© 2007, D2D Fund, Inc. 1

Promise & Potential of

U.S. Savings Bonds

Peter Tufano, Harvard Business School & D2D FundTimothy Flacke, D2D Fund

June 20, 2007

© 2007, D2D Fund, Inc. 2

Agenda

� Introductions

� LMI saving, tax time & the bucket problem

� Reinventing U.S. Savings Bonds

� Some context

� An experiment

� Findings

� Good news / bad news

� Suggestions

© 2007, D2D Fund, Inc. 3

Why Are We here?

� Care about saving, especially for Low toModerate Income (“LMI”)

� Why save?

� Shocks (emergencies)

� Strategic investments (e.g., home, education)

� Deferred consumption (e.g., retirement)

� How do we help low-income householdsto save?

© 2007, D2D Fund, Inc. 4

How Can We Help Families Save?

� Force them to save

� Make it hard not to save

� Make it easy to save

� Bribe them to save

� Social support for savings

� Make them excited to save

Social Security; UK Child Trust Program

Defaults and opt outs; bundling

SMaRT plan, Split Refunds and Savings

Tax advantages, matching funds

AmericaSaves

“Prize-linked” savings

© 2007, D2D Fund, Inc. 5

LMI Saving? Go Where the $$$ Are

� Tax Time combines:

� Savable funds (tax refunds)

� Topical tie in (finances top of mind)

� Intermediation (tax preparer typically involved,

possible advisor or salesperson)

© 2007, D2D Fund, Inc. 6

Tax Time: How Much Money?

� $220 billion (2003) in total refunds

� $103 billion for AGI < $40k

� $82 billion for AGI < $30k

� Average refund $1,482 (AGI < 30k)� 5% of annual income in single shot

� Median net financial assets only $2,000 (forbottom quintile by income)*

� Meaningful saving opportunity, especiallyrelative to current savings

* Source: Aizcorbe, Kennickell, and Moore (2003).

© 2007, D2D Fund, Inc. 7

How to Capture Refunds as Savings?

� Refund Splitting� direct portion of refund directly to savings

� where possible, offer new accounts during taxprep process

� Pilot tests TS 2004 - 2006� Demand as high as 13%

� Ultimate outcome: Form 8888

© 2007, D2D Fund, Inc. 8

But Saving Requires a “Bucket”

� Sizeable segment can’t get saving product:� Mainstream institutions

� disinterested or fearful (ChexSystems review)

� products aren’t inviting (min. balances, fees)

� often little physical presence in LMI communities

� Others (check cashers, payday lenders)� aren’t depositories / don’t offer saving

� Result: a pipe fromsavable refunds to...nowhere

© 2007, D2D Fund, Inc. 9

Where Can We Find a Bucket?

� Imagine a universalsavings vehicle

� Characteristics of thisvehicle?� small denomination� portable� competitive return� no principal risk� good liquidity...

� Product already exists:

U.S. Savings Bonds

© 2007, D2D Fund, Inc. 10

How Did We Get Here?

� 2005: Reinventing Savings Bonds

� Thought piece: how to reinvent bonds toserve LMI market

� Recommendations:

� Offer bonds to tax return filers

� Reinvigorate bond marketing

� Recognize bonds as part of financial lifecycle

� Clarify, expand emergency access to bonds

� Don’t discourage bonds w/ means testing

© 2007, D2D Fund, Inc. 11

Laying the Groundwork

� 2006: Just Keep my Money� Report on “pre-experiment” test of refund-

driven savings bond program

� test operational feasibility of selling bondsin commercial tax prep context

� trying to merge tax refund & bond orderprocess from point of view of IRS

� Indication of demand� but sample too small, too late in tax

season, product too limited (no gifting)� further study required

© 2007, D2D Fund, Inc. 12

This Year’s Agenda

Ran experiment to answer:

Will consumers buy bonds at tax time?

Preview: YES!� Experiment offered bonds to 8,000+ clients� 5.9% - 9.6% of clients offered, bought� 510 clients bought bonds for 881 people

� Substantial demand for bonds relative toother tax time saving products

© 2007, D2D Fund, Inc. 13

Context: An American Saving Crisis

© 2007, D2D Fund, Inc. 14

Beyond the Headlines

� In 2004, bottom 25% of U.S. householdsby net worth had:� mean net worth of ($1,400)

� median net worth of $1,700.

� 10% of HH had financial assets of <$100

� In terms of net financial assets, 25 to 33%are asset poor

� can’t survive three months at poverty line

Source: Bucks, Kennickell, and Moore (2006), SCF (2004), Havenmann and Wolff (2001), Caner and Wolf (2002)

© 2007, D2D Fund, Inc. 15

Estimates of U.S. Asset Poverty by

Group

� Blacks / Hispanics 62 percent

� Head aged less than 25 years 72 percent

� Head aged 25-34 years 52 percent

� Head with < high school degree 60 percent

� Renters 64 percent

� Female heads with children 71 percent

Source: Havenmann and Wolff (2001).

© 2007, D2D Fund, Inc. 16

Why Target LMI Savings?

� Need (as above)

� Impact

� Same $$$ / higher marginal impact on LMI families

� Assets matter - to individuals, families, kids,communities (Sherraden 1991, 2001)

� Appetite

� While savings rates are down, not so for lowest 60%of Americans (Maki and Palumbo 2001)

� When given incentives to save, poorest familiessaved at highest rates (Sherraden 2007)

© 2007, D2D Fund, Inc. 17

Efforts & Barriers to Boost LMI Saving

� “Asset Building” field has emerged� champion of LMI saving / asset building

� laboratory for policies, programs, products

� But scale, access & cost are still problems

� Innovation just beginning – mixed success

� Products: SVCs, HRB “Easy IRAs”

� Marketing: America Saves (social marketing), ZMET

� Policy: split refunds, savers’ credit, Automatic IRAs

© 2007, D2D Fund, Inc. 18

Saving Challenges for LMI

Uneasy

About

Saving

Not

Allowed

to Save

Not

Thinking

About

Saving

� Competingspendingpriorities

� Need accessto $ (liquidity)

� ChexSystems

� Minimumbalance req.

� No local FIpresence

� Mistrustdepositories

� Risk averse

� Skeptical

� Unclear goal

© 2007, D2D Fund, Inc. 19

Product Challenges Especially Tough

Barrier

� Small balances

� Checkered (credit) past

� Risk averse

� Mistrust mainstreamfinancial service firms

� No bank account

� Unclear goal(s)

� Long-term goals &liquidity needs in tension

Bond Feature

� Low $50 minimum

� No credit screen

� Principal is risk free

� Gov’t backed, no fees,good return

� No bank acct required

� Can save for anything

� Long-term orientation,access after 1 year

© 2007, D2D Fund, Inc. 20

Other Key Bond Features

� Gift-able

� can be purchased for self or with co-owner

� Inflation indexed

� Strong history

� high awareness

� fond memories

� No Patriot Act or KYC compliance

© 2007, D2D Fund, Inc. 21

How Savings Bonds Compare

YesNoNoMay Buy as a Gift

NoYesYesChexSystems Review

3 months interest(redemptions within 5years of purchase)

Greater of 3 monthsinterest or $25

NoneEarly RedemptionPenalty / Forfeiture

1 yearNoneNoneMinimum Holding Period

Adjusts bi-annuallyYesNoRate Fixed

$50$2,500$100Minimum to Open

$0$0$36Annual Fees

4.52%3.25%0.20%Rate of Return

Series I U.S.Savings Bond

Example 1 YearCertificate of Deposit 2

Example SavingsAccount1

1) Source Bank of America (www.bofa.com), Regular Savings Account as of 6/15/07;annual fees assumes balance less than $300.

2) Source: Wells Fargo (www.wellsfargo.com); Standard CD as of 6/15/07; rate ofreturn assumes balance less than $5,000.

© 2007, D2D Fund, Inc. 22

Savings Bond History

� Today’s savings bonds trace roots to 1935

� for small saver especially� “appeal primarily to individuals w/ small amounts to invest”

(U.S. Department of the Treasury, 1981)

� for public good, not just gov’t borrowing needs� Dept. of Treasury “to promote wise spending, intelligent

saving, & safe investment” (U.S. Department of theTreasury, 1918)

� to “democratize public finance”� “Every (person) who owned a Gov’t Bond... would serve

as a bulwark against the constant threats to Uncle Sam’spocketbook from pressure blocs & special-interest groups”(Morgenthau, 1944)

© 2007, D2D Fund, Inc. 23

Savings Bond Marketing

© 2007, D2D Fund, Inc. 24

Fundamental Questions:

Demand? New Savings?

� Do LMI individuals want savings bonds?

� If so, who, why & under what circumstances?

� Would bond sales constitute new or substitutesaving?

� Is there demand, does it increase savings

� One way to find out: experiment

© 2007, D2D Fund, Inc. 25

TS 06: Pre-experiment

� 2006 pre-experiment� location - 1 HRB district, 14 offices (Schaumberg, IL)� duration - 3 weeks only� context - commercial tax preparer only� purpose - test operations, indication of demand

� Take-aways:

� 3% take up rate despite handicaps

� no gifting option

� late in tax season

� limited training

� operationally complex - need to streamline

© 2007, D2D Fund, Inc. 26

TS 2007 Savings Bond Experiment

� Product: Series I bonds� fixed rate (premium above inflation) + inflation rate

� fixed rate set at purchase, inflation rate adjustsevery 6 months

� Channels� H&R Block offices

� larger scale, commercial firm environment

� select VITA (Volunteer) tax prep. sites� lower income clients, core mission to support saving

� Dates� Tax season start till March (VITA), April (HRB)

© 2007, D2D Fund, Inc. 27

Pilot Details: Marketing & Sales Training

H&R Block

� Relied on taxpreparers (“pros”) tooffer bonds to clients

� Majority of 400 taxpros trained in groupsessions

� Marketing limited topoint of sale (posters,monitor toppers, etc.)

VITA

� “Bond Coordinator”marketed to clients,dealt w/ ops issues

� Most tax preparerstrained directly orindirectly (used CBT)

� Marketing limited topoint of sale (posters,brochures)

© 2007, D2D Fund, Inc. 28

Marketing Examples

VITA H&R Block

© 2007, D2D Fund, Inc. 29

Research Tools

H&R Block

� Tax data

� Survey data

� buyers

� non-buyers

� control

� Transaction data

� savings & settlementproducts

VITA

� Tax data

� Survey data

� buyers

� sample of non-buyers

� Transaction data

� bond orders details

© 2007, D2D Fund, Inc. 30

Research Details

� Consents from all parties

� All personal identifiers stripped from taxdata

� Form 7216 authorization obtained fromall H&R Block clients

� Research participation not required forbond purchase

© 2007, D2D Fund, Inc. 31

Bond Eligibility - Requirements to Buy

H&R Block

� Refund >$500

� Willing to open EasySavings account tofacilitate buying bond

� total bond sale > $50

VITA

� Refund >$50

� Willing / able to usedirect deposit (orWestern Union QuickCash product)

� total bond sale > $50

© 2007, D2D Fund, Inc. 32

Bond Purchase Processing

H&R Block

� Individual “conduits”(Easy Savings Acct)

� HRB splitting(internal systems)

� Instructions, consentcollected via software

� Difficult to train taxpros & explain toclients, automatedprocessing

VITA

� Pooled “conduit”(clearing account)

� IRS splitting (via newForm 8888)

� Instructions, consentcollected via paper;faxed by site

� Easy to train preparers,labor-intensive, errorprone processing

© 2007, D2D Fund, Inc. 33

What Did We Find?

� Context

� roughly 10,000 study participants

� Block: 3,729 Treatment / 1,485 Control

� VITA: 4,410 Treatment / 431 “Incentive Offer”

� Block

� 27 offer & 4 control offices

� 2 cities (Boston, Schaumberg, IL)

� VITA

� 4 offices

� 4 cities (Baltimore, Boston, Denver, Tulsa)

© 2007, D2D Fund, Inc. 34

Measuring Take Up

� Take up = purchase / offer

� Nuances in determining eligible offers

� Block

� definitive offers - certain client offered bond

� possible offers - possible client offered bond

� VITA

� direct depositers - clients who had sufficient refund($50) & used direct deposit (required to buy bonds)

� all eligible - clients who had sufficient refund ($50)to buy a bond

© 2007, D2D Fund, Inc. 35

Conditional on receiving an offer to buy bonds:

Does Anyone Want Bonds?

Block

� 5.9% bought (definitive)

� 1.1% bought (possible)

� 220 buyers

� 407 bond recipients

VITA

� 9.6% (direct

depositers)

� 6.0% (all eligible)

� 231 buyers

� 377 bond recipients

© 2007, D2D Fund, Inc. 36

Compared to What?

� For H&R Block offices:

IRA

Openings & Re-contributions

Savings Account Openings & Re-

contributions

Treatment offices 1.5% 1.4%

Control offices 0.6% 0.1%

Block national 0.9% 0.2%

© 2007, D2D Fund, Inc. 37

Compared to What? (Other Samples)

� Opened IRAs (w/out incentive) at tax time

� H&R Block experiment, 2005 (Duflo et al.)

� 2.2% (all filers, pre-experiment)

� 3.5% (non-married, avg. AGI 30k)

� 2.9% (married filers, avg. AGI 69k)

� Contributed to an IRA� Percent of eligible tax filers (IRS data, TY02)

� 3.4% (AGI < 20k)

� 4.6% (AGI < 30k)

� 5.6% (AGI < 40k)

© 2007, D2D Fund, Inc. 38

Explaining Demand

� Bonds are familiar to buyers� Awareness: 85-88% (Block), 73-75% (VITA)

� Prior purchase: 35-39% (Block), 15% (VITA)

Have you ever purchased a US Savings Bond for yourself and/or

someone else before?

0 %

10 %

2 0 %

3 0 %

4 0 %

5 0 %

6 0 %

7 0 %

A . Y e s , f o r

my s e lf .

B . Y e s , f o r

s o me o ne e ls e

C . Y e s , f o r

my s e lf A N D

s o me o ne e ls e

D . N o , I ha v e

ne v e r p urc ha s e d a

b o nd .

someone else before?

3 0 %

4 0 %

50 %

6 0 %

70 %

Bond Purchasers

Non-BondPurchasers

© 2007, D2D Fund, Inc. 39

Take-up in Context

� Long-term product� Bonds connote long-term saving

� Requirement for 1 year holding, minimum

� No immediate tax benefit (vs. IRA)� Nothing for tax preparer to “sell” to client

� Took patience, endurance to buy a bond� Block

� open another product (Easy Savings)� get balance paid back to you (orders under $300)

� VITA� complete 3 additional forms� entrust part of refund to bank not present at site

© 2007, D2D Fund, Inc. 40

What if We Offer an Incentive?

� 20% discount on bond purchase

� for 1 week (1/29 - 2/3) in Tulsa VITA site

� goal: gauge effect of financial incentive

� up to $70 subsidy ($350 purchase) per client

� special marketing materials highlightedincentive

� 431 clients offered bonds w/ incentive

� 60 takers

© 2007, D2D Fund, Inc. 41

Incentive Findings

� Take-up: rate nearly doubled or more� 15.2% of those offered & eligible

� 18.1% of direct depositers

� Same portion of refund spent (5.8%) as non-incentive;avg $ / client $189 vs. $185

� Only 22% “yes, would’ve bought bonds w/o incentive”

� Compare to IRAs opened at tax time� H&R Block experiment, 2005 (Duflo et al.)

� 20% incentive (added to client contribution)

� 9.6% take up of eligible tax filers ($300 refund)

� Average AGI $44,789 (IRA) vs. $20,704 (bond)

© 2007, D2D Fund, Inc. 42

Block VITA (averages)

Buyers Non-Buyers Buyers Non-Buyers

n 220 3,509 231 4,179

AGI $ 36,828 $ 41,171 $ 20,888 $ 18,105

Refund $ 3,836 $ 2,951 $ 3,177 $ 1,373

Dependents 1.3 0.8 1.3 0.6

% of Refund Used for Bonds

5.9% - 5.8% -

% of Bonds w/ Co-Owners

82% - 84% -

Buyer / Non-Buyer Details

� Huge portion w/ co-owners� Buyers appear to have

� more dependents� larger refunds

� Consistent % of refund used for bonds

© 2007, D2D Fund, Inc. 43

Gifting: Co-ownership

� Bonds may be purchased with:� beneficiaries (contingent on owner’s death)

� co-ownership (either party may redeem bond)

� Chose co-ownership as most gift-like� only name required (no SSN) - easy point of sale

� up to 4 (Block) / 5 (VITA) co-owners (plus client)

� buyers: a) self only, b) self & others, c) others only

© 2007, D2D Fund, Inc. 44

Gifting Details

� Among VITA bond buyers:� 59% bought one or more bonds for child

� 9% bought one or more for grandkids

� Among Block bond buyers:

� Most popular to buy bonds as gift by wide margin

� “Self & Others” spent the most on bonds, boughtmost gifts

Bought for

SELF only OTHERS only SELF & OTHERS

% of purchasers 31% 52% 17%

Avg $ spent / buyer $ 145 $ 241 $ 335

Avg. # of gifts / buyer - 1.9 2.3

© 2007, D2D Fund, Inc. 45

Gifting: What’s Going on?

� D2D consumer research suggests childrenare a powerful force in LMI financial plans

© 2007, D2D Fund, Inc. 46

More on Gifting - Gender Differences

© 2007, D2D Fund, Inc. 47

New Savings?

� For bond buyers:� 54% (VITA) / 40% (Block)

reported no prior savings

� Of remainder, 46% (VITA) / 22%(Block) reported savings &investments < $1,000

� 53% (VITA) said they wouldhave saved less if they had notbought a bond

No

40%Yes

56%

4 %

Block Bond Buyers:

Do you have any savings

or investments?

© 2007, D2D Fund, Inc. 48

Why Did This Work? The Good News

� Strong foundation� very high awareness, experience w/ bonds

� solid product design (return, fees, credible)

� Bond features appeal to LMI tax clients� gifting

� small amounts (1/3 of VITA bonds @ $50)

� allows small savings “win”?

� Tax time & bonds a good fit� immediacy & simplicity (do it now / it’ easy)

� compliance relatively easy (Pat Act, KYC)

© 2007, D2D Fund, Inc. 49

Bank #1

Bank #2

Tax Filer

Bank #3

-- Bank

Midwest

IRS

Bureau of

Public Debt

Tax Pro enters

coupon into TPS for bond

type purchase

H&R Block

Tax Pro fills out

purchase form

Signs new

account agree-

ment and consent

Tax Pro

faxes form to

WHQ for process-

ing Client info

added to refund card

account

WHQ monitors

card account

for refund

receipt

WHQ sends

letter to client

outlining purchase details

WHQ fills out

spread-sheet with

purchase info and

uploads

Move funds from

pooled

account to fed

account

Submit via

norma l savings

bond process

Contact HRB to indicate bonds

purchase complete

Tax prep and

return filing

Receive Savings Bonds

info (via

Fed Line)

Process Savings

Bond

Mail Bond to Tax Filer

Receive US

Savings

Bond

Process Tax

Return

Send Refund

Send Instruct-

ions for Temp-orary

Account Opening

Send Instruct-

ions for Split

between debit and

check

Open Temp-orary

Account

Split the Refund

Send Funds to

HRB refund card

account

Send Check to Tax Filer

Close Account

Receive Refund

Check

Decide to buy

bond(s)

Funds received & moved (via ach)

to a pooled

account

Refund card

account closed

Receive bond

purchase

letter

Tax Season 2006, US Savings Bond Process Flow

Bank #1

Bank #2

Tax Filer

Bank #3

-- Bank

Midwest

IRS

Bureau of

Public Debt

Tax Pro enters

coupon into TPS for bond

type purchase

H&R Block

Tax Pro fills out

purchase form

Signs new

account agree-

ment and consent

Tax Pro

faxes form to

WHQ for process-

ing Client info

added to refund card

account

WHQ monitors

card account

for refund

receipt

WHQ sends

letter to client

outlining purchase details

WHQ fills out

spread-sheet with

purchase info and

uploads

Move funds from

pooled

account to fed

account

Submit via

norma l savings

bond process

Contact HRB to indicate bonds

purchase complete

Tax prep and

return filing

Receive Savings Bonds

info (via

Fed Line)

Process Savings

Bond

Mail Bond to Tax Filer

Receive US

Savings

Bond

Process Tax

Return

Send Refund

Send Instruct-

ions for Temp-orary

Account Opening

Send Instruct-

ions for Split

between debit and

check

Open Temp-orary

Account

Split the Refund

Send Funds to

HRB refund card

account

Send Check to Tax Filer

Close Account

Receive Refund

Check

Decide to buy

bond(s)

Funds received & moved (via ach)

to a pooled

account

Refund card

account closed

Receive bond

purchase

letter

Tax Season 2006, US Savings Bond Process Flow

What Worked? The Bad News

� Operational nightmare - it took thisto allow bond sales in commercialtax preparer

© 2007, D2D Fund, Inc. 50

Aren’t All Essential Ingredients

Available?

++++

Savings Bonds + IRS Split Refunds

Why isn’t this enough?

© 2007, D2D Fund, Inc. 51

Why Not Enough?

� Someone has to ask� what would take up look like if no one asked

� solution: make it so all tax filers likely to consider it

� Firms won’t process at scale� complex = expense

� solution: facilitate process so private sector doesn’thave to subsidize government when consumerasks the government to “Just keep my money”

© 2007, D2D Fund, Inc. 52

Not a New Idea: Bonds on Tax Forms

1962 IRS

Form

1040A

© 2007, D2D Fund, Inc. 53

What Can We Do?

� Continue to facilitate gifting� any changes must allow (promote?) gifting

� Ensure bonds do no harm� don’t discourage saving in bonds by including bonds

in public assistance means testing

� Align bonds w/ realities of LMI households� expand & make emergency policy more explicit

� recognize financial lifecycle (rollovers)

� Re-brand around families (“family bonds”)

� Consider financial incentives� for LMI to buy bonds

� for tax preparers to claim on clients’ behalves

© 2007, D2D Fund, Inc. 54

Policy Agenda Framework: 3 Pillars

� Increase & facilitate access, appeal� offer in tax filing process, with gifting

� clarify / expand emergency redemption policy

� exclusion for means tested benefits

� Maintain / Build Awareness� restore marketing budget

� re-brand around families, gifting

� Offer Incentives� expand Saver’s Credit

� Series T Bonds - at a discount, at tax time only, forEITC eligible

© 2007, D2D Fund, Inc. 55

Contact

Prof. Peter Tufano

Harvard Business School / D2D Fund, Inc.

ptufano@hbs.edu

617.495.6855

Timothy Flacke

D2D Fund, Inc.

www.d2dfund.org

tflacke@d2dfund.org

617.541.9064