Savings Bonds Earn New Interest

SALES of United States savings bonds are booming. But when the federal government celebrates the 50th anniversary of the popular savings bond program May 1, Marilyn Fleice will be watching the festivities with special attention. Ms. Fleice, who lives in Hicksville, N.Y., feels that Washington is not exactly candid about the disadvantages - as well as the advantages - of savings bonds. ``The government is always yelling about `truth in advertising.' Yet, where is their truth?'' she asks. Over a year ago, Ms. Fleice bought three $1,000 denomination savings bonds at a cost of $500 each, half the face value of the bonds, as required. She says she was told she would earn at least 7 percent interest. Unfortunately, when she cashed th em in about a year later her bonds earned her around 4 percent interest, less than the 5.5 percent on a typical pass book savings account.

While Ms. Fleice says she would still buy savings bonds, she charges that the government directly misleads the public in public service telephone ads. A hotline (1-800-US BONDS) inform callers that the bonds currently pay 7.19 percent interest; but the announcement doesn't mention that if bonds are redeemed before five years have lapsed, the return is below the minimum guaranteed rate of 6 percent. Moreover, she adds, the recorded message says that savings bonds represent ``the best way for all American s to invest in their families and in the future of these United States.''

``Savings bonds have a place in terms of financial planning, but many people are unaware of their disadvantages,'' says Brian Cohn, who heads Brian Cohn Inc., a financial services company in Washington. ``The bonds are patriotic and they can fit into a person's savings program in certain situations,'' such as when an individual or family finds it difficult to save much, and is able to do so more easily through a company payroll deduction program. Still, says Mr. Cohn, most savers would probably do bette r by putting funds into a money market mutual fund, and, once short-term savings goals are met, developing a long-term investment strategy.

Financial planners note that the US Treasury has an advantage in terms of advertising. Commercial banks have to provide numerous warnings on their investment products, such as signs stating that there will be ``substantial penalties on early withdrawal'' for a certificate of deposit. But the savings bond promotion sheets often either ignore the modest earnings that will accrue for bonds held less than five years, or make only vague references, such as saying that ``bonds redeemed before being held five years earn interest on a fixed, graduated scale.''

Despite their earnings limitations, the US savings bond program is booming. ``There's just lots of reasons for that,'' says Sheila Nelson, a Treasury spokeswoman. ``There is patriotism; the bonds are very safe, being backed by the US government; and there are tax advantages.''

The reporting of interest can be deferred until the bonds are cashed in; they are in most cases exempt from state and local taxes on income and personal property; under a new program, bonds purchased since Jan. 1, 1990 may be free of federal income taxes if the bonds are purchased to finance a child's college education; and bonds can now be issued by the Treasury from 12 regional locations, as well as through banks.

At the end of January, some $127.3 billion worth of savings bonds were outstanding. Bond sales for January - at $953 million - were the most sold since January of 1944, when bonds worth $1.09 billion were sold.

The modern bond program goes back to May 1, 1941, when President Franklin Delano Roosevelt bought the first Series E bond from Treasury Secretary Henry Morgenthau Jr.

Early in 1980, the Treasury discontinued the Series E bond and introduced the Series EE bond. In November 1982, the Treasury introduced a market-based interest rate system.

Bonds now held for five years or longer earn market-based interest rates, with a guaranteed minimum rate - currently 6 percent. For bonds held five years or longer, the market rate is set at 85 percent of the average return on 5-year Treasury marketable securities.