Latest / The Fiscal Policy Podcast with Fexingo: Government Budgets, Stimulus, and Public Spending / Why the Federal Government Still Mails Paper Checks
Transcript
- Lucas: Last year the federal government mailed out over 140 million paper checks. Luna: Wait — still? In 2026? Lucas: Still. Tax refunds, Social Security, veterans' benefits, even some vendor payments. And each one costs the Treasury about twelve dollars to print, process, and mail. That adds up to roughly one point seven billion dollars a year. Luna: That's a lot of trees and a lot of postage. What's the hold-up? Direct deposit has been around forever. Lucas: You'd think it would be simple. And in some ways it is — about 93 percent of federal beneficiaries already use electronic payments. But that last seven percent represents millions of people. And the reasons they get checks are more complicated than just 'they haven't switched yet.' Luna: Okay, walk me through the biggest barriers. Lucas: Let's start with the banking system. About 5.5 million American households are unbanked — no checking account, no savings account. For them, direct deposit isn't an option. So the Treasury mails a check, which they then cash at a check-cashing store or a Walmart, often paying a fee. Luna: So the government is essentially subsidizing the check-cashing industry. Lucas: Exactly. And there's a second group: people who have bank accounts but simply don't trust electronic payments. A lot of elderly Social Security recipients fall into this category. They've received a paper check for thirty years, and they see direct deposit as a risk — what if the government makes a mistake and pulls money out? Luna: Is that a rational fear? Lucas: Partly. There have been high-profile cases of the Treasury depositing benefits into the wrong account, and then the recipient has to fight to get it back. With a paper check, you physically hold it. You cash it. There's a paper trail. But the real cost here is the infrastructure. Luna: What do you mean by infrastructure? Lucas: The Treasury's Bureau of the Fiscal Service still operates two massive check-processing centers — one in Philadelphia, one in San Francisco. They run industrial sorting machines, they have thousands of employees, they contract with the Federal Reserve for check clearing. And because the check volume has declined from about 500 million in 2000 to 140 million today, the per-check cost has actually gone up. Fixed costs haven't dropped proportionally. Luna: So the unit cost is higher even though there are fewer checks. Lucas: Right. In 2000, a Treasury check cost about 4 cents to process. Now it's over a dollar per check — and that's before postage. So we're spending about a hundred and seventy million dollars just on stamps for these checks each year. Luna: That's bonkers. Couldn't they just mandate everyone switch to electronic? Lucas: Congress tried. In 2010, the Treasury was given authority to require electronic payment for most federal benefits starting in 2013. They rolled out a 'Go Direct' campaign. And it worked — for about 90 percent of people. But then Congress actually rolled back the mandate for a specific group: Social Security recipients who were already receiving paper checks before 2011 could opt out. That created a permanent carve-out. Luna: A political carve-out for paper-check recipients. That's fascinating. Lucas: It's a classic example of policy inertia. The AARP lobbied hard — their argument was that elderly Americans shouldn't be forced into a system they didn't trust. And once you grandfather in a group, it's politically very hard to ever bring them along. Luna: So there's a demographic angle too. Who are these 7 percent? Lucas: They skew older — over 75. They skew rural. And they disproportionately live in areas with limited banking access. The Treasury did a study a few years ago showing that about 40 percent of paper-check recipients live in counties with only one bank branch or none. So it's not just inertia; it's a structural access issue. Lucas: That said, there's also a hidden beneficiary here: the banking industry itself. When the Treasury issues a paper check, the money doesn't leave the government's account until the check is presented for payment. That can take days or even weeks. During that time, the government earns float on the money. But when they issue an electronic payment, the money leaves immediately. Luna: So the Treasury loses float revenue by going electronic? Lucas: They lose some, yes. But the bigger winner is the banking system. When a check is deposited, the bank gets to hold the funds for a day or two before they're credited to the recipient. That's called 'check float' — and for a bank handling millions of Treasury checks, it adds up to real money. The Federal Reserve estimates that banks earn about 200 million dollars a year in float from government checks. Luna: So banks have an incentive to keep the paper system alive. That's a pretty powerful lobby. Lucas: Exactly. And it's not just the large banks. Community banks and credit unions that serve rural areas also benefit. So you have a coalition of recipients who prefer paper, advocacy groups who defend their choice, and financial institutions that profit from the delay. Luna: Meanwhile taxpayers are footing the bill for all of it. Lucas: One point seven billion a year, to be precise. And that's just the direct cost. There's also fraud — paper checks are far easier to steal and counterfeit than electronic payments. The Treasury loses about 50 million a year to check fraud. Though that's actually down from 100 million a decade ago, as volume has declined. Luna: Okay, so what would a real solution look like? Is there a way to move that last 7 percent? Lucas: There are a few ideas floating around. One is to expand the Treasury's 'Direct Express' card program — that's the prepaid debit card that Social Security and other benefit recipients can use. It's already available, but only about 4 million people use it. The Treasury could make it the default for new enrollees who don't have a bank account, and could even offer a small incentive — like a 25-dollar bonus — for switching from paper. Luna: A carrot approach rather than a stick. Lucas: Right. Because the political reality is that a mandate is off the table. So you have to make electronic payments more attractive and more accessible. That means partnering with community banks and post offices to offer free check-cashing for Direct Express cards. It also means investing in better fraud protection for electronic payments, so the trust issue fades. Luna: And what about the banking float? Is there a way to capture that benefit for the government instead? Lucas: Some economists have proposed that the Treasury should charge banks for the float they earn on government checks. The idea is that the government is essentially giving banks an interest-free loan for a few days. If the Treasury charged a fee equal to the overnight interest rate on the float, it could recover maybe 100 to 150 million a year. But that would be a huge fight with the banking industry. Luna: So for now, it's just a cost we accept. Lucas: Pretty much. There's been some movement — the Check 21 Act in 2004 allowed banks to process checks electronically, which helped. And the Treasury has slowly nudged the percentage down. But at the current rate of decline, it would take another twenty years to get below 5 million checks a year. Unless Congress or the Treasury decides to get more aggressive. Luna: You know, this reminds me of something we talk about on this show a lot: the gap between what's technically possible and what's politically feasible. Lucas: It's the classic story of government waste that persists not because anyone loves it, but because the cost of eliminating it is spread out and the benefits are concentrated on a small but vocal group. The 140 million checks a year is a perfect case study. Luna: Alright, Lucas — so if a listener wants to dig into this more, where should they look? Lucas: The Treasury's own Bureau of the Fiscal Service publishes an annual report on payment volumes. The Government Accountability Office has done several audits on check processing costs. And there's a great 2022 report from the Bipartisan Policy Center that lays out a roadmap for modernizing federal payments. I'll link to it in the show notes. Luna: I think that's all we have time for today. Thanks, Lucas. Lucas: Thanks, Luna. And thanks to everyone listening.