The University of California, Berkeley has a reputation not only for top-tier academics, but also for the type of free-thinking activism that will spur students into a grove of Oak trees on campus to prevent their removal … and keep them there for nearly two years.
The picturesque campus, sitting just to the east of the San Francisco Bay, might therefore seem like a rather odd place to research bureaucracy – the cumbersome mechanism at the establishment’s core. Yet it seems to suit Dr. Sean Gailmard – Cal’s Judith E. Gruber Associate Professor of Political Science – just fine.
He’s studied the inner-workings of bureaucracy in great detail in the context of a broader research focus on the American political institution. So, while most of us think only of long lines and paper pushing, Gailmard sees an opportunity to better understand (and, yes, hopefully improve) the way the government operates. So, who better to ask about the process through which federal benefits were recently digitized?
It’s certainly safe to say that shifting the disbursement of Social Security benefits away from paper checks and toward prepaid cards and direct deposit has been no small undertaking. But, in the current cash-strapped government landscape, will this type of initiative ultimately prove to be worth the investment? How long has it been in the works? What effect will it have on the banking industry?
- From your perspective, what are the pros and cons of digitizing federal benefits like Social Security?
“On the bureaucracy side, the benefits are potentially pretty big for both the beneficiaries – the receivers of the benefits – and for tax payers in general. For the beneficiaries, the main benefit is that it allows for quicker disbursement of their benefits. We see that not only with Social Security, but with all kinds of federal benefits and state benefits as well – in those places where states distribute benefits through electronic formats. For example, in the benefit cards or even tax refunds that might come through a direct deposit, this is usually faster than requiring a check to go through the mail. That would apply both to a benefits card that an individual could receive or fill up and it would also apply to direct deposits in any cases where that is applicable. Now, for the tax payer, it allows for potential cost savings because of lower costs for processing of the distribution of the benefits. It doesn’t have to go through the mail, for one thing, and it doesn’t involve as many personnel to handle the checks. So there is potential for some cost savings there.
Whether a bureaucracy is actually going to just say, ‘You know, we don’t need as much money as we used to,’ is debatable at best. But, at the very least, it would allow the agency to use the money it was spending on distribution of hard-copy benefits to instead make that available to other services they could provide or for following up complaints about missing benefits and things like that. …
I think probably the biggest cost is there is a potential for some users who aren’t familiar with these kinds of cards or these kinds of transactions to not quite understand what’s happening and maybe not get all the benefits that they’re entitled to under the law and under regulations. People are used to checks, and they’ve been dealing with checks for years or decades. Any time there is a change in a format, you are definitely going to find some people who are confused and don’t entirely understand it, and there’s going to be some transition cost involved in that. There will be some cost of transitioning both for the consumer, and there will also be short-range costs for the agency because they have to use some personnel to help people figure out what’s going on.”
- From conceptualization to implementation, how long does it usually take to put this type of major bureaucratic initiative into effect?
“Many, many, many years. From when it’s a glint in the eye of some senior administrator in a major federal spending program, it will take a very long time. For instance, the Office of Management & Budget and the Government Accountability Office have been recommending electronic distribution of benefits for programs like Social Security for at least half a decade in published forums, and probably longer than that in their own conversations. No major regulations and no major administrative practices change very quickly because there are so many legal ramifications involved and the agencies themselves need to go through some internal processes to make sure that they aren’t systematically disadvantaging particular populations of benefit recipients. They have to go through long internal processes to make sure that the process is reasonably understandable to the recipient of the benefit. That takes an extraordinarily long period of time. So, I would probably say about five years.”
- Does this type of program, which emphasizes modern banking tools like prepaid cards and direct deposit, represent a boon for the banking industry?
“I think that financial institutions are good at finding ways to make money on both sides of the transactions. On the one hand, the answer to that question depends on the details of program implementation. One way to do it would be for the government agency to send a prepaid card to the beneficiaries. The beneficiary can spend off of that card and it will be something like a prepaid credit card, except that the money is deposited on there not by a financial institution or credit card company, but by the government. If those go directly to program recipients, they don’t necessary have to participate in any financial institution. On the other hand, there’s going to be some point-of-sale transaction involved anytime you swipe those cards at a gas station, at a grocery store, any kind of merchant. Those necessarily have to be digitized, and financial institutions have been pretty adept – despite some legislation trying to limit this – at making money on these transactions. So, at the very least, it will increase the volume of the money they make on this, if not the per transaction fee that they can obtain.”
- What about in terms of sheer familiarity? Won’t a program like this that puts a prepaid card in the hands of countless consumers who’ve never used one before increase the likelihood that they will continue to use such products?
“Yeah, that’s definitely true. Most of these people are receiving checks and they take the check and deposit it in a bank account. Now, you don’t have to go to an ordinary bank in order to cash a Social Security check, but generally speaking, that’s how people do it. So, most of them are participants already, but they’re not necessarily familiar with the prepaid cards’ format, or the benefit cards’ format, that the government agencies might be moving to. Because of that familiarity effect, it might make the program recipients more inclined to use prepaid cards for other purchases as well. … If you don’t understand what those cards are, you might shy away from that. But if you gain familiarity with using these cards because that’s how your government agency pays your benefits, then maybe you have a better idea of what is involved in that and it makes you more inclined to purchase it. If this decision to disperse benefits in this way amplifies the use by consumers who wouldn’t have otherwise used these products, it could definitely be an indirect benefit for financial institutions.”
- How important is it to have a promotional campaign tied to a change like this when it comes to easing the transition?
“It is very important, and it would have to take a multifaceted approach to getting the attention of the recipients because under the law these people are entitled to receive these benefits and in many cases they need the benefits, they rely on them to be able to meet their expenses. So, it’s really important that people understand how their benefits are going to be delivered and how to make use of the delivery format they’re given. Since this might be unfamiliar to people, especially some of the older demographic that is served by Social Security, then it’s definitely is going to be important for the Social Security Administration. But not just the – in general, it’s going to be important that people understand how benefits are going to be delivered, that the types of cards are usable in any point-of-sale transaction. …. It’s going to be necessary to do some explaining. It’s the obligation of the government agencies to do it. The job of the Social Security Administration is not to save money on Social Security benefits, but to distribute the Social Security benefits. The job of the agency that distributes the benefits is to make sure that the recipients get the money that they’re entitled to. It’s going to be a really important part of the process and there will be lots of confusion for sure.”
So, there you have it. It’s a digital world, and all the proof you’d ever need of that might very well be sitting in your grandmother’s purse.