Stuck in That 5.5% Rut

Why people keep $341 billion in low-interest savings accounts

Four days a week customers gather in the lobby of the Talman Home Federal Savings and Loan in the Gage Park section of Chicago. Occasionally someone makes a deposit or takes money out of an account. But most of the time, the customers just sit around chatting, drinking coffee and munching free doughnuts. Says Louis Brockman, 91, a regular at Talman: "This is one of the nicest places in the world. Everybody talks nice to you, from the sweepers to the president."

Talman employees have a reason to be nice. They would be in deep trouble without the fierce loyalty of such customers to their old-fashioned passbooks. In American banks and in savings and loan institutions, an incredible total of more than $341 billion is sitting in accounts that pay a maximum of 5.5% interest. Those funds could currently be earning about 18% in a money-market account, 14.9% in a six-month savings certificate or 13% in a tax-exempt municipal bond fund. If the 5,000 savings banks and S and Ls in the U.S. suddenly had to start paying comparable interest rates on passbook accounts, many of them would go broke. As it is, an estimated 85% of all S and Ls are losing money because the double-digit interest that they are paying on a variety of certificates of deposit--14% and more--is higher than the 9% or so that they earn on old mortgages.

Government regulation limits the interest that can be paid on passbook accounts to 5.25% at commercial banks or 5.5% at savings and loan associations or mutual savings banks. Those ceilings are supposed to be eliminated by 1985, but plans to get rid of them sooner have foundered because of opposition from banks and S and Ls. Raising the interest-rate limit by just 1% would cost the troubled savings institutions an estimated $1.8 billion annually. This week federal regulators will discuss a proposal to double the interest rates on passbook accounts to 10.5% for banks and 11% for S and Ls and mutual savings banks, but the measure is not expected to be adopted.

The amount of money in passbook accounts has dropped by more than $50 billion since the beginning of the year; yet the mystery is why the total has not declined even more sharply and why anyone still keeps a substantial amount of money in a savings account. An avalanche of publicity tells about better-paying ways to save, and the banks themselves aggressively promote six-and 30-month certificates that offer three times more interest than passbooks. The new All Savers Certificates that will start being sold next month will initially pay 12.61% tax-free for up to $1,000 in interest for an individual or $2,000 for a couple. Depending on the tax bracket of a depositor, that can be the taxable equivalent of as much as 25% interest.

One reason many people hold onto their passbook accounts is fear. Money-market funds, which invest in bank certificates, Government securities and commercial notes, are relatively new. Though the funds seem safe, people who put money in them do not enjoy the iron-clad Government insurance that stands behind every bank account of up to $100,000. Says Stanley J. Lukowski, president of Eastern Savings Bank in Lynn, Mass.: "The older generation, which remembers the Depression, is still the mutual savings bank's principal clientele." These people recall the early 1930s--when more than 9,000 financial institutions failed in just four years--and want guaranteed safety for their money.

Other passbook holders place particular value on the ability to get at money quickly and conveniently. If savings certificates are cashed in early, depositors lose three months' interest. Most money-market checks must be for at least $500. Says Frances Ghioni of Cambridge, Mass.: "I like the friendliness of the tellers, and I can get my money when I need it."

For people living precariously from paycheck to paycheck, a passbook account may be the only way to save. Money-market funds normally require a minimum deposit of $1,000 or more, and savers usually need at least $3,000 to buy a certificate of deposit. Thus the small saver will probably have to be satisfied, for a while longer at least, with 5.5% interest, plus maybe free coffee and doughnuts.

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