(Dow Jones) A little-noticed law could soon result in smaller Social Security checks for hundreds of thousands of the elderly and disabled who owe the U.S. money from defaulted loans and other debts more than a decade old.
Social Security benefits are off-limits to such creditors as credit-card issuers and banks. But the U.S. can collect debts to federal agencies by "offsetting," or withholding Social Security and disability payments.
The Treasury withholds benefits of 3.1 million Social Security recipients to recover defaulted student, farm and small-business loans, unpaid income taxes, amounts veterans owe for health care, and other debts to the government. Previously, the U.S. wasn't able to withhold Social Security payments to recover most debts delinquent for more than 10 years.
But a provision in the 2008 Farm Bill lifted the 10-year statute of limitations on the government's ability to withhold Social Security benefits in collecting debts other than student loans-for which the statute of limitations was lifted in the 1990s-and income taxes, where the limit remains 10 years.
This means that a person who defaulted on a small-business loan in 1995 and who is receiving Social Security could be notified that benefits may be reduced each month until the debt, with interest, fees and penalties, is paid. The Treasury can withhold 15% of the benefit, though it can't be reduced to less than $750. Tax debts don't have that $750 floor.
The change will add more than $6 billion to the $75 billion in delinquent debt individuals owe the government, according to the Financial Management Service, the Treasury's debt-collection unit.
A Treasury spokesman says the change "allows Treasury's Financial Management Service to collect older debts and levels the playing field so that all eligible debts, regardless of age, are subject to debt collection."
Few argue that people shouldn't repay their debts. Still, the change comes as older Americans already are pinched by mortgage woes, pension cuts and rising medical costs.
The shift applies to debtors of all ages, but Social Security recipients will bear much of the brunt. A Wall Street Journal analysis of Treasury Department data shows that Social Security recipients comprise a large and rising percentage of people from whom Treasury recovers debts.
For years, most debt the Treasury collected through its "Offset Program," came from withholding income-tax refunds. But with an aging population and steep unemployment, roughly 10% of the $4.3 billion in debts collected by the Treasury came from Social Security benefits in 2008, the latest data available, up from 1.6% in 2001, according to Journal computations that the Treasury confirms.