Many Gen Xers and millennials spent their early years receiving strange gifts from their grandparents: U.S. Savings Bonds. It was pretty much the platonic ideal of a gift from gramps and grams — something you didn’t ask for, and something you can’t even use, at least, not right away. But we were told that that $25 note, if we held onto it for a couple decades and managed not to misplace it, would eventually turn into — drumroll please! — $50! Do kids, though, still receive these when they’re born, for their birthdays or when they graduate high school? If so — or if not — why? What’s the real point of U.S. Savings Bonds, anyway? Let’s gift ourselves some answers.
Why do grandparents love U.S. Savings Bonds so much?
It’s the world they grew up in. A quick history: American savings bonds started during World War I and were known as Liberty Bonds. They were a great way for the government to finance a war, as the U.S. military wasn’t anything like the large, formidable, imperialistic force it became during and after World War II. The U.S. promoted them heavily, recruiting the entertainers and Hollywood stars of the day like Fatty Arbuckle, Al Jolson and Ethel Barrymore to shill for the government in the name of patriotism. Charlie Chaplin even made a short propaganda film about it. Boy Scouts and Girl Scouts sold the bonds, too.
Fast forward to the Depression and the eve of World War II. As Nazi Germany began to terrorize much of Europe, FDR was discreetly preparing for America to enter the European theater at some point. He and his advisers brought back the idea of savings bonds to help finance a war and marketed them as “defense bonds.” Then Pearl Harbor happened, and the name changed to “war bonds.”
Buying them wasn’t only seen as the patriotic thing to do, it was also a forward-thinking move by the government to encourage people of all social classes to save money in a simple and guaranteed way. (Social security was a pretty new thing at the time, and the safety net is nothing like it is now.)
Explain again how Savings Bonds work?
There are several different kinds, and things have changed a lot with them more recently. Peacetime bonds were introduced during the Great Depression to encourage people to save money, and were marketed as a safe investment, which was a big deal back then. The first kind were called Series A, and were followed by B, C and D. The old war bonds were officially called Series E bonds.
Most people no longer have those, and they’ve all matured by now anyway, so let’s get to the grandparents’ favorite: Series EE bonds, which replaced Series E bonds in 1980. You could buy them in denominations of $25, $50, $100, etc., for half of face value (in other words, a $50 bond cost $25). From 1980 to 2005, they were guaranteed to double in value (reaching the printed value on the bond) in 20 years, then would continue to earn interest and would fully mature after 30 years.
Until 2005, the interest rate was adjustable: It was recomputed semiannually, at 90 percent of the average five-year Treasury yield. The Treasury yield is lower than whale shit these days, but in the 1970s, 1980s and 1990s it remained above 4 percent (sometimes much higher), and so Savings Bonds were a decent, simple and extremely safe investment, though a conservative one.
What happened in 2005?
Lots of things, but one of them is that, since then, Series EE bonds pay a fixed interest rate over the life of the bond. This is usually a pretty small number. The bond will still double in value at 20 years, but it won’t earn much after that (between 20 years and when it fully matures at 30 years).
Why did they do this?
The U.S. Treasury under the George W. Bush administration basically gutted the U.S. Savings Bonds program, which is ironic, considering he led us into two wars during those years, which are ongoing. Citing marketing and management costs, they destroyed the marketing budget for them, closed offices nationwide, eliminated the ability to use credit cards to purchase them, and as previously mentioned, rejiggered the interest rates so that EE bonds paid out much less over time.
It was all seen as a move to encourage people to invest in Treasury Notes instead. But in denuding the Savings Bonds program, they were destroying a simple, safe, guaranteed way for Americans to save money long-term, free of taxes (until the bond is cashed in) as well as sales commissions and annual fees. This was, as ever, especially true for the poor and the working class. Sure, they didn’t pay out too much, but until then, they beat the rate of inflation and were thus much better than hiding cash in your mattress. But then, we’re talking about an administration that ignored warnings for both 9/11 and the Great Recession, so, maybe not a huge surprise they fucked this up too.
What happens if you cash out a bond early?
You only earn the interest on it, which isn’t much. Interest rates are so pitifully low now that the doubling of the bond in value at 20 years is basically a balloon payment. Best to hold onto them for at least 20 years if you’ve got ’em.
So should I keep holding onto a bond for between 20 and 30 years, when it fully matures?
Go to the Treasury’s website and calculate the value of your Savings Bond here. If your bond originated in the 21st century, there’s a good chance it won’t earn much more after 20 years, and may not even keep up with inflation. But if you have old bonds from the 1980s, you may be pleasantly surprised at how much they’re earning.
What other kinds of bonds are there?
There’s also Series I bonds. They’re a bit like Series EE bonds used to be, where they earn interest that’s a combination of a fixed rate (low) and an inflation rate that’s compounded semiannually (a bit higher). They earn more than Series EE bonds, though in the midst of the Great Recession, at times the fixed rate was literally zero percent.
How do I cash my old paper ones?
Just take it to your bank. They’ll do it for you.
What if I wanna buy new ones?
Since the mid-2000s, the Treasury no longer issues paper bonds. They’re all electronic, and you just open an online account at Treasury Direct (which both looks and sounds unauthorized, but it’s legit). When you go to cash it online, the money will show up in your savings or checking account in a few days. You can buy up to $10,000 worth of Series E bonds each year. By the way, the current interest rate for Series EE bonds is 0.10 percent, and for Series I bonds, 2.22 percent. Don’t spend all that interest at once!
Are U.S. Savings Bonds what people talk about when they talk about “stocks and bonds”?
Uh, no. Those are usually things like institutional bonds, mortgage-backed bonds or corporate bonds, which you can sell (and buy from others) at any time. They have higher interest rates than government-backed bonds.
According to Stephen Brincks, a professor of finance at San Diego State University’s Fowler College of Business, for an investor, these other bonds serve a few purposes, as you can earn money on them in two ways: First, by getting the interest every year. Or secondly, if interest rates go down after you buy them, you can then sell them. The drop in interest rate increases the value of your bond, and people will pay more for it than you did, which equals capital gains for you.
The other thing about these types of bonds is that they’re very low risk, and they help to mitigate risk as part of a diversified investment portfolio.
So, if I’m a delighted new grandparent, asking myself, “Should I buy savings bonds for my grandchildren?” the answer is kinda not to bother, right?
Yeah — savings bonds just don’t deliver like they used to. Interest rates across the board have been so low since the Great Recession, and anything that’s directly or, in some cases, indirectly tied to the Fed’s interest rate (savings accounts, Savings Bonds) are going to pay out a pittance in interest. They might be a good place to stick your money risk-free, and, theoretically, large institutions like to buy government-backed bonds for the same reason individual investors like bonds: They can pay out a little if future interest rates plunge, but they’re not the decent investment they used to be.
Sorry, current and future grandmas! Maybe start a 529 college savings account instead, or even an IRA for the little one! Just like Savings Bonds, there are plenty of things you can give them that they don’t want, but will eventually appreciate.
Adam Elder
Adam Elder is a writer in San Diego. He's also written for Esquire and WIRED magazines, VICE, The New York Times, The Wall Street Journal, The Guardian, newyorker.com and elsewhere.
