All Savers Come Marching In

Depositors take advantage of a once only tax-free deal

At 12:01 a.m. last Thursday, Motel Owner Sonny Cough walked into the Bar Harbor Savings & Loan Association in Maine. Then, as cameras winked, he became the first person in the continental U.S. to buy one of the new All Savers Certificates.

The A.S.C.S, which were authorized in August by Congress, will give individual savers a one-time tax exemption on $1,000 ($2,000 for couples) in interest earned on certificates bought before the end of 1982. The interest rate is set at 70% of the yield on the most recently issued one-year Treasury bills. The first A.S.C.s last week earned ah attractive 12.61% tax free, but after a new Treasury bill auction, the rate dropped this week to 12.14%. At that level of interest, an individual would have to invest $8,237 to earn the full tax benefit, while a couple must deposit $16,474.

Congress created the A.S.C.s to help both the hard-pressed thrift institutions and the housing industry. Many savings and loans are now so strapped for deposits that they can no longer make home loans, which has depressed building. Critics charge, though, that housing may not be helped much because savings institutions are not strictly obliged to put the new deposits into home loans.

The accounts should actually be called Some Savers Certificates rather than All Savers. They benefit primarily an individual making more than $15,000 annually or a couple earning at least $20,000. For the millions of Americans now in the 50% tax bracket, an A.S.C. at present rates pays the equivalent of about 25% interest on a taxable investment.

But people whose tax bracket is less than 30% may well get better results from putting their cash into money-market funds, which currently pay about 17%. Investment advisers also warn people with meager cash reserves to think twice before locking their money away for twelve months. The penalty for early withdrawal from an A.S.C. is harsh: forfeit of three months' interest and loss of the tax exemption on interest earned.

Banks and savings and loans welcome the A.S.C.s as a way to lower their costs of borrowing funds. Currently, they have to pay depositors about 15% for six-month money-market certificates. Moreover, they find it very difficult to compete with the high-yielding money-market funds. The ailing thrift institutions have suffered a $24.8 billion net loss of deposits in the past six months. Banks and S and Ls are thus promoting the certificates heavily. Great Western Savings & Loan in Beverly Hills, Calif., is spending more than $1 million advertising them, and Chicago's Bell Federal Savings & Loan put out $500,000 to spread the word.

The public's reaction to the first day of sale was somewhat muted. About 500 people bought All Savers during the initial two hours of business at the Atlantic Federal Savings & Loan in Fort Lauderdale, Fla., and there were long lines at some New York savings and loans. But bankers in other parts of the U.S. reported investors showed less interest in the A.S.C.s than was expected. Moneymen speculated that many depositors held back until they saw whether the interest rates on certificates bought this week would pay higher interest as a result of the new Treasury bill auction. When it became known that the rate was in fact going down, almost a half percentage point, large crowds flocked to the banks on Friday.

While the A.S.C.s are a good deal for savings institutions and for medium-and upper-income investors, they could turn out to be a very bad deal for the Government. The Treasury Department at first estimated that the accounts would cost the Government about $4 billion in lost taxes, but Data Resources Inc., the Lexington, Mass., forecasting firm, now calculates that the amount, initially at least, could go as high as $14 billion. This will make the Reagan Administration's efforts to reduce the ballooning federal budget deficits even harder.

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