07/01/2014 11:47 pm ET Updated Aug 31, 2014

The Sad Story of Savings Bonds

There was a time when millions of dollars of U.S. Savings bonds were sold in June - for graduation gifts, for wedding gifts, and just because of the patriotic feelings on the Fourth of July. Those days are long gone. After selling billions of dollars of Series EE bonds annually, last year the Treasury sold only 430,572 EE bonds worth just under $68 million.

What happened to Series EE U.S. Savings bonds? The government tinkered with the interest rate formula, making them far less attractive as an investment by fixing rates for the life of the bond. Then in 2012, the government stopped issuing paper savings bonds, removing their appeal as a gift. And the Treasury stopped marketing savings bonds, maybe because the government was accumulating such huge debt by overspending that they didn't want to call attention to its need to borrow money.

A Sad Demise

U.S. Savings bonds have had a long and storied history, starting with Series A-D bonds, offered during the depression to give people an incentive to save safely. The Series E bond was launched on April 30, 1941 by President Roosevelt as a way of funding World War II. Those bonds, sold as a patriotic investment, had an initial 10-year maturity and were sold at a discount to face value (maturing to full value in 10 years). They carried an interest rate of 2.9 percent. During the war years between 1941 and 1945, more than $33 billion worth of Series E bonds were sold to the public, in face amounts as low as $25.

It's stunning to realize that if the government sold those same bonds under the same terms today, they would be a comparable investment. Today's 10-year government Treasury notes yield 2.53 percent. But even though you can buy Treasuries in $100 minimum amounts at, they don't have the appeal of savings bonds which once were available in $25 face amounts, purchased at a discount.

When Series EE bonds were a Great Deal

Series EE bonds were introduced in the early 1980s - a time of soaring interest rates - to make purchase more attractive. Those EE bonds had a fixed, lifetime base rate that was set every six months for all bonds sold during that period. And the bonds carried a "floating rate" portion of the interest, which changed every six months to keep up with the prevailing rate on Treasury notes.

On November 1, 1982, the first "floating" series of EE bonds was sold with a total rate of 11.09 percent, a yield that included a fixed base (floor) rate of 7.5 percent! Sales soared, peaking at nearly $12 billion in 1986, as people rushed to buy before the floor rate dropped to "only" 6 percent the following year! I well remember using my column and daily television show at that time to advise people to load up on Series EE Savings Bonds before the floor rate was lowered. And some people, including myself, still have them! (They will reach "final maturity" soon - more on that below!)

In 1990, Series EE bonds were such an integral part of our lives that a tax benefit was extended (and exists to this day) to parents who bought bonds in their own names and used the proceeds to pay for college tuition. Those who qualify based on income in the year the bonds are used (today, roughly $73,000 for single filers) can redeem the bonds tax-free if the money is used for certain college expenses. Series EE bond sales jumped to more than $17 billion in 1992, as the deal was first publicized.

What Happened?

Two big changes in more recent years have impacted the popularity of U.S. savings bonds. Switching to book entry format instead of paper bonds was certainly appropriate in this age of technology to save money for the Treasury, but even printing a "gift certificate" from the website doesn't give the same thrill as the old, printed cardstock did.

Even more unappealing are the changes to the way interest paid on Series EE bonds is calculated. For bonds purchased starting on May 1, 2005, the variable rate was eliminated and interest changed to a fixed flat rate for the life of the bond -- or for the first 20 years of a 30 year bond. For bonds currently purchased, the flat rate is 0.5 percent! Yes, half of one percent - locked in for 20 years! It is a terrible deal.

Yes, there are Series I bonds, which carry both a fixed flat rate set at time of purchase, plus a floating rate component set every May and November based on the inflation rate. The current I bond composite rate is 1.94 percent, with the fixed rate component being only 0.10 percent. (In recent years, the fixed rate portion was actually zero!) But there's no marketing being done for these bonds. And few corporations still offer the payroll deduction for Savings Bonds.

A Big Warning for Savings Bond Holders

Some of the older EE and I bonds that carry high fixed base rates, plus semi-annual adjustments. They are very attractive investments - and you don't want to cash them in before maturity because you are still getting such a good deal. BUT, when the Series EE bonds do reach maturity and stop paying interest, which will be 30 years from the purchase anniversary, you must pay taxes on the accumulated income.

Many people who purchased Series EE bonds long ago have savings bonds worth far more than the "face value" of the bond because of the many years of accumulated interest accrual. The warning is that you must pay taxes on the accrued income in the year in which the bonds mature - even if you don't cash them in!

Many seniors who had planned to cash in the bonds on a staggered basis to avoid earning income that moves them into a higher tax bracket, and could even impact Medicare monthly premiums, should be aware that this strategy won't work. The IRS will assess a penalty if you don't declare the savings bond income in the year of maturity.

(Note: All of the original Series E bonds have already reached final maturity, even though they were extended for 40 years, and Series EE bonds issued before June, 1984 have reached final maturity.)

For more information on U.S. Savings bonds, go to, and click on "individual" and then on Savings Bonds. There is even a calculator to help you determine the current worth of your old bonds, and the final maturity dates.

There is another website, not to be confused with the government website, which will value your bonds and help maintain your inventory. It is filled with useful advice about valuing, managing, and cashing in your savings bonds at the appropriate time, so you get the maximum interest payment. It is They will send you a complimentary bond print out, color coded, to help you track your savings bonds, their values, and their maturity dates.

Those quaint old pieces of paper that you bought out of thrift or patriotism or received as a birthday gift are now worth a lot of money! What a shame that our children and grandchildren won't get the same chance to build wealth through savings bonds. And that's The Savage Truth.

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