Savers Shop for More

In the search for higher interest, they put the squeeze on banks

Anyone opening a new savings account has long had his pick of desk lamps, hair dryers or blenders, but the East New York Savings Bank is showing up the purveyors of discount detritus for the pikers they are. Full-page newspaper ads offered depositors something more than "a tacky little toaster" in return for $160,000 left on deposit for eight years --an $84,000 Rolls-Royce Silver Shadow II. When the Desert Empire Bank of Cathedral City, Calif., tried the same gimmick in 1977 in return for a $ 1 million six-year deposit, it failed to find even one taker, but East New York claims to have had 30 "serious" inquiries so far.

The cloud in that silver shadow is that the saver must forgo all interest. Moreover, the Rolls would be considered income and would be taxed as such in the year it was received. If the depositor took his interest instead, it would be taxed as he received it over an eight-year period.

Hard up for cash, banks are willing to try just about anything to attract deposits. Some, like New York's Manhattan Savings Bank, are gemutlich meeting places where savers gather in the lobby to hear pianists play golden oldies. Others, like California's Crocker National Bank, have sought to humanize their temple-of-commerce image by handing out Teddy bears. Robert Klein, a marketing consultant to 15 banks in the West, reports that his savings-starved clients have given away 23,000 color television sets in the past three years and 650 mopeds in the past 90 days.

Savings inflows at the nation's 5,000 federally regulated savings and loan associations dropped to $1.5 billion in July, down from $2.8 billion a year ago. The state-chartered mutual savings banks have lost more than $2 billion in deposits since January, $725 million just in July.

These institutions still have a pot of money--the state mutual savings banks alone command $145 billion in deposits--but they are being squeezed. As a result, mortgage money is getting tighter, just as all borrowing rates are rising. The prime rate went up last week to a record 12 1/4%.

With inflation running at 13.1% for the first seven months of this year, the saver has discovered that he is throwing his money away if he puts it in a passbook account paying the federal maximum of 5 1/4% to 5 1/2%. The real interest rate is usually less than that because it is clobbered by federal, state and city income taxes. Since interest is considered "unearned" income, the federal tax alone can go as high as 70% for wealthy people.

The small saver need not keep his money in a passbook account, but he has fewer choices than large investors. If he is willing to tie up his money for a long time, he can buy four-year bank certificates linked to the Treasury note rate, now paying over 8%. But depositors with $10,000 can earn 10% from six-month money market certificates, and people with $100,000 can pick up 11% from three-month bank certificates of deposit.

In return for the meager rates that he collects, the passbook depositor is supposed to have instant access to his money, but banks try to discourage big withdrawals. If a depositor wants to withdraw $10,000 or more, he is often questioned by an officer of the bank about what he plans to do with the money, and then strongly urged to accept not cash but a check that can take five days to clear. Bankers say that these precautions are necessary to protect depositors from being fleeced by con men. Also, bankers increasingly demand that people seeking mortgages must be depositors. New York's First Federal Savings & Loan, for example, will not grant a mortgage to anyone who has not been a depositor for five years.

Savers are transferring their funds out of banks and into the short-term money market mutual funds, which offer a better deal than all but the biggest savers can get from banks. When they started in 1972, money market funds attracted a few savvy individuals. Now many more are taking advantage of the funds' low minimum investment ($1,000 to $5,000) and check-writing privileges.

The funds pool their customers' money and invest it in large denomination, high-yielding bank certificates of deposit, corporate commercial paper and Government securities. The return on the funds fluctuates with short-term market rates, and there is no ceiling on what they can pay out. They now yield about 9.7% after fees. No wonder that since last year's end, the funds' assets have ballooned from $10.7 billion to $32.7 billion. But money market funds are not insured by the FDIC and cannot be considered quite as safe as savings accounts, although losses are rare.

Americans have the lowest savings rate in the industrialized world, putting away only 5.4% of their disposable incomes, down from an average 7.6% early in the decade. Europeans and Japanese save more, partly because they stand to get a better real return as a result of higher interest, lower taxes or less inflation.

The U.S.'s meager savings rate is impeding capital formation and investment, which is needed to create new jobs and raise sagging productivity. Says Harvard Economist Martin Feldstein: "By saving so little, the U.S. is passing up the chance for a better standard of living."

A flock of proposals are being put forth to pump up savings. Commercial bankers favor President Carter's idea of phasing out interest-rate ceilings over ten years. More and more Congressmen strongly support changes in tax policy to stimulate savings. Well over 50 bills have been filed in both houses, and most focus on exempting interest income of varying amounts up to $4,000.

All 41 Senate Republicans are supporting a bill by John Danforth of Missouri to exempt the first $100 of interest income ($200 for a couple filing a joint return) and $400 more of interest or dividends if the money is reinvested in savings or stocks. Louisiana Congressman Henson Moore has 40 co-sponsors for a similar measure, which has already passed the Ways and Means Committee and could come to a vote in the House as early as this month. Other proposals would allow people to collect up to $ 15,000 in tax-free interest over their lifetimes, provided the money comes from savings that they later use only to buy housing.

There is considerable support for "rollover" bills to defer taxes on interest income, dividends and capital gains so long as they are reinvested.

It is too early to predict the fate of these bills. They could be delayed if Congress moves instead to pass an anti-inflation tax cut. But the pendulum seems to be swinging toward helping out savers, the one group that has almost no place to hide from taxes and inflation. sb

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