The Canada savings bond program takes its final bow on Nov. 1, leaving a hole in Canadians’ hearts and savings portfolios.
The program began in 1946, preceded by war savings certificates and victory bonds issued during the two world wars. As part of Canada’s postwar financing program, the Canada savings bond and associated payroll program then arrived on the scene. In 1976, the program peaked with the bonds representing 45 per cent of total outstanding marketable debt in the country.
“Back in the day, the Canadian savings bond drive was exciting in the financial world, because it was a very good rate and people understood it, you could but it in any amount, it was liquid,” says Paul Gardner, partner and portfolio manager at Avenue Investment Management Inc. “And as well it was very good for the government because it was a good funding source for them, as we had massive budget deficits in the ’80s and ’90s.”
In 1981, the bonds’ matured annual interest rate was 19.5 per cent. “The Bank of Canada, at the time, was trying to deal with rampant inflation,” says Gardner, referring to the interest rate environment that allowed for such a high rate of return. “It was a great vehicle for savings. . . . They helped not only sell their bonds but helped make their population understand that they needed to save.”
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The appeal of the bonds, before the real advent of the slew of investing products available to investors today, was obvious, says Gardner. “It was very understandable, the government advertised it. Ma and Pa in Winnipeg understood it and it was backed by the government of Canada and it was cashable.”
Today, that same investment can only boast a rate of 0.5 per cent. Sales of the bonds have declined steadily since the late 1980s, such that in today’s market, the federal government has cited the “proliferation of alternative investment vehicles for consumers,” as a key reason why the program has outlived its purpose. As such, come November, the government will no longer issue new bonds through the program, with all outstanding bonds paid in full, either upon redemption or maturity.
Other options, such as guaranteed investment certificates, mutual funds and and exchange-traded funds, won’t have much trouble filling the gap left by the bonds, says Gardner, noting Canadian investors’ high levels of trust in the financial system. “Canadians are very comfortable lending money to our banks because they’re well capitalized and they know that they’ll be paid out at the end of the day,” he says.
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Given its simplicity as a payroll deduction program and familiarity among Canadians, will you miss the Canada savings bond program when the government discontinues it this week? Have your say in our weekly poll.
Last week’s poll highlighted a report that suggested universal basic income could be a solution to the labour force challenges posed by automation. The majority (67 per cent) agreed that, due to the significant job losses automation will likely bring, society will need to embrace universal basic income. The remaining respondents disagreed, suggesting the idea is expensive and that training programs and boosting job growth are better solutions.
