Statement of John Dyer,
Acting Principal Deputy Commissioner, Social Security Administration
before the Senate Committee on Banking, Housing, and Urban Affairs

May 22, 1997

Mr. Chairman and Members of the Committee:

I am pleased to be here today to discuss the Social Security Administration's (SSA's) experience with electronic funds transfer (EFT), and our efforts to implement the mandatory electronic funds transfer provi sions of P.L. 104-134, the Omnibus Consolidated Rescissions and Appropriations Act of 1996 which was passed by the Congress and signed by the President last year.


SSA has offered the safety, convenience and reliability of EFT, also known as direct deposit, to those receiving Social Security and Supplemental Security Income benefits for more than 20 years. Today, more than 30 million of the 50 million beneficiaries receiving Social Security and S5I use this method of payment. Our beneficiaries who use direct deposit have an overwhelmingly positive view of the service.

All Social Security and SSI benefits are issueed by the Department of the Treasury, which is our disbursing agent. From the inception of the Social Security program through the mid-1970s, all benefits were issued by check. By the early 1970s, the volume of paper checks, coupled with related nonreceipt complaints and forgery workloads, threatened the Department of the Treasury's ability to adequately provide check disbursement services to program agencies like SSA and, more important, to the public. To meet this challenge, Treasury developed an electronic payment alternative which it called the direct deposit program. Because Social Security payments are Treasury's largest workload, SSA supported the development of this new electronic service. Social Security and SSI beneficiaries were the first to be offered direct deposit in 1976.

In the late 1980's, SSA began to focus on the distinct service delivery advantages of direct deposit and looked for ways to improve the efficiency and effectiveness of this program. Our Agency took a more proactive position in encouraging beneficiaries to use EFT. Steps were taken to better inform the public about the distinct advantages associated with direct deposit and to simplify the sign up process for those who wanted to begin using use this service. As a result of SSA's efforts, more than 61 percent of all monthly benefits generated by SSA today (i.e., 30 million out of 50 million payments) are delivered by means of direct deposit.

Advantages of EFT

Direct deposit significantly improves payment delivery services. It is a safer, more reliable method of payment. This is particularly important since the incidence of check thefts have doubled over the past 10 years. In contrast, in the 21 years it has been available to Social Security beneficiaries, nor one direct payment has ever been lost. With direct deposit, there is an electronic audit trail to ensure that the payment can always be located. Payments can be traced through the banking system, and beneficiaries have a permanent record of their payments through their bank records.

There are economic advantages of EFT for beneficiaries as well. Benefits are credited to accounts at opening of business on the scheduled payment date. Beneficiaries can write checks to pay bills or use automated teller machine cards to obtain money immediately without the inconvenience of first having to cash a check. Direct deposit to interest bearing accounts earns the most interest on beneficiaries' and recipients' money because their payments will be in the accounts at the earliest possible moment. Direct deposit avoids check cashing fees. If direct deposit to a checking account is used, fees for money orders and similar charges are avoided. Many financial institutions offer free services for customers who use direct deposit.

Direct deposit is also more convenient. With direct deposit, beneficiaries are not required to be home to receive their payment. They do not have to arrange vacation schedules around check delivery dates, nor do they have to be concerned about their check during an unexpected absence from home, such as a medical emergency. Beneficiaries can write checks payable to themselves to obtain cash immediately and thus are in no different a position than if they are paid by check.

Equally important is the fact that direct deposit saves taxpayers a substantial amount of money. It costs approximately $0.42 per item to issue Federal payments by check versus only $0.02 when the payment is directly deposited into a beneficiary's account. If all remaining check receivers would convert to direct deposit immediately, it would save the Social Security trust funds approximately $500 million in the first five years.

Mandatory EFT

Public Law 104-134, the Omnibus Consolidated Rescissions and Appropriations Act of 1996, enacted on April 26, 1996, included a provision that expanded the use of direct deposit for those receiving Federal payments. SSA implemented the initial phase of the new requirement effective August 1, 1996. Anyone applying for benefits as of this date must receive them by direct deposit if they indicate at the time of the application that they have a relationship with a financial institution. This requirement is waived if the individual certifies in writing that he or she does not have an account with a financial institution.

Anyone who had established entitlement to Social Security benefits prior to August 1, 1996, is not required to use direct deposit at this time. However, by January 1, 1999, the law requires anyone receiving Federal payments, including Social Security and SSI, to be paid by direct deposit or some other form of electronic funds transfer, unless they fall within one of the exception categories designated in final regulations to be issued by the Department of the Treasury.

SSA faces the challenge of converting to direct deposit or some other form of electronic payment the 20 million Social Security and Supplemental Security Income (SSI) recipients who still receive monthly checks. The conversion must take place in less than 19 months. While all Federal payments are affected, Social Security is likely to be the most visible program affected by this legislation. Of the remaining 19.7 million beneficiaries who are still paid by check, approximately 13.2 million curre ntly have a relationship with a financial institution and could by paid by direct deposit without imposing any hardship. Of the estimated 6.5 million Social Security and SSI recipients without bank: accounts, one-third (i.e., 2 million) are expected to be able to establish an account at a financial institution without difficulty.

Of course, one of the most significant issues to be addressed by the Department of the Treasu ry and SSA is how we go about meeting the requirement of law to provide electronic payment services to unbanked recipients at a reasonable cost. This has been an issue both our agencies have been studying for a number of years. Unbanked individuals often have limited resources. They also may be unfamiliar with how to go about maintaining an account at a financial institution.

SSA volunteered to participate in two pilot programs developed by the Department of the Treasury that were designed to test the feasibility of establishing special types of electronic payment accounts for unbanked Social Security and SSI recipients. The first program, called the SecureCard program took place in Baltimore, Maryland in 1989 and 1990. A similar program, called the Direct Payment Card program, was established in the State of Texas in April 1992. The program in Texas is still operating and now serves more than 20,000 beneficiaries.

Under the Texas program, beneficiaries are assigned special debit-only accounts at a designated financial institution (Citibank). Participants are provided a debit card that can be used at automated teller machines (ATM) or point-of-service (POS) terminals. In Texas, participants are assessed an account maintenance fee of $3.00 per month. The fee includes one free ATM withdrawal per month, unlimited free withdrawals through POS terminals, and the ability to obtain account balance information by calling a special toll free 800 number established by the financial institution provider.

Beneficiaries participating in the Direct Payment Card program in Texas seem to like it. They enjoy the convenience and safety of having their monthly benefits delivered to them electronically. The monthly account fees associated with the program have not been an issue because it appears to be comparable to or less than similar fees encountered by the partic ipants previou sly when cashing their benefit checks.

The Maryland and Texas experience were models for two actions now being taken by the Department of the Treasury to meet the needs of the unbanked. The first action is a program Treasury calls Direct Deposit Too which appeals to the entire financial community to establish basic banking/EFT services for Federal recipients of limited means. Treasury expects financial institutions to compete for this market and, by doing so, keep costs to an affordable minimum. For the remaining portion of the unbanked population. Treasury and other benefit-paying agencies are working towards a national electronic benefits transfer (EBT) program in partnership with the States. EBT is a service comparable to the programs operated in Maryland and Texas and will be provided by a designated financial institution(s) selected by Treasury. In fact, the new Federal EBT program is operating now in the State of Alabama under the name Benefit Security Card. Debit card accounts are made available to unbanked Federal recipients. The service fee in the Alabama program is $1.92 per month which includes one free ATM withdrawal per month, unlimited POS withdrawals and the availability of account balance information through a special toll free 800 number.

SSA endorses the Federal EBT program and will work closely with the Department of Treasury to ensure it is made available nationally as quickly as possible. The fees associated with the program appear to be reasonable and, therefore, meet the definition required in the mandatory EFT legislation. Based on our experience with these programs to date, we do not anticipate that our unbanked population will have any significant problems with the proposed Federal EBT program. Of course, SSA will do all it can, working with the Department of the Treasury, to monitor this area to ensure the program operates as intended. To make it as convenient as possible for all remaining check recipients to sign up for direct deposit or EBT, SSA has taken the extraordinary step of sponsoring a new electronic banking standard that allows financial institutions to provide Federal agencies with enrollment information electronically through the Federal Reserve. The program is called the Quick$tart service. To date, almost 500,000 enrollments have been received using this new method.

Our current implementation plans are for SSA to announce the mandatory EFT requirements in inserts included with the September benefit checks. Inserts will also be included with checks periodically through the end of 1997. SSA will also mail notices to remaining check receivers homes throughout 1998. The notices will provide specific information and instructions on what is expected of the individual. Beneficiaries with accounts--and the unbanked who can open accounts-will be encouraged to contact their financial institution to sign up for EFT. Unbanked recipients will be provided with special instructions on how to sign up for the Federal EBT program in their area. All beneficiaries will be advised of exceptions to mandatory EFT requirements set forth by the Secretary of the Treasury in regulations. Individuals who believe they may qualify for an exception will be asked to contact SSA for assistance.


We believe EFT is distinctly superior in that it provides Social Security recipients who use it with a service that is safer, more reliable and more convenient than any other payment method, including check deliveries. SSA is confident that we can meet the mandatory EFT requirements set forth in law. Most of the remaining Social Security check receivers currently have a relationship with a financial institution and can use direct deposit immediately without imposing any hardships. Special care will be taken to ensure the needs of the unbanked population are met. SSA pledges to work closely with the Secretary of the Treasury as he develops regulations and programs ensuring that unbanked recipients of Federal payments are provided with safe, affordable electronic payment alternatives. We will monitor Direct Deposit Too programs established by the private sector as well as the roll out of the Federal EBT program to ensure they conform to the spirit of the mandatory EFT legislation. If, at any time, SSA and the Department of the Treasury determine that adequate EFT services are not available to the unbanked population or that these services cannot be provided at a reasonable cost, we will work with the Secretary of the Treasury, who has broad authority to continue to provide payments by check until an acceptable EFT program is in place.