Digital Dilemmas for Social Security Deposits

The movement to direct deposit of all Social Security benefits seems inevitable. Already, more than 46 million beneficiaries receive their payments electronically, while nearly 7 million still are paid with paper checks. Direct deposit is a good deal for nearly everyone. Gone are the fears of stolen checks, the demands of taking the check somewhere to be cashed or deposited, and just the general uncertainty of wondering if something has or will happen to your check. It's also a good deal for the government, which saves hundreds of millions of dollars in expenses with electronic deposits.

[See The 100 Best Mutual Funds for the Long Term.]

Now, the U.S. Treasury Dept. is considering doing away with paper checks altogether and improving consumer protection for direct deposit activities. It has two rule making proposals outstanding to that effect. Social Security says it strongly supports this development. What's less clear is how such a change would affect the 7 million beneficiaries currently getting paper checks. It's hard to believe all of them either understand or want to live in a digital world of direct deposit. Consumer groups also have some concerns because Social Security recipients may, for good and bad reasons, yield control of their electronic deposit accounts to other parties.

If you're a recipient or a family member, make sure you understand the rules for the use and fees surrounding direct deposit accounts for your Social Security benefits. And if you ever feel something is wrong with how your benefit payments are being handled, call the agency's national number -- 1-800-772-1213 -- or visit your local Social Security office.

The spectrum of reasons for third-party control of a recipient's Social Security payments begins on the end of common sense -- a nursing home may be caring for someone with dementia and that person's payments are used to fund their residency and care. Or, a disabled recipient authorizes a financial institution or perhaps a family member to manage their Social Security payments. The agency deals with many such requests.

However, the fair treatment of recipients can get much murkier. Many financial institutions provide fee-based services to seniors that are linked to their Social Security deposits. For example, providing Social Security funds for use via a bank debit card can be a convenience to consumers and a revenue source to financial companies. Not all debit cards are created equal, and there are regular horror stories of seniors being exploited by companies. High usage fees and ATM charges may be levied. Seniors may overdraw their cards and be socked with big fees. In the worst cases, Social Security recipients run out of money before the end of the month, and borrow cash from payday lenders, who then extract interest and fees directly from the recipient's Social Security direct deposit account. Such activity may be legal, but still may be exploiting seniors.

Taking away the option of receiving a paper check thus raises the stakes for the government to make sure that seniors aren't being victimized by third parties who wind up with effective control of their direct deposit accounts.

[See Social Security and Senior Financial Abuse.]

Social Security rules have long prohibited payments from being garnished to satisfy other obligations. But as black-and-white as this rule may appear, the real world is much grayer. Social Security has long permitted recipients to set up "master-sub account" arrangements with banks and other financial institutions. Recipients' Social Security payments go directly into these accounts, and the financial institutions may have the right to use some of the funds to meet beneficiaries' obligations to the institution. Here's a detailed description of these rules provided to U.S. News by the agency;

"Under our policy, we also allow an arrangement commonly referred to as the master-sub account. This permits individuals who may not qualify for traditional bank accounts, or who choose an alternate setup, to receive their benefits in a manner that allows them to retain control of their funds. These accounts are established and maintained in traditional financial institutions. We do not allow funds to go directly to credit card companies, finance companies, insurance companies or other non-traditional financial services companies. In the case of a non-bank financial service provider (FSP) or check cashing facility, we allow the master-sub account arrangement to be used to serve those individuals who wanted electronic deposit, but do not have a bank account. Our policy requires that the deposit into one of these accounts must meet certain criteria:

"a. Benefits must be deposited in an account owned by beneficiary;
b. Enrollment must be voluntary;
c. The arrangement must be revocable and the beneficiary can terminate the direct deposit at any time; and,
d. Funds paid to a representative payee through a non-bank FSP must be used for the beneficiary’s current needs."

These conditions can be met, however, while still permitting an institution to have effective if not legal control of a recipient's account. According to the agency's own periodic reviews, Social Security recipients have been ripped off by financial institutions under these master-sub account rules. "We believed that the conditions we established for the use of the master accounts protected the rights of our beneficiaries," the agency says in a statement. "However, we also know that our policies must evolve in light of new technologies and the vulnerabilities they sometimes create. In this regard, we are changing our policies regarding the use of master account arrangements to better protect the rights of our beneficiaries."

"Under Treasury’s proposed rule," the agency statement continues, "the use of these master account arrangements by check cashers and payday loan companies would not be permitted. We are making changes to our policy and procedures consistent with Treasury’s proposed rule change."

[See Social Security Defenders Circling the Wagons.]