Savings Bonding

Now that the budget deficit has morphed into a surplus, the Treasury’s Bureau of Public Debt is in sore need of a new mission. Sure, the U.S. still has $5.6 trillion in obligations to manage. That’ll keep it busy for a while. But things are different now that we’re no longer spending more than we make. For one thing, the once vitally important U.S. savings-bond program seems ripe for attrition. Savings bonds finance only 4% of the national debt, down from more than 20% in their heyday, and officials are in deep discussion about how to keep the program relevant.

There have been some innovations in the past 12 months–the new I-bond, whose interest rate rises and falls with inflation; the EasySaver plan, which features automatic bank-draft purchases; and PC purchasing via a bank. Next up: online purchases direct from the Treasury with no commissions or fees. Treasury will be trumpeting these new features–which private industry caught onto years ago–in a marketing campaign next year.

But should you be buying? Aren’t savings bonds an investing anachronism? Not necessarily. They’re especially well suited for anyone who puts away only $50 or $100 at a time (and saving any amount you can is worth doing) or who doesn’t have a decent retirement plan at work. Increasing our anemically low national savings rate in this manner may emerge as the bureau’s new mission.

Not in that group? Savings bonds still offer a return that’s competitive with things like bank CDs, money-market funds, Treasury bills and savings accounts. Better yet, the income is exempt from state and local taxes, and you have control over when you cash in savings bonds and pay the tax.

But the Treasury, as it ponders how to get the word out on its new savings-bond programs, would do well to address some old problems first. The main one: some $6.5 billion of savings bonds are no longer accruing interest because they are 30 or 40 years old. Yet they go unredeemed. Many of them are tucked in a drawer or safe-deposit box, and the owner, who may have inherited them, has no idea that the bonds have matured. If you own savings bonds, check the dates. At minimum, any bonds that are no longer accruing interest should be converted into newer bonds that do. A government website, publicdebt.treas.gov will help. Or check bondhelp.com run by Dan Pederson, author of Savings Bonds: When to Hold, When to Fold. While checking dates, look at newer bonds too. Consider:

–If you plan to buy I-bonds, do it before Nov. 1, when yields get reset. I-bonds have two elements: a guaranteed 3.3% interest rate and the rate of inflation, last counted at 1.75% (for a total 5.05% yield). The inflation rate is going higher, and will be applied to old and new bonds. But the guaranteed part may go lower on the new bonds. Buy now, and lock in the old guarantee.

–Americans forfeit $150 million a year by mistiming sales. Savings bonds bought before May 1995 pay interest only twice a year. The best time to redeem them is immediately after interest has been credited.

–The last savings bonds you should sell are any bought between October 1994 and April 1995. At the five-year mark, they carry an unusual one-time kicker that amounts to six months of interest at 16%.

Now that’s relevant investing.

See time.com/personal for more on savings bonds. E-mail Dan at kadlec@time.com See him on CNNfn, Tues., 12:45 p.m. E.T.