The future of savings bonds is paperless

"Their customer base is older. If you look at the stats for people over age 50, as many as 25 percent are not online and have no plans to go online. The feedback we're getting is many people won't have any way to participate. That may be just 10 percent of bondholders, but that's a lot when you have 55 million savings bond owners."

Bytes are cheaper
As you might suspect, the primary reason for the change is to save money. The Bureau of Public Debt, which promotes and sells savings bonds and marketable Treasuries, has been closing marketing offices and transitioning toward a paperless system.

The bureau stopped printing paper Treasury bills and notes in 1986. In 2002 it made the I bond available in electronic form, and added the electronic EE bond in 2003.

"In 2001 we had a total budget of $191 million and it cost $165 million to handle the savings bond program," says spokesman Pete Hollenbach.

"We have to maintain something like 12 billion records. When people lose bonds, we do the research. The other thing is we're selling 40 to 50 million individual pieces of paper each year. We'll be saving the cost of printing, postage and the fees paid to the issuing agents, which are mainly banks."

Hollenbach says significantly more than 90 percent of people who participate in the savings bond program have bank accounts, although he says the bureau is concerned about people who don't have computers or Internet access. The transition, he adds, is mandated not only by cost but also by the need to be ready for the generation of investors that expects to do business online.

The electronic bonds will end the age-old problem of dusty savings bonds being discovered in a drawer months or years after they've matured. The government will know your bond has matured and will deposit the proceeds directly into your bank account.

That, Pederson, points out, will cost the government money it is now saving.

"There are 32 million savings bonds that haven't been redeemed. That's a savings to the government of over $12.9 billion every year."

New bond rules
The flip side is that investors will have to pay federal tax when a bond matures. Currently, a form 1099 isn't triggered until the bond is cashed; under the new system a 1099 will automatically be issued when the bond matures.

While some investors may not realize a bond has matured, others don't cash it because they want to delay paying the tax for a short period of time. The paperless electronic system will force investors to comply with IRS rules.

"The rule," notes Hollenbach, "is you report the income on a bond that reaches final maturity in the year in which it happens -- whether you cash the bond or not."

Another change related to the electronic transition was the discontinuing of the HH bond on Sept. 1, 2004. Previously, when series EE/E bonds mature, investors could exchange them for series HH, continue earning interest and defer paying taxes for another 20 years. But not any more.

"When the bonds mature the government will force you to cash them in," says Jackie Brahney.

"Some people buy savings bonds with the anticipation of deferring taxes for 20 years and now they've pulled that option."

Hollenbach says the HH doesn't fit in with the government's plan, which is to eventually offer savings bonds and a full range of Treasury bills and notes that investors can buy and redeem electronically.

Dan Pederson opines that the elimination of the additional 20-year deferral could be the government's way of speeding up tax collection.

Not issuing paper bonds printed with a set purchase price means investors will no longer be limited to the typical eight denominations. Currently, if you have $62 available to spend on a bond, but the denominations are $50 and $75, you have to reduce your investment to $50. The electronic system will allow you to invest any amount, including change, up to the maximum calendar year limit.

A major area that still needs work is buying bonds for minors. Regulations require a person to be at least 18 years of age to open a Treasury Direct account. Treasury officials say they'll ask that the rule be changed so minors can have their own electronic statement bonds.

If not last year, perhaps this year, current I and EE bondholders will be asked to send in their paper bonds and establish a Treasury Direct account through its SmartExchange program. The exchange will not be mandatory; paper bonds will be honored until final maturity.

Employees who purchase savings bonds through payroll savings will have electronic accounts. Workers will tell their employer how much money to put toward bonds and the employer will send the money to Treasury Direct.

In another move to streamline costs, Treasury Direct stopped accepting credit card payments as of Dec. 31, 2003. All Treasury Direct payments will be debited from or credited to bank accounts.

Officials at the Bureau of Public Debt say they are launching a campaign to familiarize the American public with Treasury Direct and the changes to the savings bond program.