Promise & Potential of U.S.

Savings Bonds

Peter Tufano, Harvard Business School & D2D Fund Timothy Flacke, D2D Fund June 20, 2007
© 2007, D2D Fund, Inc. 1

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.

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Why Are We here?
Care about saving, especially for Low to Moderate Income (“LMI”) Why save?
Shocks (emergencies) Strategic investments (e.g., home, education) Deferred consumption (e.g., retirement)

How do we help low-income households to save?

© 2007, D2D Fund, Inc.

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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.

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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.

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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 (for bottom quintile by income)* Meaningful saving opportunity, especially relative to current savings
* Source: Aizcorbe, Kennickell, and Moore (2003).
© 2007, D2D Fund, Inc. 6

How to Capture Refunds as Savings?
Refund Splitting
direct portion of refund directly to savings where possible, offer new accounts during tax prep process

Pilot tests TS 2004 - 2006
Demand as high as 13% Ultimate outcome: Form 8888

© 2007, D2D Fund, Inc.

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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 from savable refunds to... nowhere

© 2007, D2D Fund, Inc.

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Where Can We Find a Bucket?
Imagine a universal savings vehicle Characteristics of this vehicle?
small denomination portable competitive return no principal risk good liquidity...

Product already exists: U.S. Savings Bonds

© 2007, D2D Fund, Inc.

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How Did We Get Here?
2005: Reinventing Savings Bonds
Thought piece: how to reinvent bonds to serve 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.

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Laying the Groundwork
2006: Just Keep my Money
Report on “pre-experiment” test of refunddriven savings bond program test operational feasibility of selling bonds in commercial tax prep context trying to merge tax refund & bond order process 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. 11

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 to other tax time saving products

© 2007, D2D Fund, Inc.

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Context: An American Saving Crisis

© 2007, D2D Fund, Inc.

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Beyond the Headlines
In 2004, bottom 25% of U.S. households by 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.

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Estimates of U.S. Asset Poverty by Group
Blacks / Hispanics Head aged less than 25 years Head aged 25-34 years Head with < high school degree Renters Female heads with children 62 percent 72 percent 52 percent 60 percent 64 percent 71 percent

Source: Havenmann and Wolff (2001).
© 2007, D2D Fund, Inc. 15

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 families saved at highest rates (Sherraden 2007)

© 2007, D2D Fund, Inc.

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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.

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Saving Challenges for LMI
Not Thinking About Saving Competing spending priorities Need access to $ (liquidity) Uneasy About Saving Mistrust depositories Risk averse Skeptical Unclear goal Not Allowed to Save ChexSystems Minimum balance req. No local FI presence

© 2007, D2D Fund, Inc.

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Product Challenges Especially Tough
Barrier Small balances Checkered (credit) past Risk averse Mistrust mainstream financial 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.

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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.

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How Savings Bonds Compare
Example Savings Account1 Rate of Return Annual Fees Minimum to Open Rate Fixed Minimum Holding Period Early Redemption Penalty / Forfeiture ChexSystems Review May Buy as a Gift 0.20% $36 $100 No None None Yes No Example 1 Year Certificate of Deposit 2 3.25% $0 $2,500 Yes None Greater of 3 months interest or $25 Yes No Series I U.S. Savings Bond 4.52% $0 $50 Adjusts bi-annually 1 year 3 months interest (redemptions within 5 years of purchase) No Yes

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 of return assumes balance less than $5,000.
© 2007, D2D Fund, Inc. 21

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 the Treasury, 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’s pocketbook from pressure blocs & special-interest groups” (Morgenthau, 1944)
© 2007, D2D Fund, Inc. 22

Savings Bond Marketing

© 2007, D2D Fund, Inc.

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Fundamental Questions: Demand? New Savings?
Do LMI individuals want savings bonds?
If so, who, why & under what circumstances? Would bond sales constitute new or substitute saving?

Is there demand, does it increase savings One way to find out: experiment

© 2007, D2D Fund, Inc.

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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. 25

TS 2007 Savings Bond Experiment
Product: Series I bonds
fixed rate (premium above inflation) + inflation rate fixed rate set at purchase, inflation rate adjusts every 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. 26

Pilot Details: Marketing & Sales Training
H&R Block Relied on tax preparers (“pros”) to offer bonds to clients Majority of 400 tax pros trained in group sessions Marketing limited to point of sale (posters, monitor toppers, etc.)
© 2007, D2D Fund, Inc.

VITA “Bond Coordinator” marketed to clients, dealt w/ ops issues Most tax preparers trained directly or indirectly (used CBT) Marketing limited to point of sale (posters, brochures)
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Marketing Examples

VITA
© 2007, D2D Fund, Inc.

H&R Block
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Research Tools
H&R Block Tax data Survey data
buyers non-buyers control

VITA Tax data Survey data
buyers sample of non-buyers

Transaction data
savings & settlement products

Transaction data
bond orders details

© 2007, D2D Fund, Inc.

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Research Details
Consents from all parties All personal identifiers stripped from tax data Form 7216 authorization obtained from all H&R Block clients Research participation not required for bond purchase

© 2007, D2D Fund, Inc.

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Bond Eligibility - Requirements to Buy
H&R Block Refund >$500 Willing to open Easy Savings account to facilitate buying bond total bond sale > $50 VITA Refund >$50 Willing / able to use direct deposit (or Western Union Quick Cash product) total bond sale > $50

© 2007, D2D Fund, Inc.

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Bond Purchase Processing
H&R Block Individual “conduits” (Easy Savings Acct) HRB splitting (internal systems) Instructions, consent collected via software Difficult to train tax pros & explain to clients, automated processing VITA Pooled “conduit” (clearing account) IRS splitting (via new Form 8888) Instructions, consent collected via paper; faxed by site Easy to train preparers, labor-intensive, error prone processing
32

© 2007, D2D Fund, Inc.

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.

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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.

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Does Anyone Want Bonds?
Conditional on receiving an offer to buy 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.

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Compared to What?
For H&R Block offices:
IRA Openings & Recontributions 1.5% 0.6% 0.9% Savings Account Openings & Recontributions 1.4% 0.1% 0.2%

Treatment offices Control offices Block national

© 2007, D2D Fund, Inc.

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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. 37

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 som eone else before?
70 %
som eone else before?

60% 50 % 40% 30% 20% 10 % 0%

70 % 60% 50 % 40% 30%

Bond Purchasers Non-Bond Purchasers

A. Yes , fo r my s e lf .

B . Yes , fo r s o me o ne e ls e

C. Yes , fo 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 .

© 2007, D2D Fund, Inc.

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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. 39

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 highlighted incentive

431 clients offered bonds w/ incentive 60 takers

© 2007, D2D Fund, Inc.

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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.

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Buyer / Non-Buyer Details
(averages) n AGI Refund Dependents % of Refund Used for Bonds % of Bonds w/ Co-Owners Block Buyers Non-Buyers 220 3,509 $ 36,828 $ 41,171 $ 3,836 $ 2,951 1.3 0.8 5.9% 82% VITA Buyers Non-Buyers 231 4,179 $ 20,888 $ 18,105 $ 3,177 $ 1,373 1.3 0.6 5.8% 84% -

Huge portion w/ co-owners Buyers appear to have
more dependents larger refunds

Consistent % of refund used for bonds
© 2007, D2D Fund, Inc. 42

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.

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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:
% of purchasers Avg $ spent / buyer Avg. # of gifts / buyer SELF only 31% $ 145 Bought for OTHERS only 52% $ 241 1.9 SELF & OTHERS 17% $ 335 2.3

Most popular to buy bonds as gift by wide margin “Self & Others” spent the most on bonds, bought most gifts
© 2007, D2D Fund, Inc. 44

Gifting: What’s Going on?
D2D consumer research suggests children are a powerful force in LMI financial plans

© 2007, D2D Fund, Inc.

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More on Gifting - Gender Differences

© 2007, D2D Fund, Inc.

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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 would have saved less if they had not bought a bond
Block Bond Buyers: Do you have any savings or investments?
4 %

No 40%

Yes 56%

© 2007, D2D Fund, Inc.

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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. 48

Tax Season 2006, US Savings Bond Process Flow

Tax Filer

What Worked? The Bad News
Decide to buy bond(s) Signs new account agreement and consent Receive Refund Check Tax prep and return filing

Receive bond purchase letter

Receive US Savings Bond

H&R Block

Bank #1

Operational nightmare - it took this to allow bond sales in commercial tax preparer
Client info added to refund card account WHQ monitors card account for refund receipt Funds received & moved (via ach) to a pooled account Open Temporary Account Split the Refund Send Funds to HRB refund card account Send Check to Tax Filer Close Account Move funds from pooled account to fed account

Tax Pro enters coupon into TPS for bond type purchase

Tax Pro fills out purchase form

Tax Pro faxes form to WHQ for processing

Send Instructions for Temporary Account Opening

Send Instructions for Split between debit and check

WHQ fills out spreadsheet with purchase info a nd uploads

WHQ sends letter to client outlining purchase details

Refund car d account closed

Bank #2

Bank #3 -- Bank Midwest

Submit via norma l savings bond process

Contact HRB to indicate bonds purchase complete

IRS

Process Tax Return

Send Refund

Bureau of Public Debt

Receive Savings Bonds info (via Fed Line)

Process Savings Bond

Mail Bond to Tax Filer

© 2007, D2D Fund, Inc.

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Aren’t All Essential Ingredients Available?

+
Savings Bonds + IRS Split Refunds

Why isn’t this enough?
© 2007, D2D Fund, Inc. 50

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’t have to subsidize government when consumer asks the government to “Just keep my money”

© 2007, D2D Fund, Inc.

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Not a New Idea: Bonds on Tax Forms
1962 IRS Form 1040A

© 2007, D2D Fund, Inc.

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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. 53

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, for EITC eligible
© 2007, D2D Fund, Inc. 54

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
© 2007, D2D Fund, Inc. 55

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