On the Payroll: The Interesting Design of Canada’s Payroll Savings Program

Imagine being able to open a savings account directly with the federal government, outside of the traditional banking system. That you could access through an online portal or through telephone banking. And you could hold up to $500,000 per year (or more in some cases), fully guaranteed. And you don’t need to link it to a bank account with a commercial bank to make deposits or withdrawals.

If you squint a little bit, then you’d see the Canada Savings Bonds Payroll Savings Program, which traces its origins to the aftermath of WWII, and which was taking in well over $1 billion in deposits annually (with an equivalent amount in withdrawals), from more than 800,000 Canadian residents across the country, leading up to the demise of the program in 2017.

The program was in fact a sort of pay-by-installment plan to purchase retail debt directly from the Government of Canada, and was administered through organizations that would facilitate the registration and installment process for their employees.

Annual enrollment would take place in October, at which time employees would commit with their employer as to how much they wanted to regularly have taken from their pay that year and sent directly from their employer to the Government on their behalf. Deposits could range from $2 to $9,999 a week, and could be decreased or stopped at any time (but not increased until the next annual sales window in October). Withdrawals could happen anytime but had to be in multiples of $100 or the entire balance held in a specific series (whatever was less).

Finally - account holders could request withdrawals by either direct deposit or cheque (and Government cheques are cashable at any branch of a bank that has tellers). So technically an account holder could take advantage of the program even if they were "un-banked" as long as they were employed by an organization enrolled in the program.

The program provides an interesting contrast to traditional commercial savings accounts. It acted effectively as a retail savings account that was a federal government liability rather than a commercial bank liability, and thus had no need for deposit insurance coverage.

The design of the program is also supportive of some Modern Monetary Theorist views that sovereign debt acts effectively as a risk-free savings account for idle money. For the Payroll Savings Program, this concept is laid bare through not only its design, but the actual name of the program.

A final thought worth considering is how such a program could evolve to incorporate payments.

Imagine, for example, a program like this morphing into a general savings account concept (removing the veil of “savings bonds investment”), and then allowing individuals to pay taxes or receive rebates in such an account directly to/from the Government. And then allowing transfers between these accounts, and finally allowing payment service providers to connect to these accounts to facilitate transfers and provide value added services. Starts to look and sound a lot like an official sector digital currency on a retail payment platform.

This concept could certainly end up being disruptive to commercial banking, not to mention monetary policy, but there could also be public purpose benefits worth thinking about, like financial inclusion.

And if it seems odd that such a currency would not be a central bank digital currency, but rather a government digital currency - it’s not so odd if you consider that the coins in our pockets are produced by the Mint...on behalf of the Government.

Here is a video showing the online redemption process for the program:

https://www.youtube.com/watch?v=0ZTyG-dvE_I