Payroll savings pay off in bonds

Nation's Business, May, 1989 by Joan C. Szabo

Payroll Savings Pay Off In Bonds

For 40 years or more, U.S. savings bonds were viewed by many as investments designed mainly to support the government, particularly in wartime. While patriotism may still be the principal appeal for some who buy savings bonds, recent changes in bonds have made them highly attractive investments for other reasons as well. In November 1982, savings bonds began to yield competitive, market-based interest rates, and investors took to them in a big way.

And as savings bonds have gained greater clout among investors, more and more companies have begun offering their employees the advantages of the payroll savings plan for acquiring bonds, say Treasury Department officials.

Under the payroll savings plan, which began in 1941, regular deductions from workers' pay are applied to savings-bond purchases.

It's a convenient way to purchase safe investments; the bonds are backed by the full faith and credit of the U.S. government. They also help strengthen the nation's economy by increasing savings and reducing the costs of financing the federal debt.

Each year, drives for savings bonds are held in companies across the country, and firms are encouraged by Treasury to set goals on employee enrollment and savings allotments. If past increases are any indication, the 1989 campaign will show continued expansion of commitment by U.S. businesses and their employees.

As of September 1988, there were 47,571 company units offering savings bonds through the payroll savings plan, a nearly 3 percent increase from 1987, when 46,349 offered the plan. In September 1982, only 36,288 company units were enrolled. About two-thirds of the units participating in the payroll plan have fewer than 500 employees.

Approximately 6.6 million employees buy savings bonds through the program with deductions that average $37.75 per month. Over the course of a year, those employees acquire, on average, 8.4 bonds per purchaser.

While bonds can be bought in other ways, such as at savings institutions, most of the 9.9 million Americans who purchase Series EE bonds each year take part in the payroll savings plan.

"We have had a terrific response from employees," says Linda Jepson, a legal assistant with the Tampa, Fla., law firm of Kass, Hodges & Massari. Since the firm started offering the payroll savings plan to its 50 employees a few weeks ago, nearly half have signed up, and more are expected to do so. "It is a great way to save money," jepson says, "especially for file clerks and clerk typists who can't seem to put much aside."

Establishing the program at the firm required little effort, Jepson says. "We talked to everyone individually, sent out letters, explained the program, then we distributed authorization cards and answered employees' questions. Employees started signing up, and the plan caught on quickly."

Vincent Pearce, manager of systems and programming at Bendix Field Engineering Corp., in Columbia, Md., says 99.5 percent of the company's 900 employees buy bonds through payroll deductions.

Pearce, who has been involved in his company's savings-bond campaign for three years, says: "The payroll plan is a painless way to save because it is automatically deducted from an employee's pay. Bonds are an easy way to make a safe investment."

Advocates of the payroll plan say it also is the easiest way for all Americans to participate in the financial affairs of the country, and it helps to improve the country's public-debt management while directly increasing the buyer's financial resources.

Says John L. Clendenin, the national chairman of the 1989 Savings Bonds Campaign: "Savings bonds continue to attract people looking for a stable investment with a solid return. There are many strong incentives for parents saving for their children's education, as well as for those saving to supplement retirement income or for other needs. Best of all, bonds help fuel the long-term economic growth of our country."

Clendenin is chairman of the board of BellSouth Corp., in Atlanta, and incoming chairman of the U.S. Chamber of Commerce.

Under the payroll savings plan, employees purchase Series EE savings bonds through regular payroll deductions. Once the full purchase price of a bond is met, the person is issued the bond, which begins earning interest from the first day of that month. The U.S. government guarantees principal and interest.

Series EE bonds are accrual securities, which means that the interest is credited periodically, increasing the bond's total redemption value; interest is paid when the bond is redeemed.

Savings bond were first issued in 1935 when Series A through D, the "Baby Bonds," were made available. Then in 1941, Series E bonds were issued to help support World War II.

In 1982, savings bonds became variable-rate securities instead of fixed-rate securities. The market-based interest rate system has resulted in increased sales, says Mike McKinney, area director of Treasury's U.S. Savings Bond Division in Tampa.

The current market-based interest rate on Series EE bonds is 7.35 percent. Since Nov. 1, 1982, the market-based rates for savings bonds have averaged a competitive 8.32 percent.