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Improper Payments Cost Taxpayers Billions

by Michael Tasselmyer / /

In June, the Senate introduced the Social Security Overpayments Fairness Act of 2014, a bill that would reinstate a 10-year limit on the period during which the Social Security Administration could recover improper payments to beneficiaries. The high frequency of improper payments on the federal level is a major issue for both government agencies and taxpayers, and it carries billion-dollar consequences.

While receiving a check without earning it doesn't seem likely, according to a recent report published by the Government Accountability Office (GAO), the chances of this happening to you are better than winning the lottery. Their study found that the government spent over $105 billion in improper payments last year, arising from outright fraud, clerical errors, or awards without the proper paperwork and verification.

The GAO conducts the study each year to determine which federal agencies are making wasteful payments and how to minimize the frequency of these payouts. Although improper payments have slowly decreased since 2010 (when they peaked at $121 billion), it is estimated that over the course of five years, about half a trillion dollars will be paid to ineligible individuals. That's $500 billion that could be circulating in the economy and fostering economic growth.

By providing funds or services to individuals without the proper medical documentation, entitlement programs are the largest contributors to wrongful payments. Here are some examples:

  • Medicare, alone, wrongly expended $50 billion dollars -- that's almost 18 billion Starbucks tall coffees.
  • Medicaid spent $14.4 billion in improper payments (enough for 1.6 billion monthly Netflix subscriptions).
  • Social Security wasted $2.4 billion, the equivalent of about 1 billion loaves of bread.

Whether it's coffee or bread, there are countless ways in which this money could be spent in the private sector, but the fact of the matter is improper payments represent a huge deadweight loss in the economy.

Fortunately, there are a number of options to reduce the incidence of improper payments. The first step to reducing these payouts relies on identifying the root cause of the issue, whether it's simply an accounting error or a high frequency of fraud. Secondly, government agencies can implement reforms such as data sharing and training programs to improve up-front validation of eligibility. Many of these steps will increase spending, however, so it is important that these agencies make the most cost effective reforms. Lastly, it's important for the agencies to identify instances of improper payments so that they can then quickly recover the lost funds. If agencies like the Social Security Administration can establish a more efficient and cost effective way to recover improper payments in a timely manner, then there will be no need to pursue indirect beneficiaries for funds allocated more than a decade before. Similarly, a transparent Social Security program with more uniform payments would make it significantly easier for the administration to determine when it has wrongly apportioned funds.

There is no doubt that tax and healthcare fraud pose a serious threat to taxpayers and the economy. With the total estimated costs of healthcare fraud exceeding $270 billion, more than $375 billion dollars in taxpayer funds are being wasted each year -- that's 7.5 percent of all federal tax revenues. Not only does this harm the taxpayer and hinder the recovery of the economy, it also sets tax levels at a higher rate than necessary. By cleaning up our system, we can lower the need for federal revenue and, in turn, leave a few extra dollars in each American's pocket.

Special thanks to NTUF Research Associate Steve Adams for authoring this post.