed 4 percent interest rate on new bonds; and posting the interest rate every six months, not monthly.

Not surprisingly, many longtime savings-bond buyers, such as Marilyn Fleice, a Long Island homemaker, are not thrilled about the proposals.

``Why is it that it's always the middle class, the small saver, that gets hit with changes like this?'' she asks. Ms. Fleice wonders if ``small savers'' will now get as fair a shake buying small denomination Series EE savings bonds as more affluent Americans who can buy Treasury bills. The savings bonds start as low as $25, compared with Treasury bills that start at $1,000, or bank certificates of deposit, which usually start at the same amount but have a guaranteed interest rate.

``I'm not so certain that the proposed changes sound very appealing,'' says Stephen Brobeck, executive director of the Washington-based Consumer Federation of America, a public interest group. His suggestion: small savers might do better buying intermediate-term certificates of deposit, such as two-year certificates, which offer interest rates of about 6 percent at many banks.

Currently, US savings bonds held for at least five years pay a minimum of 4 percent interest, or 85 percent of the average rate on five-year Treasury securities, whichever is higher. But under the proposed changes, the guaranteed 4 percent minimum rate, or ``floor,'' would be scrapped. The adjustable market rate would stay in place. For now, that's not a problem. Thanks to rising interest rates, the current rate is 5.9 percent.

Under the new plan, for bonds held between six months and five years, bond holders would get a return based on 85 percent of the average yield on six-month Treasury bills, compared with 4 percent now. The glitch: If interest rates tumble, there would be no floor under new bonds.

The other possible change would require bond holders to be particularly savvy, says Daniel Pederson, president of the Detroit-based Savings Bond Informer, a research company. Interest would be credited every six months, instead of monthly, during the first five years, as now.

This could hurt investors who redeem a bond prior to maturity. For example, if the interest was due to be posted on June 1, but the investor redeemed the bond in May, he or she would forfeit five months of interest earnings.

``The Treasury is probably counting on the fact that a lot of savings bond holders don't track [accrual] dates when they turn in their bonds,'' Mr. Pederson says. The Treasury expects to save $122 million over five-years through the crediting change.

ACCORDING to Peter Hollenbach, a Treasury spokesman, the changes are designed to make the savings bond program ``more compatible'' with market rate investments. ``Even if the rates come down, you'll still be earning interest comparable to other investments.''

But not totally. Investors who can afford to buy Treasury securities of higher denominations, such as $1,000, can lock their money in at a specific rate. Moreover, they get back 100 percent of their interest earnings, not an 85 percent ratio.

``This whole plan sounds like it was put together by a government committee,'' says Thomas O'Hara, president of the National Association of Investors Corporation, an organization of investment clubs based in Royal Oak, Mich. ``You almost wonder if it wasn't first thought up when interest rates were falling, not rising, as now, and someone in Washington wanted to get rid of the minimum,'' Mr. O'Hara says.

The proposed changes do not sound attractive, he adds. ``For roughly the same amount of money as a savings bond, you can buy into a company stock investment plan, or buy into a mutual fund,'' O'Hara says.

The Treasury stresses that the $180 billion in savings bonds now outstanding would not be affected. But ``bond holders need to see if the changes, if implemented, would take away the guaranteed minimum when existing bonds go into an extended maturity period,'' Mr. Pederson warns.

Typically, savings bonds have two extended maturity periods after an original maturity period. And modifications in terms can often apply to extended maturity periods, Pederson says.

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