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:
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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.