All Savers Certificate

An All Savers Certificate was a nontaxable certificate of deposit 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.

An All Savers Certificate required a minimum of $500. The CDs paid 70% of the yields of one-year Treasury bills. One major incentive: 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. 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. Notably, All Savers Certificates remained pegged to 70% of one-year Treasuries the entire time, even as the waned in popularity.

Also, All Savers Certificates failed to catch on with the masses. As a result, All Savers Certificates failed to do a lot 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. Meanwhile, housing starts remained depressed throughout 1982, although some say the problem could have been worse without the program.

In the big picture, All Savers Certificates flamed out. 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 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.