View all Articles
Commentary By Dustin Siggins

Uncle Sam Loses Millions to Improper Payments

Economics Tax & Budget

This year the federal government is projected to spend almost $4.1 trillion, with over $600 billion in deficit spending. According to a January Government Accountability Office (GAO) report and the White House’s, $144 billion was spent on improper payments last year. GAO reported that improper payments increased by $7 billion from FY 2015, mostly due to growing Medicaid costs. estimated that the rate of error was 4.7 percent.

However, both numbers undercount what is likely the full reality of improper payments.

Improper payments are defined as those payments that send too much or too little money to intended recipients. Programs with the rates of improper payments over 10 percent are Medicare fee-for-service, Medicaid, Earned Income Tax Credit, Unemployment Insurance, the national school lunch and breakfast programs, and two Veterans Affairs programs. Medicaid and Medicare fee-for-service account for $77 billion of the $144 billion, and Medicare Advantage Part C’s 10 percent improper payment rate totaled $16 billion.

In an e-mail, GAO Director of Financial Management and Assurance Beryl Davis said that these payments can sometimes be fraudulent as well as simple error.

Davis is the lead author of a regular GAO analysis of federal agencies’ abilities to audit their operations. Uncle Sam has tracked improper payments since a 2002 law signed by President George W. Bush.  In 2012, Congress began requiring federal examination of high-priority programs -- differentiated by having a higher threshold of concern.

The official 2016 error rate of 4.7 percent is lower than the 2015 rate of 4.8 percent, but it is an incomplete figure that – in keeping with a years-long tradition – creates the impression that taxpayer dollars are all being wisely spent.

It is impossible under current law to know precisely how much money is wasted on improper payments. First, the official error rate cited above is only accurate if the government includes the Pentagon’s Defense Finance and Accounting Service  Commercial Pay program. GAO noted in its report that OMB’s method of analysis on DFAS may not be reliable. Without including this program, the error rate would jump from 4.7 percent to 5.1 percent, since the agency spends $249 billion but has an alleged error rate of about $111 million.

Davis further explained that many programs are not required to report improper payments.

“Current law defines significant improper payments as gross annual improper payments (i.e., the total amount of overpayments and underpayments) exceeding (1) both 1.5 percent of program outlays and $10 million of all program or activity payments made during the fiscal year reported or (2) $100 million (regardless of the improper payment percentage of total program outlays).”

This means that many programs that have lower or higher error rates are simply not being reported.

How much of the federal government does not record improper payments? My calculation shows that 19.5 percent of the budget is not included in the GAO and estimates. Instead, the $144 billion comes from just 80.5 percent of the budget.

To its credit, the Obama administration greatly improved the share of dollars examined. My analyses of FY 2013 and FY 2015 showed that just 68 percent of the budget was examined in 2013, and about 75 percent in 2015. But the 2016 numbers still overlook one-fifth of the federal budget.

Veronique de Rugy, Senior Research Fellow at the Mercatus Center, said that the cost of improper payments and other inefficiencies in the federal government – such as fraud and duplication – fail to “include opportunity cost to taxpayers or impact on economic growth from government inefficiencies.” She also said that Democrats who “praise the low administration costs of these programs” ignore that “these low costs are due to the programs’ lack of attempt to end fraud, waste, and abuse.”

Improper payments are not the only problem facing taxpayers when it comes to accountability of agencies. For fiscal year 2015, 15 of 24 federal agencies were not able to fully account for their dollars in line with the 2012 law, according to Inspector General reports – and those agencies accounted for about 96 percent of improper payments in 2015.

Many opportunities for significant savings are available, such as the annual GAO reports on duplication. According to former Senator Tom Coburn, a Manhattan Institute fellow, duplication wastes at least $200 billion per year. Tens of billions in annual health care and military-specific savings have also been targeted by various policy experts and politicians. OMB did not respond to multiple requests for comment as to how the administration plans to better hold agencies accountable to taxpayers.

Greater transparency, such as that seen in Senator James Lankford’s (R-OK) bipartisan Taxpayer Right to Know Act, could help elected officials, bureaucrats, and the public collaboratively identify where dollars are misplaced.

The implications of wasted taxpayer dollars are significant, especially as U.S. debt continues to grow. The official $144 billion in improper payments totals $1,041 for each of the 138.3 million U.S. taxpayers – no small chunk of change for hard-pressed workers. On the policy front, $144 billion is about two-thirds more than the Department of Education’s 2015 budget, and could fund Medicaid expansion in 2018 17 times over. If either party was serious about compromise, Democrats could shift savings on wasteful spending to their favorite programs while Republicans could lower some taxes and reduce the deficit. 

Dustin Siggins is a contributor to Economics21.

Interested in real economic insights? Want to stay ahead of the competition? Each weekday morning, e21 delivers a short email that includes e21 exclusive commentaries and the latest market news and updates from Washington. Sign up for the e21 Morning Ebrief.