What Is an All Savers Certificate?
An All Savers Certificate was a type of nontaxable certificate of deposit (CD) with a maturity of one year, designed to boost thrift institutions and build funds for mortgage lending. The Economic Recovery Tax Act of 1981 introduced and authorized All Savers Certificates in October of that year. All Savers Certificates sought to help small lending institutions hard hit by the Savings and Loan Crisis, while also bringing down high mortgage interest rates by encouraging more lending.
After initial success, the bonds disappeared from the market by the end of 1982, largely due to a decline in short-term interest rates as well as the inability to compete with comparably higher yields from money market funds.
- All Savers Certificates were nontaxable certificates of deposit (CDs) issued to boost thrift institutions and mortgage lending.
- They were introduced in late 1981 but were discontinued towards the end of 1982.
- They failed to achieve their objective mainly because they were pegged to short-term treasury rates which declined during this period.
Understanding an All Savers Certificate
An All Savers Certificate required a minimum of $500 investment. The CDs paid 70% of the yields of one-year Treasury bills. One major incentive was that holders of the certificates received a one-time exemption from federal income tax of up to $1,000 on earned interest, or $2,000 on a joint return. This made the CDs attractive to savers in higher tax brackets.
At their introduction, All Savers Certificates yielded about 12.6%. This was lower than that of money market mutual funds at the time, although the tax savings helped to make them competitive.
Demand for All Savers certificates surged in the early going, amid heavy promotions by savings and loans as well as banks. According to available statistics, they attracted $39.3 billion in investments within the first two months of introduction. Some smaller institutions offered very high interest rates to customers who moved funds into All Savers Certificates upon their introduction.
However, declining short-term interest rates from late-1981 through most of 1982 doomed All Savers Certificates. The CDs attracted few buyers after the first month and fell well short of expectations throughout 1982. The enthusiastic start failed to keep pace for the rest of that time period and All Savers Certificates ended with only $53.2 billion of sales in the first 12 months. Notably, All Savers Certificates remained pegged to 70% of one-year Treasuries the entire time, even as they waned in popularity. Towards the end of their issue period, All Savers Certificates offered returns of 6.26%, a sharp decline from their earlier rates.
Another possible reason put forward is the easing of regulation for limits, which had been in effect earlier, on long-term deposits. This made long-term deposits more attractive as compared to the certificates, even though the former were taxed at regular rates.
Also, All Savers Certificates failed to catch on with the masses. A study conducted by the United States League of Savings Associations stated that the certificates were attractive to high-income households within the top 30% as opposed to lower-income households. A later study conducted by the Treasury Department confirmed these findings.
As a result, All Savers Certificates failed to help either savings and loans or the housing market. The oft-criticized Resolution Trust Corporation seemingly did far more to help the savings and loans institutions. Meanwhile, housing starts remained depressed throughout 1982, although some say the problem would have been made worse without the program.
Pros and Cons of All Savers Certificates
In the big picture, All Savers Certificates flamed out. Estimated losses from the certificates run at $2.9 billion, mainly in the form of interest exemptions for deposits at Savings & Loans institutions. They generated great interest at the start but failed to keep up with competitive offerings, namely money market accounts. Also, long-term rates held up better than short-term rates in 1982. This made yields on longer-term bonds far more attractive, and it negated the tax-free advantages of All Savers Certificates for all but very wealthy individuals.
One way All Savers Certificates arguably did succeed, however, is educating more savers about the advantages of other tax-free investments, such as muni bonds.