After receiving kudos from Vice President Gore and winning a $5,000 prize from grateful bankers, Michael Johnson is waiting for the savings to roll in from a system he devised to help the government stop erroneous Social Security payments.

The system -- which uses the automated clearing house payment network to retrieve Social Security payments mistakenly made to the recently deceased -- began operating in April.

Big Savings Expected

The brainchild of Mr. Johnson, a payment systems director at the Social Security Administration's headquarters in Baltimore, the system is expected to eliminate more than half of the $190 million of erroneous payments to dead people made by Social Security through the clearing house every year.

"Obviously, it's gratifying to come up with a new idea and see it become successful," Mr. Johnson said.

But bankers too are gratified, since Mr. Johnson's innovation could save them a good deal of money.

Funds Management Problem

"For some banks we've talked to, like BankAmerica, the benefits have been quite substantial," said Elliott McEntee, president of the National Automated Clearing House Association in Herndon, Va.

As the largest originator of payments through the automated clearing house, the Social Security Administration found itself with a big funds management problem, stemming from the cumbersome way in which the government administers benefit payments.

On the 20th of each month, Social Security prepares a list of benefit payments to be made by the Treasury Department.

It takes the Treasury Department until the third day of the next month to actually get the payments out.

The problem is that every day, the Social Security Administration finds out from hospitals, coroner's offices, and police departments that about 2,700 people who receive benefits through the clearing house have died.

By law, people are due Social Security payments only for those months that they live out in their entirety.

But once the Social Security tells the Treasury whom to pay, the Treasury can't stop the payment.

This means that every month the Treasury makes some 30,000 Social Security payments through the clearing house, worth a total of $190 million, to people the government knows are dead.

"We know they're dead, but we aren't able to do anything to stop that payment from occurring," Mr. Johnson said.

Much Recovered, Some Lost

Much of the money is recovered. But some is put into the recipients' bank accounts, withdrawn by relatives or other people who have access to the accounts, and never recovered. Banks bear some of the liability for these losses.

By law, if banks are notified within 45 days that a customer who received government benefits has died, then the banks are liable for any funds that are lost. The government splits the liability with banks when banks are notified more than 45 days after a death.

Before the clearing house system began operating, erroneous Social Security payments to dead people were costing banks between $25 million and $50 million a year, compared with losses of $19 million a year for the Social Security Administration, Mr. Johnson estimated.

Death Notification

The clearing house system that Mr. Johnson conceived should slash these losses.

Basically, the new system enables the administration to send a new type of message through the clearing house, called a "death notification entry," to tell banks when a customer who receives government benefits has died.

This notification, which arrives in many cases one or two weeks before the death notification letters that the government used to mail to banks, makes it possible for banks to immediately return government benefits payments before depositing them in a customer's account.

While the reduction in losses has yet to be tallied, Mr. Johnson said that the number of erroneous clearing house payments that the administration has to recover has dropped by more than 60% since the administration began sending out the clearing house death notices, and the value of the erroneous payments has dropped by a similar amount.

The Big Winners

Big banks, and those with lots of retired customers, are the biggest beneficiaries of this change.

For example, BankAmerica expects to save hundreds of thousands of dollars a year in administrative expenses alone by using computers to compile a list of dead customers who erroneously received benefit checks, rather than having people manually open the death notification letters from Social Security.

The bank also expects to reduce its losses from people who don't pay back Social Security payments made to dead people, said Barbara Konecky, a BankAmerica vice president and automated clearing house product manager.

Applause and an Award

The clearing house innovation was cited as an example of laudable innovation in a government report championed by the vice president in September, called "Creating a Government That Works Better & Costs Less."

The vice president wrote a congratulatory letter to Mr. Johnson that was read at an awards ceremony earlier this month, where Mr. Johnson received a $5,000 check from Chemical Banking Co. for winning a treasury management competition sponsored by Chemical and the Treasury Management Association, an association of corporate cash managers in Bethesda, Md.

Subscribe Now

Access to authoritative analysis and perspective and our data-driven report series.

14-Day Free Trial

No credit card required. Complete access to articles, breaking news and industry data.