An op-ed piece in today’s Wall Street Journal makes the case.
By David Enna, Tipswatch.com
Probably the most-often-mentioned “negative” of the U.S. Series I Savings Bond is the purchase cap of $10,000 per person per calendar year, plus the option of $5,000 in paper I Bonds in lieu of a federal tax refund. A lot of investors look at that limit and brush the attractive investment aside as “insignificant.”
And that’s true if you are sitting on a multi-million-dollar portfolio and looking to make a one-time investment in I Bonds. That $10,000 or even $15,000 will barely budge your asset allocation.
That’s why I have argued for years that the Treasury’s purchase cap requires an investor to buy I Bonds year after year, up to the cap if possible, to build a sizeable allocation in inflation protection. This strategy means buying even if the fixed rate is 0.0% and the inflation-adjusted variable rate is 0.16%, as we saw through six months of 2016. (Those 2016 I Bonds will be paying 7.12% annualized this year for six months, just like the “very attractive” I Bonds you can purchase today.)
I Bonds are getting a lot of attention right now, thanks to that 7.12% annualized rate, which is likely to remain quite high throughout 2022 and into 2023. According to the Wall Street Journal, over the past three months I Bond purchases have soared to $7.1 billion, compared with an average of $700 million a year during the decade before.
But, here’s the question: Should the Treasury raise the purchase cap? Absolutely.
When I Bonds were first created in the fall of 1998, the purchase limit was $30,000 per person per year, and the Treasury even allowed credit cards to be used for purchases with no fees. (Air miles!) However, according to Finweb.com, the Treasury determined about 98% of all savings bonds were purchased in amounts under $5,000. This triggered a new policy in 2008: a $5,000 limit per calendar year.
The current limit of $10,000 per person per calendar year went into effect in January 2012, when the Treasury required I Bonds to be purchased in electronic form at TreasuryDirect, except for the $5,000 option as a tax refund. So the current cap has been in effect for a decade, with no adjustments for inflation over that time. It takes $12,400 in today’s dollars to match the buying power of $10,000 in January 2012.
So yes, the Treasury should immediately raise the purchase cap on I Bonds to allow Americans to protect more of their savings from surging inflation. I’ve suggested doubling the amount to $20,000 per year (or $40,000 for a couple). And maybe at the same time eliminate the $5,000 tax refund option, which is probably a logistical nightmare for the IRS and Treasury.
A much more dramatic proposal
The Wall Street Journal today carried an op-ed piece by Joshua Rauh (a senior fellow at Stanford University’s Hoover Institution) and Kevin Warsh (a former member of the Federal Reserve Board and visiting fellow at Hoover). They argue that surging inflation is becoming a “menace” that requires decisive action:
“President Biden, by executive order, should immediately direct Treasury Secretary Janet Yellen to raise the annual cap on Series I savings bonds from $10,000 to $100,000. … The executive order should also make clear that the higher purchase cap would fall when price stability is re-established, as certified by the Fed. …
“If the revamped I-bond program grew in popularity, the government would accrue higher funding costs. That’s part of the point. The government should internalize the budgetary and reputational costs of its policy errors. … Inflation’s 40-year hiatus from history is over. Errant monetary and fiscal policy decisions are to blame.”
Clearly, this proposal has a strong political spin, but it is hard to disagree with the theory that excessive monetary policy (by the Federal Reserve) and fiscal policy (by Congress) have sent inflation surging to a 40-year high.
My initial thought, however, is that raising the purchase limit to $100,000 temporarily would be a financial windfall for more wealthy Americans, allowing a couple to sock away $200,000 earning 7.12% interest as a short-term investment. Would these wealthy investors jump into — and then out of — I Bonds when yields fall in the future? Very likely.
I’d prefer to see the I Bond purchase limit increase to $20,000 per person per year permanently, and then be indexed to inflation (possibly in $500 increments). Or … even better … raise the limit to $30,000 as it was when the I Bond launched in 1998. (Can we also use credit cards for purchases with no fees? OK … let’s not get greedy.)
If you want to know more about how I Bonds work as investment, check out these pages on my site:
I Bond Manifesto: Using I Bonds as part of your emergency fund
Q&A on I Bonds: The way I Bonds work
Inflation and I Bonds: Tracking the I Bond’s variable rate
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David Enna is a financial journalist, not a financial adviser. He is not selling or profiting from any investment discussed. The investments he discusses can purchased through the Treasury or other providers without fees, commissions or carrying charges. Please do your own research before investing.
The limit should be at least a year’s spending, adjusted for inflation each year. The idea is to preserve our purchasing power, isn’t it?
What can people do to best advocate for raising the I bond limit?
Write your Congressman. Get it on their radar at least.
I’ve been around long enough to remember when the limit was $30K and the fixed rate was 4%.
The fed is trying to get people out of fixed income and into stocks. There is a zero chance they increase the limit and a good chance they do away with I-Bonds completely.
The Fed realizes that the U.S. Treasury will need to borrow money — in large amounts — into the infinite future, so it is still interested in having people buy Treasury issues. I don’t think the Treasury will do away with I Bonds, but agree it won’t increase the limit in the near future.
Either the fed will buy it all or they’ll get a favored bank like Blackrock to do it for them. Fixed income investing is dead since 2009. I thought they would try to fix it, but looks like it’s unfixable. The excesses and distortions are so great that the fed has to keep everything together forever. In the meantime, the public will pay with their savings, with negative yields forcing a bail-in of sorts. Everyone knows that real inflation is much higher than 7.9% which excludes food, energy and rent.
If the Fed wishes to have people swich from fixed income to stocks, would raising interest rates not work counter to that? Is it not true that the higher interest rates go, the more that would reduce corporate profits for any business that has ongoing borrowings, making stocks less, rather than more attractive? In an environment of rising interest rates, would not investors want to switch from stocks yielding lower returns to fixed income investments yielding more interest, especially for those seeking income?
Great points, Lou. If 5-year CDs rise to something like 3.5%, I could see a lot of people moving back into CDs, me included. We’ve rarely seen a rate like that in the last dozen years.
I don’t believe Treasury will see the “benefits” of raising the purchase cap to $100,000 as the op-ed writers do. There are a couple of issues I see:
1. Raising the purchase cap during times of high inflation and lowering them when lower is counterintuitive, and not for a good reason. ‘”Internalizing” the budgetary and reputational costs of its policy errors’ is not capitalistic, is it? If you owned a business and found that you were in a financial bind would you go to get financing from a bank or pay a higher rate by crowdfunding? Of course you’d take the bank financing, who would pay more to penalize themselves? That’s not internalizing the mistakes, that’s being financially inept. You’d take crowdfunding when bank rates are higher or unavailable to you. Today the government is not in a financial bind by any means, Treasury would have buyers for all the 3% bonds they could issue.
2. Ok, so let’s suppose Treasury did do this, who ultimately bears the cost for internalizing the policy error(s)? Taxpayers, not Treasury, not the government. Sure, those folks who are able to somehow buy more than $10,000/year would benefit, at the expense of all other taxpayers, the majority who are not able to afford even purchasing any I-Bonds at all. I believe the objective in offering I-Bonds was to provide a mechanism for the masses to get some additional return…the Average Joe. We all see the headlines of how 50% of folks don’t even have $400 to be able to cover an emergency expense. So who and how many would raising the cap from $10,000 to $100,000 really benefit? Maybe the top 10%? It’s really an extremely small niche. But hey, maybe folks on Capitol Hill will point to the op-ed article as a reason to float the idea – it would directly benefit themselves, as they could personally sock away an additional $90k/person/year and lock in yields more than triple market yields as we enter a recession.
Excellent points, Mary. I believe the authors of the op-ed were actually trying to ridicule the Federal Reserve and Treasury by suggesting a policy that would be punishing to the U.S. budget deficit. But, as I said in the article, the purchase cap has changed over the years but not since 2012 and I think it is time for it to be higher. One reader suggested a $20,000 cap for both I Bonds and EE Bonds in one year, in any combination. That’s a great idea. (And if the limit is raised, the Treasury could also end the paper I Bonds for tax refund alternative.)
I loaded up on maximum $30,000 a year I-bonds in the early 2000s. I figured it was too good a deal to pass up, and indeed, the govt dropped the maximum to $10,000 a year. The govt did this to discourage massive I-bond purchases by individuals, knowing that paying interest on trillions of dollars of I-bonds during high inflation periods would be a serious problem. No way I-bond maximum will increase. If anything, I expect that it will decrease. Frankly, I-bonds are such a good deal for investors that I suspect the govt is sorry it set up the program.
A big plus for I-bonds that is not often mentioned (it is talked about on this web site) is that your principal and earnings will never decrease, even during periods when the CPI plus fixed rate goes negative. The composite rate can never go below zero.
One of the major drawbacks of savings bonds is that the beneficiary cannot be a trust, not any kind of trust. The beneficiary has to be a living person and you only get one beneficiary. If that beneficiary dies, you have to select another one. A workaround is to put all your bonds in the name of your trust (I use a living trust) and then when you pass, the trust will divide up the proceeds to the beneficiaries named in the trust. Of course all the bonds are cashed out then, which is generally not what you want.
Finally, I think a useful article would address the tax situation after the 30 year maturity date is reached. This could result in a huge tax bill, so it might be smart to cash in some bonds a few years before they actually reach maturity. One has to do the math.
Maybe I should be more sympathetic to the plight of the wealthy but it seems to me that those who are really desperate to put $100K into an inflation-linked instrument, there’s TIPS.
“Clearly, this proposal has a strong political spin, but it is hard to disagree with the theory that excessive monetary policy (by the Federal Reserve) and fiscal policy (by Congress) have sent inflation surging to a 40-year high.”
I’ll give “disagree with” a whirl. Monetary and fiscal policy have not changed radically for the last 12 months, more or less a continuation of the previous 48 months. Yet, inflation has changed in the last 6 to 8 months. It’s hard to pin that directly on the Fed.
One of the key inflationary pressures is certainly energy prices. This is supply and demand. We have economic expansion and I’ve seen articles that suggest oil companies are in no hurry to pump. Prices will rise. There’s a multiplier to that, too. A 1% change in the price of oil is thought to lead to a .25% change in general inflation.
Another key pressure is housing, particularly rents. Tax cuts that freed up a lot of cash for wealthy investors have turned into big cash offers for investment housing, driving others out of the market and pushing up rents. And housing construction, generally, isn’t catching up with demand.
Yet another key pressure is auto prices. That’s a supply issue. Until last year of so, the local Chevy dealer’s lot was absolutely covered with trucks. Where there were once 50, there’s now 5. And we know we have chip supply issues, too.
I should have added, for those with $100K, in addition to buying TIPS on the bond market or from TD, there’s ETFs. I use STIP but there’s others available.
The massive step up in both Congressional stimulus and Federal Reserve stimulus happened after March 2020 and the panic caused by the Covid pandemic. And that very aggressive stimulus had a very predictable effect. Take a careful look at the rather insane growth over the last four years:
Federal deficit by year:
2021 $2.77 trillion
2020 $3.13 trillion
2019 $0.98 trillion
2018 $0.78 trillion
Federal Reserve balance sheet by end of year:
2021 $8.7 trillion
2020 $7.4 trillion
2019 $4.2 trillion
2018 $4.0 trillion
Federal funds rate, end of year:
2021 0.00% to 0.25%
2020 0.00% to 0.25%
2019 1.50% to 1.75%
2018 2.25% to 2.50%
M2 Money Supply, end of year
2021 $21.5 trillion
2020 $19.1 trillion
2019 $15.3 trillion
2018 $14.3 trillion
Fed balances don’t erase the pressures I outlined.
Also, I don’t have the latest figures to hand but the UK inflation rate was 4.2% for 2021 as of October. Difficult to blame that on the Fed.
I’m not sure I agree with the author that the paper bond are a logistical nightmare for the IRS and the Treasury. They have been at this for several years now and seem to have the process down. I always assumed that retaining the paper bonds in this way was to protect a few printers jobs at the Bureau of Public Debt or else someone just feels nostalgic for the paper bonds and doesn’t want to see them go completely extinct. Ultimately most people who have them will convert them to electronic bonds.
Sorry about the paper bonds comment David. I didn’t realize you wrote the WSJ article.
But I still don’t think it is that big of issue with the BPD and even less so for the IRS which just passes the form 8888 information on to them.
Thanks for reading Rob, and providing feedback. Always valuable.
Even a baby step of $20K/year of any combination of EE and I Bonds would be welcomed. I only want to purchase I Bonds and could purchase $20K/year. Others might only like EE Bonds and could purchase $20K/year. And yet others could split their $20K between the two in any way they like, not necessarily $10K/$10K.
There may be some sort of rationale at the Treasury for limiting purchases to $20K/person/year. OK, but my $10K/year cap of EE Bonds is going “unused” when I would be more than happy to use that to purchase an additional $10K of I Bonds. Others might feel the same way about an additional $10K of EE Bonds.
Very good idea, Ken.
Considering that the reduction to $5,000 occurred during the Bush administration, I would assume that the reason was a belief that the government should not be in the business of issuing securities with above market rates.
At the time the reason given by the government for the reduction was that savings bonds were intended to be for small investors and it it was believed that there appeared to be a small group of affluent investors that were capitalizing on the program. The Obama administration eased the restriction a bit to $10,000 without comment.
Back in January 2008, when the reduction took place, below market rates weren’t as much an issue. At the time, a 5-year TIPS was yielding 1% real and a 10-year, 1.59%. The I Bond’s fixed rate at that time was 1.20%, but dropped to 0.0% in May 2008. On Oct. 31, 2007, when that 0.7% rate was set, the 5-year TIPS was yielding 1.9% and the 10-year, 2.14%.
If the government’s intent all along was to have I-Bonds only for small investors, why did it raise the maximum so much in the first place? How could it not forsee that affluent investors would take advantage of the new maximum, mindful that at that time the fixed and inflation components of the composite interest rate were each running in excess of 3%?
The Treasury wants to provide the service for the small investor and they have decided that purchases of $20K/year is adequate for what they are categorizing as a small investor. I may not agree, but the policy is defensible from a logic perspective. I’m OK with that.
Where it breaks down for me is saying that allowing a limit of $10K EE Bond and $10K of I Bonds is designed to benefit the small investor, but $20K in any combination of EE and I Bonds would somehow not be equally beneficial to the small investor.
It’s still $20K.
I neglected to mention that my reference was to the especially high maximum for I-Bonds set in 2002 ($30,000 for paper plus $30,000 for electronic; the same maximum was applied to EE Bonds in 2003), which was reduced to $5,000 per Social Security number in 2008 and increased in 2010 for the Tax Refund $5,000, before being increased to today’s maximums. So from 2002 though 2007 an individual could purchase (in own name) as much as $60,000 of I-Bonds, and from 2003 through 2007 as much as $60,000 in EE Bonds. Of course, both the fixed and inflation components of the interest rate declned significantlyduring that period, reducing the incentive to purchase them.
Yes, as I noted in the article, the purchase limit fell to $5,000 in 2008 and remained there until 2012, when it was set at the current $10,000.
I see mention of all the benefits to individuals for raising the cap, and in the comments supposed benefits to the country (i.e., more I Bond purchases takes money out of the system, reducing inflation). But what are the negative consequences of raising the limit? Any serious discussion of altering the purchase limit should address those concerns.
I don’t think there would be any negatives to raising the limit to $20,000 a year. None at all. This would remain an investment with a focus on small-scale investors, and would encourage safe, long-term investing. Raising the limit to $100,000 or more ($200,000 for a couple) would bring money flooding in from very wealthy investors, or as my pal Michael Ashton called them, “the hedgies.” That would last until the variable rate dropped to something equivalent to 5-year nominal Treasurys, and then the very wealthy would ditch their I Bonds.
Personally, I disagree. People with multi-million dollar portfolios can invest in TIPS. I-bonds (savings bonds in general) are meant to be for small investors. Even still, investing 10K in I-bonds and 10K in EEs every year an easily result in nearly a million dollars after 20 – 30 years of investing.
At least there is something for us ordinary people.
As I commented before the impetus for inflation-indexed securities (TIPS) was to lower the government’s funding costs by eliminating part of the risk premium in nominal securities. I might assume the objection to more funding through I bonds is that most people choose not to pay income taxes yearly on the accrual.
That said the tinkering with the computation of the CPI calculation since the days of Alan Greenspan has always made me dubious as to how much protection from inflation I am really receiving. Especially as a senior.
Better than what you can get in CD’s now.
I agree with David that the cap should be raised to say $30,000 per person and inflation adjusted annually. IRA contribution limits have increased since 2012 (from $5,000) so why not I Bonds? Both should be increased in line with official inflation every year.
F-o-u-r posts. My bad. Actually fourth post is a correction. I plead old age and declining cognitive functioning. David Graham recent blog post was about I-Bonds not TIP’s. He does mention TIP’s elsewhere in his blog. I did not post the URL to his blog here as that would not be proper. Seek and ye shall find.
Three posts today. I’m becoming a pest.
Over at Humble Dollar, Michael Flack wrote a piece titled ‘No I for Me’. I’m all for differing opinions as long as those making them can politely handle any criticism which comes their way.
Here’s a link to Michael Flack’s piece … https://humbledollar.com/2022/02/no-i-for-me/
His criticism centers around creating a separate investment account (two of them for a married couple), which in my opinion is a very minor hassle. I’ve had a TreasuryDirect account for nearly 20 years. The question I’d ask: As an investor, are you holding cash elsewhere and are you happy with the return you are currently getting: 0.05% to possibly 1%, failing well below current inflation? If not, at least consider I Bonds.
I think he makes a good case for not jumping into I Bonds with the intention of jumping out when inflation returns to near 0. It might not be worth creating an account for that. But he makes assumptions in his article some stated and some implied. He doesn’t state it but he seems to assume that high or moderate inflation is just a short term phenomenon. He doesn’t say whether he thinks accumulating I bonds would be a good idea if inflation persists for many years. He also repeats many times his dismay of the failure of the Treasury to notify heirs about the existence of the I bonds. This might be a concern, but in my opinion the concerns of the investor come first and the heirs second. It is the responsibility of the investor to make their assets known to the heirs. And is it true that the Treasury does nothing to locate heirs? He calls the I bond program a scheme, but I don’t think it could be more transparent. Does Fidelity search for the heirs of their investors? It’s too bad he wasn’t looking into I bonds when they had the Dick Tracy decoder card to login. It would have given him something else to complain about.
A plug for David Graham, MD who has a blog where he opines on recent popularity for TIP’s and so much more. He’s one of my two favorite communicators on financial matters for those who don’t work within the financial industry (Jill Schlesinger being the other).
I am also a big fan of Jill Schlesinger’s daily “Jill on Money” podcast. She’s always giving solid advice and she is selling nothing, so no conflicts … https://www.jillonmoney.com/podcasts
The old x1 for singles and x2 for couples. Couples expenses are not necessarily twice that of a single person. There are many examples why this is so, and if one thinks about economies of scale as but one example, one can start to understand. A better proposal would be $15,000 for singles and $20,000 for couples. For over twenty years since I lost my wife to cancer, I’ve remained single, and have discovered through talks with others (singles, couples and families), that x1 living expenses for singles and x2 living expenses for couple is not accurate in most cases.
The current TreasuryDirect system is based on one person, one Social Security number, one account. So it’s not likely they will make changes to purchase limits for singles versus couples.
You could always create a living trust account for double your share.
Thanks for the article! I’ve spoken with many friends about i-bonds over the years. Before the reduction to $10,000 and Treasury direct I was able to occasionally convince people to purchase i-bonds. Once i-bonds were no longer able to be purchased from a bank and the limits were reduced to $10,000…well, I haven’t been able to convince anyone. Personally, the $10,000 cap combined with the Treasury Direct requirement has kept me from new purchases as well.
the Treasury Direct requirement is really not that big an issue. It’s fairly easy to set up and fund your TD account. Though I realize it probably is somewhat intimidating to those who aren’t use to/don’t trust banking online.
As for the cap. I’d love to see it higher (the 20k or 30k suggestion sounds good to me) but again, it’s shouldn’t be that big an issue. Do people who think the iBond cap is too low also avoid funding IRAs and HSAs because of their yearly caps (which are even smaller than the iBond cap)?
Banks began withdrawing from the Savings Bond program some time ago, with good reason, from their perspective. These Savings Bonds never were their product, on which they could earn profit. Not only that; the Treasury has never paid commercial banks a dime of commission for selling them. Meantime, the banks have had to train their employees on the various governmental requirements and processing procedures for these bonds, which are totally unique in the world of bonds. In the early 2000s the bond limits were raised to $30,000 per person per year, so a married couple could purchase $60,000 of bonds annually (potentially, even more through the use of trusts and sole proprietorships). Then, these bonds became serious competition for the banks’ own products, especially CDs.Not surprisingly, banks began withdrawing from the program. There are still some local branches of various banks around the country that have an employee that knows how to handle redemptions of paper bonds (none can handle sales because paper bonds cannot be purchased anymore outside the annual $5,000 IRS tax refund program).
As for increasing the annual purchase maximum, from a big-picture perspective it may make sense to the Treasury to do that, even if only temporarily. There is currently a huge oversupply of money in the country. Increasing the I-Bond purchase cap to, say, $100,000 at the currently very high interest rate will likely attract buying on the kind of massive scale that is needed to absorb that oversupply and help to significantly reduce inflation, which is currently the main focus of the Federal Reserve. The interest cost to the country will be high but if enough liquidity is withdrawn from the economy, that cost may be mitigated if the higher max is in place for only a short while, at which point the Treasury could lower the cap. To ensure that very high income earners do not take excess advantage of the tax-deferral of interest on such large purchases, a temporary change can be made to the Tax Code whereby such income earners pay at least some tax on interest on large purchases without deferral.
From the point of view of I-Bond purchasers, let’s remember that the interest rate includes a fixed rate component of zero, meaning that the current 7.12% rate is not a return on I-Bond principal but partial protection of that principal – partial, because as some point, for most people,income tax will be payable upon redemption.
Lou, thank you for this thoughtful and knowledgeable comment. One reaction: The reason that I Bonds are suddenly so popular is that even thought they will only match future U.S. inflation, there are very few safe options today offering that possibility. Savers today face rates of 1% to 1.5%, which is disastrous with inflation running at 7.5%.
Does anyone have first-hand experience buying and delivering a gift bond? According to the Treasury Direct site, you can wait to deliver it at a later date. It starts earning interest based on the purchase date. But it counts towards the $10k max per person in the year it’s delivered, not when purchased. So I’m curious how they verify limits. For example, could my spouse and I each buy our $10k bond for 2021 now, and also buy $10k as gifts for each other, but wait to deliver until 2022? If so, all $40k could start earning the 7% rate now. I think that would also start the 1 year clock now, instead of waiting. I wonder what would happen in a situation where I delivered a gift bond to someone who had already purchased their $10k that year?
The $10,000 per year limit would apply to the person receiving the I Bonds as a gift in the future. TreasuryDirect would apply that $10,000 to their limit, capping out their purchases for the year. If you tried to “double up” a purchase, I imagine TreasuryDirect would simply send the gift back to the gift box.
Just to confirm:
1) Could my spouse and I each buy our $10k bond for 2021 now, and also buy $10k as gifts for each other, but wait to deliver until 2022?
2) If so, all $40k could start earning the 7% rate now?
The answers to both I presume is “YES” … could you please confirm
My recollection is that when “I” bonds started, you could buy $30,000 of paper bonds and $30,000 of electronic bonds per year, ditto “EE”‘s, so a couple could make a quite meaningful investment.
This could be true. I Bonds were launched in 1998 as paper only, and then the electronic version came in October 2002. TreasuryDirect says, “October 17, 2002: Annual purchase limit raised to $30,000 on paper and electronic Series I savings bonds.” (Which is vague. Meaning each or total?)
I recall an article from the Wall Street Journal remarkng that some families were purchasing I bonds to the tune of hundreds of thousands of dollars utilizing various registrations. (Approximately 20 years ago) Fixed rates were above 3% then!
That was vague to me too, so I dug in and found this archived FAQ from 2003:
Excellent work, Sean. Thanks for this information. I quote from 2003: “You can buy up to $30,000 worth of paper I Bonds each calendar year. In addition, you may also purchase up to $30,000 in electronic I Bonds through TreasuryDirect. “
Very nice link with good historic value. As I recall, I even used my credit card to purchase I-bonds back then. Those were the days.
I like all of these ideas! I wish I’d started buying I-Bonds many years ago. Thank you for keeping us informed.