Can Social Security Make The Leap To E-Banking?

Beginning March 1st, many people who receive social security and other federal benefits will no longer receive paper checks. The Treasury Department says sending payments electronically will save nearly a billion dollars. But some experts say it could affect the "un-banked." Host Michel Martin talks with The Wall Street Journal's Sudeep Reddy.

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MICHEL MARTIN, HOST:

Now we want to get more perspective on a couple of issues the Obama administration is putting forward that has direct impact on many people's finances. Sudeep Reddy of the Wall Street Journal often joins us to talk about issues like this. Thanks so much for joining us once again.

SUDEEP REDDY: Hi, Michel.

MARTIN: So we want to ask about an administrative step that the administration has taken that sounds small but which they say could actually save some big money.

But first I want to ask you about President Obama's proposal that he advanced last night to increase the federal minimum wage. What is that proposal and why now?

REDDY: Well, the president is trying to increase the minimum wage, get it to $9 an hour or above $9 an hour and get it to really start moving with inflation, which has been a big problem. Sometimes you see prices going up, people stuck at that lower minimum wage and they don't have the ability to keep up.

And so this is an attempt to deal with two problems at once. One is that incomes for most Americans, for the common household, haven't increased over the last decade. They've actually declined when adjusted for inflation, and that's a huge problem. The other is income inequality has gotten worse over the last three decades, and this is an attempt to address that issue by giving the people who are not considered generally middle class families a little bit of a leg up, some help in getting higher incomes, and forcing it through government policy.

MARTIN: I don't know about you, but I'm already getting a furious reaction from people who represent the business community, particularly small business, and a jubilant reaction from people representing union workers and low wage workers. But both are citing research to support their very different points of view. I mean the business community says this is bad for the economy because people will just hire fewer workers or cut the hours of the people they have, and people who represent the workers are saying this is good for the economy because it puts more money into people's pockets.

What do you say about that?

REDDY: The reaction is understandable. Ever since we had the minimum wage of 25 cents in the 1930s and you've seen it go up to try to address some of these issues, you've gotten a similar reaction every time, of is this really the right move that's going to help the economy overall.

There are economists who have looked at this. There is obviously division when you get into economic studies about what effect this has. It is fairly clear that people who have jobs at the minimum wage - many of them would benefit from this and see a somewhat higher wage as a result. That's pretty clear.

The question is, especially from the business perspective, are you going to hire less as a result of that higher minimum wage? And if you see the wage for the lowest skill worker going up, you might be more willing to consider automation. You might look for ways to increase productivity in other ways. That means you're not going to see as much hiring as a result from something like this.

It's very difficult to actually pinpoint what the - both the short and the long term effect something like this would have on hiring, and that's why it is so contentious, because one of these studies found that a lot of people who benefit from an increased minimum wage tend to be teenagers, perhaps teenagers who are not even from low income households, who might just be getting a summer job. And is that really what we're trying to support from something like this that addresses a huge swath of the economy?

MARTIN: If you're just joining us, we're speaking with Wall Street Journal reporter Sudeep Reddy. Now we want to ask you about a plan that you've written about. The Treasury Department says it can save a billion dollars over the next 10 years by switching most people who get benefit checks from Social Security or the Veterans Administration to switch them to electronic payments. And they said they're going to do this really quickly, by March. Tell me about that. Why do they want to do this?

REDDY: This is a decades-long effort by the government to try to bring us into the electronic age. The Treasury Department, on behalf of other agencies, actually makes more than a billion payments a year, and if you look at the cost of making a payment, when you see a check printing and to mail it, that's a little more than a dollar. If you could to that electronically through direct deposit or some other form that doesn't require all that overhead, that's about 10 percent of that cost. And so it's a huge cost savings for the government to do something like this and that's the reason there has been this effort since 1975 to get people toward direct deposit, toward electronic payments.

And they've made a lot of progress, but there are still quite a few people who are still getting their payments by mail. Ninety percent are getting it electronically, so there has been a lot of progress, but a lot of people are still waiting for the check to come in, going to their mailbox, then having to go and find a place to deposit, and all of that still creates problems for expenses and also the risk of losing the check, fraud, all sorts of other issues.

MARTIN: What about people who don't have bank accounts? I mean, we've done a lot of reporting on this, as have you, and there are millions of people who don't have bank accounts. They say the fees are too high, and as you reported, the fees are - many banks say that they're trying to actually increase the fees that they charge because - well, they say, because of new regulations. And so what are these people supposed to do?

REDDY: Exactly. That is a very big problem and that's actually one of the reasons why, back in the late 1990s, the Treasury Department delayed some of the implementation of this, because there are so many people who are unbanked and weren't able to get to this.

There's been an effort over the last five years to introduce what's called the direct express card. It's kind of like a prepaid debit card that allows people to get the money through this card and go use it, to pull money once per payment out of an ATM or to go spend it just like you would with any other debit card. And that's actually showing some signs of progress, but there are a lot of people who either still don't trust the electronic form of what they see, because you want to see money. You like seeing a check. That's particularly an issue with older people.

And so on March 1, the Treasury Department faces this deadline to convert everyone else, basically people who are below the age of 90, to get into electronic payments. They're not going to cut everyone off there.

MARTIN: Literally below the age of 90?

REDDY: Right. They've created an exemption for people in their 90s, but there are a lot of people who are well below 90 who don't want to move over like this. A lot of people didn't grow up in this age of electronic banking and do not like using ATMs. My parents don't like using ATMs and they're not that old, and so they still want to go into a bank branch. And so you have some of these issues that you have to get past, some that are societal and technological barriers and some that are actually dealing with technical issues around payment.

MARTIN: In part, though, you're saying that this is motivated in large part by cost savings, I mean that a paper check literally costs 10 times the cost of transmitting a payment electronically. But is part of it from a policy perspective trying to get the unbanked to get to a bank?

REDDY: Exactly. One of the worst outcomes we've seen from the unbanked, these millions of people who either don't trust banks or just for whatever reason can't get a bank account, is they go toward(ph) check cashers and pay these fees, sometimes one percent, sometimes six percent of their money. And that's very hard-earned money. That's money that you want and you end up losing a lot through those fees. And there's been an effort - a lot of different government programs that haven't been terribly successful through those channels to try to get people into the banking system so they're not losing what can, over the course of a lifetime, be thousands, if not tens of thousands of dollars in fees if you end up in that situation.

And so the government has tried, for instance, through tax refunds to encourage people who still wanted to get paper tax refund checks, wait all those weeks in the mail, to try to get them to take a prepaid debit card where they'd get their refund instantly or at least much more quickly and go and use that in that form. This was a pilot program that was done in recent years. It didn't have a very large take-up because a lot of people just still don't like that idea or don't understand it.

And that's one of the big barriers. Even if you've converted the vast majority of people, whether they're benefit recipients or taxpayers, you still have a lot of people, when you look at the big size of what the government does in terms of payments, who haven't been willing to adopt this.

MARTIN: Sudeep Reddy is a reporter for the Wall Street Journal. He was kind enough to join us once again from our studios in Washington, D.C.

Sudeep, thanks so much for joining us.

REDDY: Thanks, Michel.

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