How $137 Billion Strangely Disappears

In fiscal year 2018, $137 billion was paid “improperly” by the federal government, according to a recent report. That number sums all the improper payments by what the government calls high-priority programs. They are programs with improper-payments estimates exceeding $2 billion annually.

If it makes your head spin, it should.

Always the optimist, I have tried hard to find some good news in this year’s number. I have been tracking such improper payments for a while, and I am happy to report that, while they grew dramatically between their FY2013 level ($106 billion) and FY2015 ($137 billion), they haven’t gone up since.

Now that’s where the good news stops, I am afraid. In 2015, the $137 billion was spread over 15 programs. The $137 billion in improper payments in 2018 is spread over 12 programs. In other words, each program’s improper payments have grown.

Now, not all of these improper payments are the result of fraudulent activities. Some of them, which include overpayments as well as underpayments, might result from clerical error, from an innocent failure to confirm that a recipient is eligible to receive the amount of money that is disbursed, or from any violation of federal guidelines or rules.

While that may not sound as bad, these are still large-scale mistakes, errors that Uncle Sam continues making year after year in all impunity.

Interestingly, although not surprisingly, most of the government’s “high-error programs” are social welfare programs, which are fairly well-known for having low administrative costs in part because of poor oversight. The highest dollar amount of improper payments comes from Medicaid. The program registered $36.2 billion in improper payments, or almost 10 percent of the $370 billion paid out to beneficiaries in 2018 in total. Second-highest is Medicare’s fee-for-service program, with improper payments totaling $31.8 billion (or 8.12 percent of that program’s total payments). If you add the $15.6 billion in improper payments under Medicare Advantage (Part C) to the other two health care programs, you get 60 percent of all improper payments on the list.

Traditionally, the highest rate of improper payments comes from the Earned Income Tax Credit (EITC) program. Not this time. In 2018, the distinction goes to the Veterans Health Administration VA Community Care Program, with an error rate of 105 percent! Basically, all of this program’s $8 billion in payments were improper. The tremendous level in this program’s improper payments (and the program wasn’t on the list of high-error programs before) isn’t the result of a sudden increase in payments going to the wrong parties, or paid in the wrong amounts, or paid twice or more for the same service. Instead, it seems to be the result of changes made in what the VHA is counting as improper payments —  for instance, all the “transactions that did not follow acquisition regulations.” Nevertheless, such a stupendous error rate should make us wonder what’s going on.

The EITC is hardly off the hook, though. The $18.4 billion in improper EITC payments represents a substantial portion — 25.06 percent — of the EITC’s total 2018 spending of $73.6 billion. That’s right. A full quarter of the program’s payments were improper.

This high error rate is not new. In fact, the EITC is well-known for its high error rate. Ironically, the program is administered by the Internal Revenue Service, a government agency that isn’t known for its leniency toward taxpayers making reporting mistakes. Unfortunately, this fact has had no impact whatsoever on the unconditional support and praise the program receives from both the political left and right. In fact, not only has EITC funding expanded, from $65 billion in FY2015 to its current level, but this program is on everyone’s wish list for yet further expansion. Chris Edwards of the Cato Institute and I do not share this wish; indeed, we have written that the EITC should be terminated.

Also on the improper-payments list are programs with very low rates of error but massive dollar amounts of improper disbursements. One such program is Social Security’s Retirement, Survivors, and Disability Insurance (RSDI). While its improper-payment rate is only 0.68 percent, that’s still some $6.2 billion of payments gone wrong. This low rate is easily explained by the large overall amount of benefit payments made by this agency ($910 billion in 2018). However, just because a program has a low reported rate of error doesn’t mean that taxpayers shouldn’t be displeased.

Now, if I were the one measuring improper payments by government, I would include all payments made as a result of expansions in people’s eligibility to receive money from government programs. Many such programs distribute taxpayer funds to people under questionable — and in some cases, highly objectionable — circumstances. I am thinking here of programs such as the Supplemental Nutrition Assistance Program and the Social Security Disability program. Then, I would add in all the programs that have no place being funded at the federal level or with taxpayers’ dollars (corporate welfare, transportation, and education spending come to mind). Some of these programs are both inappropriately funded at the federal level and have expanded beyond the original intent of the program because of very questionable changes to eligibility standards. Needless to say, my list would be much bigger!

But while we can debate the merits of whether government should be involved in certain activities (like extending loans to small businesses or for green energy), policy makers at least should agree not to tolerate the high levels of improper payments currently made by many existing programs. The difficulty is that the government has grown so big that no one is accountable for improper payments. With a government so large, it is delusional to believe that there is any form of meaningful oversight going on, especially when no one seems to care at all. The best evidence for my gloomy conclusion is provided by this report, which lays out the numbers in ways easy to understand but will have no noticeable impact.

Year after year, I complain. And year after year, high rates of improper payments occur.

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Veronique de Rugy

AIER Senior Fellow Veronique de Rugy is also a Senior Research Fellow at the Mercatus Center at George Mason University and a nationally syndicated columnist. Her primary research interests include the US economy, the federal budget, homeland security, taxation, tax competition, and financial privacy.