How to Prepare for Paperless Social Security Payments

The Social Security check is about to go the way of the door-to-door salesman and Green Stamps. Beginning March 1, 2013, paper checks for U.S. government benefits will virtually disappear. After eight years of trying to get beneficiaries to switch to digital payments voluntarily through its Go Direct campaign, the Social Security Administration (SSA), the Veterans Administration (VA) and other federal agencies that pay out benefits are now requiring the change.

If you or someone you know is among the 5 million Americans still receiving Social Security or Supplemental Security Income (SSI) benefits by check, you can either enroll in direct deposit or sign up to get your money loaded onto the Direct Express prepaid debit MasterCard. Do nothing and the SSA will send you urgent letters, and eventually may send you the debit card by default.

The electronic shift is intended to save taxpayers more than $100 million a year, and to eliminate theft of paper checks from mailboxes. But it comes with its own challenges, not the least of which are confusion and physical difficulties for the elderly and disabled.

"For some, direct deposit or a debit card may be convenient, but for others, those options may be less affordable or harder to use than receiving a paper check," says Cristina Martin Firvida, AARP's director of consumer affairs and financial security.

Bank accounts lessen difficulties

If you're already successfully managing your own money and have an account at a bank, credit union or savings and loan, changing to direct deposit requires no real behavior shift. The deposit is made on the same day each month and the funds are instantly available. The only thing that's different is that you don't have to deposit a physical check.

"When discussing this, we were sensitive to the fact that a lot of older people may not be comfortable with electronic payments," says Walt Henderson, director of the Go Direct campaign for the U.S. Treasury. "There's a lot of misconception that they have to get a computer or have to get on the Internet. It really doesn't change anything they're doing except they have to make one less trip to the bank."

That makes sense for Leslie Straw, social services designee for Pioneer Lodge, a nursing home in Coldwater, Kan. As a representative payee -- a person who manages funds for benefit recipients who are unable to do so themselves -- Straw finds the new system beats the old one."Direct deposit works better for me," she says. "It makes keeping track a lot easier."

Direct deposit fears

Still, Straw concedes that the change stresses out some senior citizens who like to hold a check in their hands. Many are uncomfortable with digital payments and fear their money will get stolen or diverted.

That's certainly a possibility. In September 2012, Social Security Administration Inspector General Patrick P. O'Carroll Jr. testified that between October 2011 and August 2012, his office received nearly 20,000 reports concerning questionable direct deposit changes to Social Security beneficiaries and redirection of benefits to other accounts. He said his office was continuing to get about 50 such reports a day. Some were due to mistakes by the beneficiaries or banks. Many were related to identity theft.

The SSA is trying to tighten security controls, but as payments move from the mailbox to digital delivery, thieves are likely to find more high-tech ways to steal payments. Frequently, the beneficiary gives the criminal just enough information over the phone to enable the hacker to divert funds.

But it's not as if paper checks are safe. In fiscal 2010, more than 540,000 paper Social Security and SSI checks were reported lost or stolen according to the Treasury Department. It investigated nearly 50,000 cases of altered or fraudulently endorsed checks, totaling around $93 million. Those numbers suggest that direct deposit is the safer bet as long as retirees know how to protect their digital information or have someone do it for them.

Cards for the unbanked

Bigger changes are in store for beneficiaries who don't have a bank account -- about 6.6% of Social Security recipients, according to statistics compiled by the Federal Deposit Insurance Corp. The SSA is encouraging them to open bank accounts and enroll in direct deposit. But some may be unable or unwilling to do so.

For example, the FDIC report found that the majority of people without bank accounts don't think they have enough money to make an account economically feasible. Henderson of Go Direct says others have legal issues that preclude them from opening an account or mental disabilities that make banking nearly impossible.

The alternative to opening a bank account for direct deposit is the Direct Express prepaid card. About 3.5 million beneficiaries are already using Direct Express, Henderson says. The card is automatically loaded every month with benefit funds, which can be used anywhere a MasterCard debit card is accepted, including online. Cardholders can make withdrawals at an ATM, get cash back from retailers and pay bills with Direct Express.

However, the most vulnerable unbanked beneficiaries may find learning a new financial system overwhelming. There is a lot of information to absorb, ranging from which merchants accept the card to what fees might be charged to how to keep track of finances in a digital world.

"AARP believes retirees and other Social Security beneficiaries deserve to know that their hard-earned benefits will be safely delivered without risking high fees," says Firvida. "That's why AARP has submitted comments, met with the administration and advocated on behalf of older Americans to ensure that reforms meet the needs of those impacted."

Direct Express debit card fees

The Treasury has negotiated with the card provider to minimize fees. In the meantime, the agency is enlisting everyone involved -- bankers, representative payees, family members and caregivers -- to help beneficiaries make the change.

The prepaid debit card fee comparison chart below may help. Compared with other prepaid debit cards on the market, Direct Express is competitive. There's no activation fee or monthly service charge. You get one free withdrawal each month from an in-network ATM. After that it costs 90 cents -- cheap, compared with $2 or more for subsequent withdrawals on commercial prepaid cards. Direct Express's surcharge-free ATM network includes Comerica, Charter One, Privileged Status, Alliance One, PNC Bank, MasterCard ATM Alliance and Money Pass.

Using an out-of-network ATM for Direct Express, however, can be expensive. ATM owners may charge several dollars for each withdrawal. Go outside the US and fees get even higher -- $3 per withdrawal plus a 3% surcharge.

There are other considerations, too, including usage limitations. For example, buying gas with the card requires a visit to the attendant. The card won't work at the pump. Other restrictions can be found in the Frequently Asked Questions section of the Direct Express website.

Card security

Another concern with the debit cards is what happens if they get lost. A federal rule called Regulation E holds that if debit card owners report their cards lost or stolen within two days of realizing what's happened, they can only be held liable for $50 worth of fraudulent charges. After that, they can be held liable for up to $500. For most cards, liability increases again after 60 days. Direct Express holders get 90 days to report their cards missing or stolen before their liability goes over $500.

If you have a parent, patient or friend who is prone to losing things and forgetting about them, this could become an expensive problem.

Exceptions Some people are exempt from having to give up paper checks -- but very few. They include:

People older than 91.
People with mental issues that prevent them from being able to make the switch.
People in rural areas without direct deposit capabilities.

Since the agency began pushing the Go Direct initiative in January 2011, Henderson says roughly 100,000 people have applied for an exemption. Most of these, he says, were just uncomfortable with the change, and Social Security staff members were able to help them understand the new system and transition their accounts. A very small percentage is granted a waiver.

One way or another, for most beneficiaries, the change must come.

Additional fees for the Direct Express card include .75 cents each month for a paper statement, $1.50 each time you transfer funds to a bank account and $13.50 for overnight delivery of a replacement card. To keep your card fees low, Direct Express offers some tips:

Use a Direct Express surcharge-free network ATM for all withdrawals, if possible, to reduce additional ATM fees. You can use the Direct Express ATM locator to find one near you.
Pay for items at retail outlets with your Direct Express card instead of using cash.
Get cash back when paying with your Direct Express card using your PIN number at retailer checkouts.
Financial institutions displaying the MasterCard acceptance mark can give you cash from your Direct Express card for free.
Money orders can be purchased for a nominal fee ($1.20 for amounts less than $500) at your local post office.