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Last week, I received a pamphlet with my pay stub (don’t get me started on just how wasteful this is…) advertising the newest series of Canada Savings Bonds (CSBs). My employer, like many across Canada, offers automatic payroll deductions for the purchase of CSBs through a program called the Payroll Savings Program. Now I have never actually owned CSBs, although my wife was given several bonds by her aunt when she was younger as a savings vehicle. Based on a very un-scientific poll, at least half the people in my office participate in the CSB program, with some using this program as a way to save for Christmas, others to save for vacations, and others for big ticket purchases. The marketing campaign is slick, and the literature indicates that CSBs were the first investment for 2 out of every 3 Canadians. There can be no question that the CSB “brand” is strong and that many Canadians choose to save with CSBs. But why? Wouldn’t regular, automatic deposits to a high interest savings account be just as effective a means of saving?
Comparing Ease of Use
The marketing literature describes CSBs as an easy and safe way to invest, and they are- you just fill out a fairly simple form, submit it to your employer, and the amount you choose will be automatically deducted from every cheque. The status of your bonds can be checked online using an unimpressive but effective government website, and bonds can be redeemed using this website and money transferred to your bank account electronically. If you redeem during the first 3 months of your bond, you don’t get any interest, but after that you get whatever has accrued to date. You also can’t partially redeem bonds during the first 3 months, so you either take everything out or leave it all there.
But setting up CSB deductions is no simpler than setting up automated transfers to a high yield savings account on every payday; in fact, automatic transfers are probably even easier if you’re even marginally adept at online banking. Assuming that you already use online banking (and if you’re reading blogs, you probably are), a separate savings account is probably a more integrated and efficient system. There should be no delays in accessing your money or transferring it to another account, and no restrictions whatsoever on redemption. So while CSBs are an easy way to start saving, they’re no easier than a separate savings account, and are ever-so-slightly more difficult to redeem.
Comparing Returns
The current series of CSBs yield 2.0% interest per year, although this rate is adjusted annually. The interest you earn is also fully taxable, so after tax it’s unlikely that your savings will even keep up with inflation.
This return is less than the rates offered by the leading Canadian high interest accounts. Just take a look at the rates offered by some of the top players with no minimum balances and no fees:
|
Bank |
Annual Interest Rate (as of Oct. 20, 2008) |
| Icici Bank of Canada |
3.4% |
| PC Financial Interest Plus |
3.05% (minimum balance: $1,000) |
| Canadian Tire High Interest Savings |
3.05% |
| HSBC Direct Savings Account |
3.0% |
| ING Direct |
3.0% |
| RBC High Interest eSavings |
2.75% |
| PC Financial Interest First |
2.0% |
Currently, the interest earned in these accounts is fully taxable just like the interest from CSBs. However, as of January 1, 2009 most banks will be offering comparable Tax Free Savings Accounts (TFSA) which will allow tax free growth on up to $5,000 per year, giving high interest savings accounts an even bigger edge over CSBs. There is no mention anywhere on the CSB website of CSBs being available for automatic purchase through a TFSA, although I’m sure there will be a way to arrange this in the future, just not for this series. In terms of returns on your investment, it is clear that any of these high interest accounts will yield returns as good as or better than a Canada Savings Bond. If you set up a TFSA in January, the difference is even more pronounced.
Comparing Security
The final selling point for CSBs is the perceived security that they offer. These bonds are issued and guaranteed by the Government of Canada and rated AAA by S&P, so they should be as low risk as any other investment on the market. And let’s face it- if our government fails, you’ve probably got bigger worries than your HD TV savings fund.
But are CSBs any more secure than high interest accounts? Not really. The Canada Deposit Insurance Corporation (CDIC) insures all account deposits up to $60,000, and as CDIC is a crown corporation, your deposits are in effect guaranteed by the government as well. With a high interest account, there is an increased risk of fluctuation in the interest rate paid or the terms of the account, although I suspect that it’s unlikely that rates will drop below those offered by CSBs.
Are CSBs Worth It?
To summarize: no real benefits, less real return, equal security. From what I can see, Canada Savings Bonds offer no benefit over a high interest savings account.
I’m certainly not trying to besmirch the good name of the CSBs, nor do I think they are terrible purchases. In fact, anything that gets people saving a little more is a good thing. I just don’t quite understand the appeal of these bonds- why are CSBs so popular? Is it a lack of education as to savings and investment choices, or just inertia, or maybe even fear? Or could it be subtle patriotism at work, with people wanting to lend money to a government currently running its 10th straight budgetary surplus? I’d really like to hear if I’m missing some obvious benefit, and if you purchase CSBs I’d also like to hear what helped you make your decision.
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{ 4 comments… read them below or add one }
I got the same offer last week and I plan to pass it like the year before
Below is my combined response to this article and the debit card article…
I totally agree with your post. MY big issues with the CSB are the same as yours: return and liquidity. As for WHY people get them it’s the same reason people use debit instead of credit cards - DISCIPLINE.
People love automatic debits because it forces them to save. Most people don’t have the discipline to set aside that $20 bi-weekly into a savings account but they can setup automatic deductions. If they had to manually set aside that $20 every two weeks it’s unlikely to happen… Don’t even get me started on automatic bill payments from a bank account!!
The same goes for credit cards. If you don’t have overdraft protection you can’t spend what you don’t have. This isn’t the case for credit cards. Without the proper discipline 1% cash back and extended manufacture warranties are a pittance compared to 19.9% interest.
By the numbers a cash back credit card and a no fee high interest/chequing combo is by far the best. But unfortunately (and this sounds terrible but…) the general population is financially illiterate and undisciplined. So they pay $100 a year for a chequing account, only earn 2% on their CSB’s and forego the 1% cash back on all purchases (just one of many benefits of a credit card). I guesstimate this could add up to $500 a year… But I guess some people don’t like money? haha
I agree with the post if you are saving for a new TV.
For anyone who has any type of substantial savings, CSBs maybe your only viable secure option.
For example, if the bank your with fails, and one other Canadian chartered bank fails, CDIC will go bust. Read CIDC 2007 report, they only have enough to cover %0.34 of Canadian eligible deposits. In that scenario you may have to wait years to get money from CDIC. Yes they will guarantee you up to $100K , but they don’t say when they will pay you. Plans I have heard said %50 in the first 3.5 years, the balance within 11 years.
So if you want to have to worry about your bank and the CDIC failing for a fraction of a % interest, go for it. Myself I will only be worrying about Canada failing.
This is an old article but I want to point out one thing that everyone who can only see money in front of their eyes seem to miss. Canada Savings Bonds is money the government owes you. That’s right; your money goes toward government spending and not to the coffers of the bankers who by the way do not provide funding for social services, law enforcement, domestic security, public education and health care.
You don’t have to be a patriot to understand the difference between an elected body dedicated to serving the interests of the country and a commercial entity dedicated to serving its own interests. (no pun intended)