Canada Savings Bond - Are they still relevant today?

[stryte]

Today is the launch date for the 2008 sales campaign of Canada Saving Bonds, with the Bank of Canada announcing a rate of 2% for series 114 with a ten year annuity.

Considering such things as cost of living, the taxpayer cost to administer the bonds, public's access to high interest saving accounts with banks, the new tax free saving accounts and other investment options what are your thoughts on the government continuing to offer these bonds?

 

[Edward Campbell]

These remain an absolutely no risk (unless you fear the whole country will collapse) and moderately high yield (compared to most of the bank savings accounts available to most low income Canadians) investment tool for very small ‘investors’ – children and low income earners, for example.

I would rather that high-school students with minimum wage jobs save $100.00/year rather than zero dollars – and the CSB is a good tool for them to save and, more important, to acquire the habit of saving. Ditto single mothers with two jobs and so on.

It might cost ‘us’ (the older, better fixed Canadians) a wee bit to help the ‘others’ but I think it is a good investment for us all. Teaching Canadians to save, even if it is just a little bit, is a good thing.

I bought my first savings bonds in high school; I bought them faithfully in the late ‘50s and in the ‘60s (when I was a young soldier in the ranks) until ‘better’ investment tools were available for me – ‘better’ because my disposable income had risen enough to let me buy more than a few hundred dollars worth of CSBs each year, and ‘better’ because I could afford to take a bit more risk for a bit more return.

I’m glad they’re here, even if they are slightly subsidized.

 

[stryte]

I agree with your post in so far that saving is important and the ability to save needs to be available to all income levels in society.

However, when I see the bonds are 2% I think to myself why wouldn't someone just open an interest first savings account through pcfinancial @ 2% which does not require any minimum deposit and the funds are immediately available or a 3.05% saving account if they were to have $1,000 or more. Similarly someone could get a one year GIC at 3.5% and if it is registered get a tax break. All of which are no risk.

My concern with the bonds being at 2% is that in today's economy are you even keeping up with inflation?

 

[Blackadder1916]

Considering such things as cost of living, the taxpayer cost to administer the bonds, public's access to high interest saving accounts with banks, the new tax free saving accounts and other investment options what are your thoughts on the government continuing to offer these bonds?

It would seem that you are basing your opinion of CSBs on their effectiveness solely as an investment product for the public.  That, of course, is marginal.  However, CSBs (and it predcessors Victory/War Bonds) were primarily designed as a (reasonably) cost effective method of financing for the government.  The benefit to the public was a secondary concern.  Despite calls in recent years for the program to be scrapped based on an expectation that there could be considerable savings if similar sums were borrowed from commercial sources, this has been resisted due to many of the "social" reasons well articulated by E.R.C. .   These days, with an expectation of government surpluses (however long that lasts) there may be less of an need for the government to borrow, but there is still a (social?) need for an entry level investment product.  I don't think that you would find many (if any) in the private sector who would offer a similar product (there wouldn't be big profit in it).

However, when I see the bonds are 2% I think to myself why wouldn't someone just open an interest first savings account through pcfinancial @ 2% which does not require any minimum deposit . . .

One of the benefits of CSBs for the beginning saver was its restrictions on cashing it in.  You were forced to jump through enough hoops that real thought had to be made before you could withdraw your money.  The same can not be said for a bank account.  And (as witnessed by many in the military) there were many out there who, if they did not put some aside in CSBs through a payroll deduction, would never have saved a cent.

 

[stryte]

It would seem that you are basing your opinion of CSBs on their effectiveness solely as an investment product for the public. 

Yes I am, but I acknowledge it is not the only rational for having them.

CSBs (and it predcessors Victory/War Bonds) were primarily designed as a (reasonably) cost effective method of financing for the government.

That's a good point, but do people still see them that way?

I don't think that you would find many (if any) in the private sector who would offer a similar product (there wouldn't be big profit in it).

I disagree with you on this based upon GIC's which I referenced in my previous post. Maybe I am missing something?

One of the benefits of CSBs for the beginning saver was its restrictions on cashing it in.  You were forced to jump through enough hoops that real thought had to be made before you could withdraw your money... there were many out there who, if they did not put some aside in CSBs through a payroll deduction, would never have saved a cent.

Another good point, if the ability to withdraw from a savings account is too tempting for someone to leave alone then bonds could be appropriate.

 

[Blackadder1916]

I don't think that you would find many (if any) in the private sector who would offer a similar product (there wouldn't be big profit in it).

I disagree with you on this based upon GIC's which I referenced in my previous post. Maybe I am missing something?

There may be financial institutions out there that provide GICs with better or comparable terms than CSBs but many of those products may have additional conditions attached.  Not being familiar with all, I'll just link to the first result that came up when I googled "GIC payroll saving plan".  Since the majority of holders of CSBs purchase them through a payroll savings plan that would put it on a level playing field.

http://www.rbcinvestments.com/gfs/gsp-gia.html

Minimums
$25 per investment, per payroll contribution, depending on investment selected.
$1,000 for GICs (payroll deductions accumulate in a savings account until minimum is reached and then are automatically invested into a GIC)

Canada Savings Bonds are a very recognizable brand and maybe the only recognizable brand for the totally unsophisticated, first time investor (. . . investor may not be the right word, let's try "guy"  . . .) who thinks he should save a few bucks so there is something available at Christmas, or wants to put a couple of hundred in each of his children's names each year.  It is this sort of niche that the CSB fills.  It is very easy for those who may be more financially savvy to assume that everyone else will have a minimum understanding of available financial products.  The government continuing to be involved in the savings of its citizens is not outside the realm of understanding.  For many who save through the CSB program, the only reason that they do save (even for short term goals) is because it is CSB.

 

[stryte]

No argument there BL. I just hope you weren't referring to me when you wrote:

It is very easy for those who may be more financially savvy to assume that everyone else will have a minimum understanding of available financial products.

Because I do not assume that and wasn't trying to come across that way.

 

[DBA]

High interest low fee savings accounts are a product of a financial situation for banks that may be changing so they might not be around in the same form a few years from now.

GICs are really *insured* investments, it's an insurance/underwriting company that backs the guarantee and while defaults have historically been really low that also could change.

The CSB rates are the guaranteed rates (and only for a few years), which can also be adjusted up if market conditions warrant. In addition by limiting your redemption window each year to the month after the anniversary the rate is a bit better. For example Year 1 - 2.35%, Year 2 - 2.50%, Year 3 - 2.65%.

The rates are better and the limits lower than the major banks' high interest savings accounts. They aren't as good compared to banks like PC and ING Direct but none of the savings accounts have guaranteed minimum interest rates for 3 years.

 

[Daidalous]

I currently use CSB  as a Christmas fund.  It is convenient for me to put aside money every month and draw what I need in December. (It is what my parents did, so I guess I am just following in there footsteps)

 

[Lockness]

The problem with Canada Savings Bonds is that their rates do not keep up with inflation.  (Inflation is defined as the expansion of money supply, i.e. printing or digitally creating money by the Bank of Canada.)  An indicator of inflation is to look at the current consumer price index CPI of 3.5%.  Actual inflation will be much higher than this.

http://www.tradingeconomics.com/Economics/Inflation-CPI.aspx?symbol=CAD

With say a 2.50% for a 2 year bond you are losing a minimum 1% in purchasing power each year.  Then you are taxed on the interest income on top of that if the bond is not in a sheltered plan. An argument can be made that it is better to spend the money now rather to save for tomorrow.  The incentives to save are backwards although the $5k per year tax free savings plan is a step in the right direction.

Check out the Canadian Royalty Trusts in the energy sector.  Their dividend yields are usually over 10% per year and some over 20% per year but there are higher risks due to market fluctuations in oil and gas prices.

http://en.wikipedia.org/wiki/Royalty_trust

 

[Neill McKay]

I currently use CSB  as a Christmas fund.   It is convenient for me to put aside money every month and draw what I need in December. (It is what my parents did, so I guess I am just following in there footsteps)

That's along the same lines as what I do.  I don't view the CSB as a serious investment tool, as much as a safe place to put money where I won't touch it for eight or ten months.

 

[CountDC]

The problem with Canada Savings Bonds is that their rates do not keep up with inflation.  (Inflation is defined as the expansion of money supply, i.e. printing or digitally creating money by the Bank of Canada.)  An indicator of inflation is to look at the current consumer price index CPI of 3.5%.  Actual inflation will be much higher than this.

http://www.tradingeconomics.com/Economics/Inflation-CPI.aspx?symbol=CAD

With say a 2.50% for a 2 year bond you are losing a minimum 1% in purchasing power each year.  Then you are taxed on the interest income on top of that if the bond is not in a sheltered plan. An argument can be made that it is better to spend the money now rather to save for tomorrow.  The incentives to save are backwards although the $5k per year tax free savings plan is a step in the right direction.

Check out the Canadian Royalty Trusts in the energy sector.  Their dividend yields are usually over 10% per year and some over 20% per year but there are higher risks due to market fluctuations in oil and gas prices.

http://en.wikipedia.org/wiki/Royalty_trust

higher risk and higher cost.  The CSB works as a tool for those with small amounts of money they want to make safe. 

 

[retiredgrunt45]

I've had one every year for the past 20 years or so, I've used them for Christmas, to pay for my daughters books when they were in university and now that its just the misses and and I, what ever we don't use we put away into our ING savings account. It's been a great savings vehicle for me over the years and I plan to keep on buying them every year.

CSB's are not get rich schemes, there for the person who wants to save a bit of money but doesn't have the discipline to put money away each month. The old analogy, "You don't miss what you can't see" works for most people. Without a CSB, I wouldn't of been able to save a dime.

 

[Siovan]

I ended running into this forum just trying to find some information in regards to Canada Savings Bonds that wasn't written in financese.  My parents have bought my son a savings bond every year since 1996.  This was due to me being a single mom and divorced from his father who's theory on life was don't expect me to pay for him to get an education.

Being a single mom with NO additional income inwhich to garner any type af savings to insure some sort of education fund for my son.  My parents bought CSB's.  Why ?It insured that there would be money for him down the road.  That it could not be siezed by anyone as the bonds are purchased in his name.  No, the bonds do not have the high interest rates like in the 1980"s at 19.5 % but being the current market and instability of the banks  I would rather put my money into my country than in a bank  where it is backed by the gov't, so unless Canada fold my son should have money to go to secondary education if he so wishes.

I am still confused in regards to "bond maturity" the new extended maturity time on some bonds series.  See my parents just passed away and now I'm sitting on over $1000 in bonds and have no idea how they work or how to keep them working for my son.  Its frustrating.  Guess I'm going to have to take some time off and talk to a banker inre the bonds.

 

[retiredgrunt45]

Heres the link to the CSB website, it will give you all the information you need. There's also a couple of 1800 numbers you can call to get advice.

http://www.csb.gc.ca/eng/

 

[Redeye]

If you are trying to save for your son's education, then you should make sure he has a Registered Education Savings Plan - any bank can open one for you (there are non-bank providers, but I wouldn't go with them because they do not offer very much in the way of flexibility).  You need to get him a social insurance number to open one and to take advantage of grants available for him.  There are a number of different ways to get money from the government through an RESP.

When the bonds paid close to 20%, inflation was just as high, so bondholders weren't necessarily any better off - though those rates did last longer than the inflation.

As for "the current market and instability of the banks  I would rather put my money into my country than in a bank  where it is backed by the gov't", I do hope you realize that bank deposits are covered by the Canada Deposit Insurance Corporation, and that Canadian banks are the world's best right now and not at all unstable.

Your best course of action is to get an RESP opened up by your bank for your son, and put away what you can, with the CESG and Canada Learning Bond programs you will have a good opportunity to save very effectively for his education.  Good luck!

I ended running into this forum just trying to find some information in regards to Canada Savings Bonds that wasn't written in financese.  My parents have bought my son a savings bond every year since 1996.  This was due to me being a single mom and divorced from his father who's theory on life was don't expect me to pay for him to get an education.

Being a single mom with NO additional income inwhich to garner any type af savings to insure some sort of education fund for my son.  My parents bought CSB's.  Why ?It insured that there would be money for him down the road.  That it could not be siezed by anyone as the bonds are purchased in his name.  No, the bonds do not have the high interest rates like in the 1980"s at 19.5 % but being the current market and instability of the banks  I would rather put my money into my country than in a bank  where it is backed by the gov't, so unless Canada fold my son should have money to go to secondary education if he so wishes.

I am still confused in regards to "bond maturity" the new extended maturity time on some bonds series.  See my parents just passed away and now I'm sitting on over $1000 in bonds and have no idea how they work or how to keep them working for my son.  Its frustrating.  Guess I'm going to have to take some time off and talk to a banker inre the bonds.