The Best Way to Cut Government Spending: Get Really Tough on Fraud

Fraud and improper payments for government programs amount to $125 billion a year. Reducing those losses substantially would avoid a lot of painful cuts.

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David Axelbank / Gallery Stock

As America slides toward the fiscal cliff, both sides are debating ways to reduce the deficit in 2013 and also over the longer term. President Obama’s proposed budget for 2013 called for total deficit reduction of $4 trillion over six years – or more than $660 billion a year – based on a ratio of $2.50 in spending cuts for every $1 of tax increases. In fact, it wouldn’t be too hard to find additional revenues: The tax hikes currently scheduled to go into effect in 2013 consist of nine different categories accounting for as much as $539 billion. And only a fraction of that would be needed to meet revenue targets for any likely budget deal. What’s less clear is where spending cuts can be made, since most programs that could provide big savings remain off the table.

Fortunately, there is a way to begin reining in spending that would be painless: Get really tough on fraud.

The challenge on the spending side becomes clear if you consider the consternation caused by the so-called sequester, the cuts slated to go into effect automatically in 2013 if there is no budget deal. This program would slash $55 billion from defense, $38 billion from discretionary Federal spending and the rest from cuts to entitlements, for total savings of $109 billion a year. But the spending reductions needed over the coming decade to bring the U.S. budget into a sound condition would have to be several times as large as the sequester. To have any hope of reaching those goals, policymakers cannot afford to overlook savings that can be made relatively painlessly.

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As a percentage of total spending on entitlement programs, fraud has been reduced somewhat over the past decade. But the size of social programs has been growing so rapidly that the amount of money lost to fraud remains enormous in total dollar terms. Moreover, the recent stimulus program has created new opportunities for fraud, according to the FBI. Among the largest sources of improper payments:

Medicare & Medicaid – The Department of Health and Human Services pays for health care for more than 100 million Americans. Medicare currently spends nearly $600 billion and is projected to rise to $1 trillion by the end of the decade. Medicaid spending is harder to quantify because it is split between the Federal government and the States, but it currently totals more than $400 billion and is growing faster than Medicare. These amounts are so big that government health care accounts for the biggest chunk of fraud, ranging from overcharges for drugs and surgery to insurance claims that are totally bogus. For the 2011 fiscal year (2011-2012), the Department of Health and Human Services estimated that improper payments exceeded $64 billion.

Social Security – More than 56 million Americans receive more than $770 billion a year in Social Security payments. Regular Social Security payments are quite accurate, with overpayments running less than half a percent. Improper payments are much higher for Supplemental Security Income, which goes chiefly to low-income Americans who are aged, blind, or disabled. Last year, the Social Security Administration inspector general told a Congressional subcommittee that Social Security overpayments were about $6.5 billion, $4 billion of which was for Supplemental Security Income.

Food Stamps – The number of Americans on food stamps has soared from 28 million in 2008 to 46 million today. Spending totals about $80 billion a year and outright fraud accounts for less than $1 billion a year. Two to three times as much is lost, however, through benefits that go to ineligible households. Total improper payments amount to more than $3 billion annually.

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Similar losses to outright fraud, overpayment and payments to ineligible beneficiaries exist throughout Federal government programs. Figures released by the White House two weeks ago estimate that all types of improper payments now amount to 4.3% of entitlement spending. Defense-related improper payments are smaller in percentage terms but still a sizable amount of money.

If those rates could be cut by a quarter, the government would save around $30 billion a year. Such savings would greatly blunt the impact of proposed spending cuts. Indeed, savings from eliminating one-quarter of current fraud would reduce cuts from the sequester by more than 10% for defense and by more than 40% for nondefense spending. While that doesn’t offer a total solution to U.S. budget problems, it certainly makes sense to go after fraud aggressively before contemplating cuts that would do real harm to national security and the general welfare.