Follow the Money: Tackling Improper Payments — Rachel Greszler, Senior Research Fellow (March 31, 2022)
Summary
Testimony of Rachel Greszler, Senior Research Fellow in Economics, Budgets, and Entitlements, The Heritage Foundation, before the Subcommittee on Government Operations, Committee on Oversight and Reform, on Follow the Money: Tackling Improper Payments, dated March 31, 2022. The testimony states that the views expressed are the witness's own and not an official position of The Heritage Foundation. It says that, according to the Office of Management and Budget's 2021 reporting, improper payments totaled $281 billion in 2021, with an improper payment rate of 7.2 percent, up from $175 billion and a rate of 5.1 percent in 2019. It says there are trade-offs, like a seesaw, between improper payments and the ease with which individuals can access government benefits, and lists solutions including enforcing compliance with federal digital identity standards.
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“Follow the Money: Tackling Improper Payments — Rachel Greszler, Senior Research Fellow (March 31, 2022).”
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Follow the Money:
Tackling Improper Payments
Testimony before the
Subcommittee on Government Operations
Committee on Oversight and Reform
U.S. House of Representatives
March 31, 2022
Rachel Greszler
Senior Research Fellow in Economics, Budgets, and Entitlements
The Heritage Foundation
My name is Rachel Greszler. I am a Senior Ensuring the accuracy and expediency of
Research Fellow in Economics, Budgets, and federal payments is not an easy task as the two
Entitlements at The Heritage Foundation. The goals often run counter to one another. This is
views I express in this testimony are my own one reason why federal tax and transfer
and should not be construed as representing any programs are inherently less efficient than
official position of The Heritage Foundation. individuals keeping more of their own earnings
and being able to spend them without jumping
Elevated and growing global cybersecurity through necessary but bureaucratic hoops.
threats alongside expanding government
programs have heightened the need for greater Like a seesaw, there are trade-offs between
integrity within government programs. In improper payments and the ease with which
addition to hundreds of billions of taxpayers’ individuals can access government benefits. At
dollars that have been improperly distributed, a base level, some trade-offs will always exist,
the protection of Americans’ privacy, personal but the problem today is that we are not dealing
identities, and our national security require with a normal seesaw balancing on a two-foot
significant improvements in the integrity of base, but rather one with $3.9 trillion in federal
federal programs and payments. transfer payments underneath.1
1
Congressional Budget Office, “CBO’s Projections of November 2021, https://
Federal Receipts and Expenditures in the National www.cbo.gov/system/files/2021-11/57432-
Income and Product Accounts: 2022 to 2031,” NIPA.pdf#page=2 (accessed March 28, 2022).
Improving the integrity of federal programs (GDP) increased by 65 percent as total program
and payments requires limiting the size and payments rose 182 percent, and improper
scope of government programs so that there is payments surged 355 percent. Extending that
less bureaucracy for Americans to have to comparison from 2005 to 2021, GDP increased
navigate and fewer opportunities for criminals 76 percent, total program payments rose by 221
to steal Americans’ identities and tax dollars. percent, and improper payments increased 633
Commonsense security measures must be percent.
implemented and enforced to protect the
integrity of government programs.
In my testimony today, I would like to briefly
review the magnitude of improper payments
across the federal government and within a few
particular programs, including recommended
reforms; discuss widespread fraud and abuse in
the pandemic unemployment insurance (UI)
programs; and propose solutions that could
reduce both the rates and overall level of
improper payments across the federal
government.
Already Enormous Improper Payments
Surged in 2021
According to the Office of Management and
Budget’s 2021 reporting, improper payments
totaled $281 billion in 2021, with an improper
payment rate of 7.2 percent. 2 This is an
increase from $175 billion and a rate of 5.1
percent in 2019. At $281 billion in 2021,
improper payments were the federal
government’s 5th largest expenditure.
In general, improper payment amounts and
rates have been trending upwards over the past While not all improper payments are 100
15 years, from lows around $41 billion and 2.9 percent wrong payments, it is also highly
percent in 2006 and 2007 to amounts exceeding possible that a portion of fraudulent payments
$100 billion every year since 2020 and rates go undetected and are not captured in the
exceeding 4.0 percent in every year except improper payment total.
2013.
Some Simple Solutions to Address Rising
What has happened is that outsized growth in Improper Payments
government has led to exponential growth in
improper payments. Between 2005 and 2019, The online migration of government services
prior to the pandemic, gross domestic product has opened the door to widespread fraud and
PaymentAccuracy.gov, “Annual Improper Payments
2
https://www.paymentaccuracy.gov/payment-accuracy-
Database,” 2021 and 2015 Datasets, the-numbers/ (accessed March 25, 2022).
2
improper payments. No longer necessary to memorandum (OMB 19-17) that requires
physically walk into the Social Security federal agencies to implement the NIST
Administration or Unemployment Insurance Special Publication (SP) 800-63-3 and any
Office—government ID and supporting successive versions, most agencies simply are
documentation in hand—it has become far not doing this.
easier for individuals to file for and receive
benefits that they are not eligible for, and the Even login.gov, which is among the current
online format makes it possible for criminals to Administration’s primary tools—and one of its
steal people’s identities and illegally claim proposed solutions for cybersecurity—is not
government payments in their names. And yet, compliant with the NIST standards. Current
digital records, online filing, and direct transfer OMB Deputy Director for Management Jason
payments are extremely efficient for legitimate Miller testified during a March 17, 2022,
transfer payments. Senate hearing that login.gov is not where it
needs to be, noting that it “needs to be
Even as criminals become increasingly strengthened going forward,” including
sophisticated, information security systems, “stronger tools in place on identity
identity verification, and methods of eligibility verification.” 4 And login.gov is not a viable
determination are also continually evolving. option for the IRS, in part because of its limited
capacity and lack of standards.
Although no perfect standard nor system exists,
the National Institutes for Science and Simple solutions to reduce improper payments
Technology (NIST) has developed a set of government-wide include:
digital identity guidelines (NIST 800-63) that
provide excellent tools for public- and private- • Enforce compliance with federal
sector organizations. Compliance with these standards, including OMB
standards results in significant reductions in memorandum 19-17, “Enabling
fraud and improper payments. For example, Mission Delivery through Improved
states that implemented NIST-compliant Identity, Credential, and Access
eligibility checks during the surge in pandemic Management.”
unemployment insurance programs saw their • Set and enforce improper payment
fraudulent claims payouts plummet standards, such as limits on rates of
immediately, and reported hundreds of billions improper payments, for each program
of dollars in reported fraud prevention.3 with penalties for failure to achieve
standards.
While solid standards exist and the Office of • Optimize use of the government’s Do
Management and Budget (OMB) issued a Not Pay database
3
See, for example: Chorus Nylander, “N4T 25/californias-unemployment-fraud-20-billion
Investigators: State Says Security Measures Protected (accessed March 27, 2022).
$75 Billion from Unemployment Fraud,” News 4 4
Hearing, Pandemic Response and Accountability:
Tucson KVOA, October 1, 2021, Reducing Fraud and Expanding Access to COVID-19
https://www.kvoa.com/news/n4t-investigators-state- Relief through Effective Oversight, Committee on
says-security-measures-protected-75-billion-from- Homeland Security and Government Affairs, U.S.
unemployment-fraud/article_89c57b5e-2307-11ec- Senate, March 17, 2022,
921e-87637fd20932.html (accessed March 27, 2022), https://www.hsgac.senate.gov/hearings/pandemic-
and Adam Bee, “California’s Unemployment Fraud response-and-accountability-reducing-fraud-and-
Reaches At Least $20 Billion,” The Los Angeles Times, expanding-access-to-covid-19-relief-through-effective-
October 25, 2021, oversight (accessed March 27, 2022).
https://www.latimes.com/california/story/2021-10-
3
(donotpay.treasury.gov), including incorrectly were claimed by tax filers ineligible
clarifying which agencies must use the for the credit.”6
Do Not Pay database, and considering
ways to effectively share Social An analysis by my Heritage Foundation
Security’s master death file within the colleagues Robert Rector and Jamie Hall
system.5 reported that between 43 percent and 50
• Do not federalize cybersecurity percent of all EITC filings include
systems. The private sector and public overpayment claims, primarily due to income
sector should be learning from one misreporting and qualifying child/residency
another and maintaining a competitive errors.7
market for security services is crucial to
protecting taxpayers’ identities, their
hard-earned tax dollars, and our
national security.
While these solutions apply broadly across
government programs, individual programs
have different eligibility standards that
necessitate unique solutions.
Earned Income Tax Credit and
Additional Child Tax Credits
In 2021, improper payments in the Earned
Income Tax Credit (EITC) program totaled
$19.0 billion, with a 27.8 percent improper
payment rate. This is not an anomaly to the
pandemic. Over the past decade, improper
payments have averaged $16.4 billion and 24.7
percent. Virtually all of these improper
payments have been overpayments, primarily
to people who were ineligible for the credit. An
IRS audit publication from 2014 “found that
between 79% and 85% of EITC dollars claimed
5
See U.S. Government Accountability Office, Tax Credit Claimed on 2006–2008 Returns,”
“Improper Payments, Strategy and Additional Actions Publication 5162, August
Needed to Help Ensure Agencies Use the Do Not Pay 2014, https://www.irs.gov/pub/irs-
Working System as Intended,” GAO-17-15, October soi/EITCComplianceStudyTY2006-2008.pdf (accessed
2016, https://www.gao.gov/assets/690/680631.pdf March 26, 2022).
(accessed March 27, 2022), and U.S. Government 7
Robert Rector and Jamie Bryan Hall, “Reforming the
Accountability Office, “General Government: Use of Earned Income Tax Credit and Additional Child Tax
the Do No Pay Working System (2017-11),” last Credit to End Waste, Fraud, and Abuse and Strengthen
updated March 31, 2020, https://www.gao.gov/action- Marriage,” Heritage Foundation Backgrounder No.
tracker/general-government-use-do-not-pay-working- 3162, November 16, 2016,
system-2017-11 (accessed March 27, 2022). https://www.heritage.org/sites/default/files/2018-
6
U.S. Department of the Treasury, Internal Revenue 04/BG3162.pdf.
Service, “Compliance Estimates for the Earned Income
4
income information is received and
The Additional Child Tax Credit (ACTC), checked,
which is the refundable portion of the tax • Require enhanced income
credit, also has high improper payments and verification requirements for
rates. In 2021, improper payments for the individuals claiming self-employment
ACTC totaled $5.2 billion, with a 13.3 percent or small business income,
improper payment rate. Since the ACTC • Require the IRS to deny claims that
represents only about 40 percent of total Child do not include the required information,
Tax Credit Payments and ACTC improper and only pay claims if the individual
payments almost certainly include improper responds to the denial by providing the
payments within the non-refundable portion of required information,
the CTC, total improper payments in the CTC • Impose financial penalties for
are most certainly higher than $5.2 billion.8 If substantial income misreporting, and
the 13.3 percent ACTC improper payment rate • Only allow individuals with legal
were applied across the entire $117.6 billion in custody of children to claim the EITC
CTC and ACTC payments, improper payments and ACTC on their behalf.
would equal $15.6 billion. (The $117.6 billion
represents the Joint Committee on Taxation’s Medicare, Medicaid, and CHIP
2020 estimate for fiscal year 2020 child credits
and does not include any additional pandemic- In 2021, total Medicare improper payments
related credits or payments.)9 equaled $49.6 billion with an improper
payment rate of 7.0 percent. While Medicare
Policymakers in charge of these programs improper payment rates have generally been
should require, prior to payments, programs: declining in recent years, Medicare
Advantage’s improper payments surged by
• Verify the identity of individuals who $6.9 billion in 2021, as the improper payment
claim the EITC and ACTC, rate jumped from 6.8 percent to 10.3 percent.
• Confirm that the children for whom
they claim these credits actually exist, Both Medicaid and the Children’s Health
and Insurance Program (CHIP) have experienced
• Verify that the same child is not disturbing jumps in improper payments over
claimed on more than one tax return. the past three years. Between 2012 and 2018,
Medicaid averaged $27.1 billion per year in
Rector and Hall provide additionally improper payments, with a rate of 8.5 percent.
recommended reforms in the EITC and ACTC, In 2021, Medicaid’s improper payments
which they estimate could save taxpayers $19 totaled $98.7 billion, with an improper
billion annually. Some of those directives are:10 payment rate of 21.7 percent, meaning more
than one-in-five Medicaid dollars was an
• Require the IRS to fully verify improper payment.
income and not issue any refundable
EITC or ACTC payment until all
8
The Joint Committee on Taxation, “Estimates of 23-20, November 5, 2020,
Federal Tax Expenditures for Fiscal Years 2019–2023,” https://www.jct.gov/publications/2020/jcx-23-20/
December 18, (accessed March 26, 2022).
2019, https://www.jct.gov/publications.html?func=start 10
Rectory and Hall, “Reforming the Earned Income Tax
down&id=5238 (accessed March 26, 2022). Credit and Additional Child Tax Credit to End Waste,
9
Joint Committee on Taxation, “Estimates of Federal Fraud, and Abuse and Strengthen Marriage.”
Tax Expenditures for Fiscal Years 2020–2024,” JCS-
5
Even more disturbing is the jump in improper up costs, DPCs can often provide better
CHIP payments, which went from an average care at a lower cost.
of $851 million and a 7.7 percent rate between
2012 and 2018 to $5.4 billion and 31.8 percent Unemployment Insurance: How
in 2021. Nearly one-of-three CHIP dollars in Federal Pandemic Programs Resulted
2021 were improper payments.
in Highest Rates of Fraud in History
Many improper federal health care program The CARES Act, passed by Congress in
payments stem from an unnecessarily complex March 2020, included a dramatic expansion
and confusing payment process, which results of states’ unemployment insurance programs,
in significant clerical errors. Unnecessary with the federal government setting benefit
regulations, particularly related to levels and eligibility criteria and covering the
documentation, administrative work, and non- costs of the program expansions. These
market-based payments, also create an expansions simultaneously increased the
incentive for providers to improperly bill. incentive for fraud with higher benefits,
slashed states’ capacity to detect and prevent
An April 2018 Health Affairs research article fraud, and reduced states’ incentives for
provides a comprehensive review of the proper oversight.
complexity of these programs and their costs. Larger Benefits, Longer Durations.
In explaining the costly and burdensome billing Congress provided an unprecedented $600
and payment process, the authors note that weekly supplement to state unemployment
hospitals typically have more billing specialists insurance benefits from March 2020 through
than hospital beds, and physician offices spend July 2020, and an additional $300 weekly
$30 billion a year on billing costs.11 supplement from December 2020 through
September 2021, although about half of the
While there are many reforms necessary to states ended the additional $300 benefits
protect the integrity and efficiency of federal during the summer of 2021. Congress also
health insurance programs one broad directive increased the length of benefit availability by
and one specific reform are to: a factor of three, from the usual 26 weeks to
79 weeks. Combined, this led to a roughly
• Streamline or eliminate regulations eight-fold increase in the potential payout
that add to complexity and drive up from a single unemployment insurance claim,
improper payments. from $10,400 to $79,000.12
• Incorporate Direct Primary Care
(DPC) providers as an option within Expanded Coverage, Added Eligibility
federal health insurance programs. Criteria, and Reduced Verification. For
DPCs are innovative practice starters, Congress created a new program—
arrangements in which doctors contract the Pandemic Unemployment Assistance
directly with individuals for an annual program—to provide benefits to workers
or monthly fee. By eliminating who did not pay into the unemployment
bureaucracy and regulations that drive insurance systems. This included individuals
such as the self-employed, freelancers, and
11 12
Joshua D. Gottlieb, Adam Hale Shapiro, and Abe Peter Ganong, Pascal J. Noel, and Joseph S. Vavra,
Dunn, “The Complexity of Billing and Paying for “US Unemployment Insurance Replacement Rates
Physician Care,” Health Affairs, Vol. 37, No. 4, April During the Pandemic,” National Bureau of Economic
2018, Research Working Paper No. 27216, May 2020,
https://www.healthaffairs.org/doi/10.1377/hlthaff.2017. https://www.nber.org/system/files/working_papers/w27
1325 (accessed March 26, 2022). 216/w27216.pdf (accessed August 1, 2021).
6
gig workers, as well as others who may not on unemployment insurance benefits, making
have lost a job or income as a result of the them available for three times as long as
pandemic. usual, widening eligibility, and reducing
verification requirements, these expansions
opened the floodgates to individual fraud and
As Inspector General Larry D. Turner of the
abuse as well as large-scale criminal
U.S. Department of Labor testified on March
enterprises stealing Americans’ identities and
17, 2022,
taxpayers’ money. These unfettered
expansions even caused national security
The expanded coverage offered under the risks, including the Chinese military breaking
PUA [Pandemic Unemployment into some states’ unemployment insurance
Assistance] program posed significant systems.14
challenges to states as they implemented
Unemployment insurance fraud has been so
processes to determine initial and
high that the Office of Inspector General
continued program eligibility for
(OIG) is investigating or reviewing more than
participants. The reliance solely on
143,000 complaints of fraud—a more than
claimant self-certifications without
1,000 times increase in the volume of UI
evidence of eligibility and wages during the
work—and UI fraud investigations account
program’s first 9 months rendered the PUA
for 94 percent of the Inspector General’s
program extremely susceptible to improper
cases, compared to 11 percent prior to the
payments and fraud.13
pandemic.15
The Federal Trade Commission (FTC)
In addition to adding coverage for new groups
reported a 27-fold increase in identity theft
of workers, Congress added broad-reaching
claims related to government benefit
new eligibility criteria—such as being
programs during the pandemic. Between the
“impacted” by school or daycare closures,
one-year period leading up to March 2020
quitting one’s job for reasons related to
and the one-year period afterwards, 23,471
COVID-19, losing partial income, or the very
identity theft reports from individuals who
broad qualification of having one’s
said their personal information had been used
employment be “affected” by COVID-19—
to obtain a government document or claim a
that were difficult if not impossible to verify.
government benefit spiked from 23,471 to
Widespread Fraud and Identity Theft. By 636,520.16
putting an unprecedentedly high dollar value
13
Larry D. Turner, “Pandemic Response and 15
Turner, “Pandemic Response and Accountability:
Accountability: Reducing Fraud and Expanding Access Reducing Fraud and Expanding Access to COVID-19
to COVID-19 Relief through Effective Oversight,” Relief through Effective Oversight.”
testimony before the Committee on Homeland Security 16
See Tableau Public, “Identity Theft Reports by the
and Governmental Affairs, U.S. Senate, March 17, Federal Trade Commission,” Federal Trade
2022, Commission Consumer Sentinel Network Report,
https://www.hsgac.senate.gov/imo/media/doc/Testimon https://public.tableau.com/app/profile/federal.trade.com
y-Turner-2022-03-17-REVISED.pdf (accessed March mission/viz/IdentityTheftReports/TheftTypesOverTime
26, 2022). (accessed August 2, 2021), and Federal Trade
14
Sean Lyngaas, “Cybersecurity Firm Says Chinese Commission, “Protecting Consumers During the
Hackers Breached Six US State Agencies,” CNN, COVID-19 Pandemic: A Year in Review,” April 16,
March 8, 2022, 2021,
https://www.cnn.com/2022/03/08/politics/china- https://www.ftc.gov/system/files/documents/reports/pro
hacking-state-governments-mandiant/index.html tecting-consumers-during-covid-19-pandemic-year-
(accessed March 28, 2022).
7
While the pandemic unemployment insurance were issued to names of California prison
expansions created the perfect storm, states’ inmates. 21 This demonstrates the problem
unemployment insurance systems were in when those administering a program have
desperate need of modernization and little stake in its integrity. With the federal
improved oversight long before the government footing the bill, states had less
pandemic. According to the OIG, incentive to prevent inaccurate payments. But
it also demonstrates fundamental flaws in
The unprecedented infusion of federal funds
programs even prior to the pandemic, such as
into the UI program gave individuals and
the need for checks against do-not-pay
organized criminal groups a high-value
databases, and the provision of basic privacy
target to exploit. That, combined with easily
protections in the distribution of program
attainable stolen personally identifiable
information.
information and continuing UI program
weaknesses identified by the OIG over the We Do Not Even Have an Accurate
last several years, allowed criminals to Count of Improper UI Payments
defraud the system.17
According to the Department of Labor OIG,
Despite widespread knowledge of flawed the Department’s Employment and Training
government systems and ample oversight Administration estimated an 18.7 percent
recommendations, both state and federal improper payment rate within the Pandemic
government agencies have often failed to Emergency Unemployment Compensation
implement the reforms needed to protect the (PEUC) and Federal Pandemic
integrity of their programs. Unemployment Compensation (FPUC)
For example, the Los Angeles Times reported programs, and it has not yet provided an
that although the California state auditor estimated improper payment rate for the
recommended in March 2019 that the largest, and arguably most susceptible-to-
Employment Development Department fraud PUA program. 22 An 18.7 percent
(EDD) stop including Social Security improper payment rate across the estimated
numbers in its mailed documents, the EDD $872.5 billion in pandemic unemployment
continued to send out 38 million pieces of insurance benefits would mean a minimum of
mail containing Social Security numbers after $163 billion in improper payments.
the onset of the pandemic.18 Of the California Yet, as the OIG notes, the estimated 18.7
EDD’s estimated 10 percent to 27 percent of percent improper payment rate is based on the
fraudulent benefits paid out, 19 35,000 experience of the regular UI programs (not
checks 20 totaling $810 million in payments the actual pandemic ones). The OIG notes,
review/covid_staff_report_final_419_0.pdf (accessed Numbers,” January 16, 2021,
July 6, 2021). https://www.edd.ca.gov/Unemployment/pdf/fraud-info-
17
U.S. Department of Labor, Office of Inspector sheet.pdf (accessed July 6, 2021).
General, “DOL–OIG Oversight of the Unemployment 20
Jack Kelly, “The Most Brazen $400 Billion
Insurance Program.” Unemployment Funds Heist in History,” Forbes, June
18
Patrick McGreevy, “Despite Reports of 12, 2020,
Unemployment Fraud, California Keeps Sending Mail https://www.forbes.com/sites/jackkelly/2021/06/12/the-
with Social Security Info,” Los Angeles Times, most-brazen-400-billion-unemployment-funds-heist-in-
November 19, 2020, history/?sh=b3bbd302020e (accessed July 6, 2021).
https://www.latimes.com/california/story/2020-11- 21
Bee, “California’s Unemployment Fraud Reaches At
19/california-edd-unemployment-social-security- Least $20 Billion.”
numbers-fraud-forms (accessed June 29, 2021). 22
Turner, “Pandemic Response and Accountability:
19
State of California Employment Development Reducing Fraud and Expanding Access to COVID-19
Department, “California Unemployment: Fraud by the Relief through Effective Oversight.”
8
“Based on the OIG’s audit and investigative unemployed people, clearly indicating a
work, the improper payment rate for massive amount of improper payments.25
pandemic UI programs is likely higher than
18.71 percent.”
Some researchers have estimated improper
payment rates approaching 50 percent within
the pandemic unemployment insurance
programs. For example, Blake Hall, CEO of
the authentication company ID.me, said, “The
fraud rates that we’re seeing are over 10 times
what we usually see at federal agencies.” 23
Hall, whose company works with about two
dozen states to detect fraudulent benefit
claims, estimates that unemployment fraud
has potentially cost taxpayers $400 billion.
My Estimate: $357 Billion in
Unemployment Insurance Payments
Sent to People Who Were Not
Unemployed
From the onset of the pandemic, I followed
weekly Unemployment Insurance (UI) claims
payments and monthly unemployment A very conservative estimate of the number
reports and noticed that UI payments were of fraudulent or improper payments comes
regularly far greater than the number of from assuming that 100 percent of all
unemployed people. This led me to conduct unemployed people filed for and received
an analysis aimed at providing a lower-bound unemployment insurance benefits and
estimate of the number of UI payments that comparing that figure with the total amount of
were going to people who were not actually benefits that were paid out.26
unemployed.
Providing unemployment benefits to 100
Typically, only about 35 percent to 40 percent percent of all unemployed workers would
of unemployed workers receive have resulted in 807 million benefit checks,
24
unemployment insurance benefits. Between compared to the 1.365 billion checks that
April 2020 and May 2021, the number of went out the door. That means at least 557
people receiving unemployment benefits million benefit checks went to people who
averaged 176 percent of the number of
23
Consumer Bob and Nicholas Kjeldgaard, or choosing not to file for benefits due to short spells of
“Unemployment Benefits Fraud Could Cost $300 unemployment.
Billion Nationwide,” NBC San Diego, March 24, 2021, 25
U.S. Department of Labor, Employment and Training
https://www.nbcsandiego.com/news/local/unemployme Administration, Office of Unemployment Insurance,
nt-benefits-fraud-could-cost-300-billion- “UI Weekly Claims,” data archive,
nationwide/2558796/ (accessed July 6, 2021). https://oui.doleta.gov/unemploy/claims_arch.asp
24
There are various reasons why not all unemployed (accessed June 30, 2021).
26
workers collect unemployment benefits, including not Many people who were unemployed did not file for or
participating in the UI system due to self-employment, receive UI benefits for a variety of reasons, which
not having worked long enough to qualify for benefits, makes this a conservative estimate.
9
were not actually unemployed.27 Translating verification provider (ID.me), its claims fell
that across total program costs of $873 by 99 percent.29
billion28 implies that at least $357 billion in UI programs are state-run and thus policies to
payments went to people who were not strengthen them should be state-driven, but
actually unemployed. considering that the massive pandemic UI
fraud was born by federal taxpayers, both
federal and state lawmakers should act to
reduce improper payments:
• Federal policymakers: Do not
impose UI eligibility rules on states.
By compelling policies on states that
they could not securely and
effectively carry out, the federal
government made it extremely
difficult to protect the integrity of
taxpayers’ dollars.
• Federal policymakers: Make
federal funds for state UI programs
conditional on meeting security
compliance (such as meeting NIST
standards), as such standards
drastically reduce fraud.
• State policymakers: Modernize UI
programs.
• State policymakers: Ensure ID
verification through programs that
Even with outdated systems, states failed to meet state-adopted security standards.
perform some very basic checks. Some states • State policymakers: Ensure
had weeks in which a majority of UI claims eligibility through improved sharing
were made by people with out-of-state IDs, of state-based data.
who presumably did not live in the state and
thus should have been automatically • State and federal policymakers:
ineligible. Arizona reported that in the Restrict UI programs to UI-
summer of 2020 it was receiving more UI participating individuals and
claims than its entire workforce, but after businesses as this provides
partnering with a certified identity verification of eligibility and
accountability of finances.
27
For a full explanation of the analysis, see Rachel Insurance Program,” June 10, 2021,
Greszler, “A Warning Against Embedding Problematic https://www.oig.dol.gov/doloiguioversightwork.htm
Pandemic Unemployment Benefits,” Heritage (accessed June 29, 2021).
Foundation Backgrounder No. 3637, July 13, 2021, 29
Nylander, “N4T Investigators: State Says Security
https://www.heritage.org/sites/default/files/2021- Measures Protected $75 Billion from Unemployment
07/BG3637.pdf. Fraud.”
28
U.S. Department of Labor, Office of Inspector
General, “DOL–OIG Oversight of the Unemployment
10
structure incentivizes longer periods of
unemployment and often fails to meet
Limited Government Can Minimize workers’ basic income needs. 30 Individuals
Improper Payments, Maximize and families would be better off receiving
Personal Autonomy their share of UI taxes and putting it into a
Universal Savings Account to access based
Both prior to and since the pandemic, the size
on their unique needs.
and scope of government has expanded, and
large legislative packages have been
Tax Credits Are Inherently Complex and
proposed that would include socialist
Inefficient and Drive up Marginal Rates.
programs that require individuals to submit to
Tax credits require the federal government to
the federal government in order to access
levy higher tax rates now or in the future to
everyday goods and services. All of those
make up for the revenue lost from the credits.
programs would come with huge potential for
Higher tax rates discourage work and
improper payments, and also with eligibility
savings—which leads to lower incomes and a
criteria and verification processes that would
smaller economy. Further deadweight loss
slow down individuals’ ability to obtain the
comes from the inefficiency of those credits.
things they need when they need them. Below
Furthermore, so-called “refundable tax credits”
are just a few examples of how the process of
involve the IRS sending cash benefits to
utilizing a government program to obtain
individuals and should be more correctly
something individuals could otherwise get on
considered spending programs. A May 2021
their own can increase improper payments
report from the Treasury Department’s
and limit individuals’ incomes and autonomy:
Inspector General for Tax Administration
Unemployment Insurance Amounts to suggests that improper payment rates are
Forced “Savings” with Limited Access. inherent to the nature of government programs:
Although employers pay the taxes that fund
UI programs, workers ultimately bear the cost Although error rates for each of these
of those taxes through lower wages and credits remain high, the IRS attributes
benefits. Thus, UI programs are effectively a these refundable tax credit overclaims
means of forced savings, but with rigid rules to their statutory design and the
and a bureaucratic process required to access complexity taxpayers face when self-
the savings. Moreover, benefits are certifying eligibility for the refundable
determined by bureaucrats without regard to tax credits and not to internal control
individuals’ needs. While one worker may weaknesses, financial management
need to replace 100 percent of her earnings deficiencies, or reporting failures.31
for four weeks, another 60 percent of his
earnings for 12 weeks, and another could get The Child Tax Credit is one such example of
by with 50 percent wage replacement for an inefficient credit—and one which some
eight weeks, UI programs pay a standard policymakers seek to significantly expand. The
benefit for a standard number of weeks, Additional Child Tax Credit has a 12 percent
regardless of unique circumstances. This improper payment rate, 32 and proposals to
30
Congressional Budget Office, “Economic Effects of 31
Treasury Inspector General for Tax Administration,
Additional Unemployment Benefits of $600 per Week,” “Improper Payment Rates for Refundable Tax Credits
Letter to the Honorable Charles Grassley, June 4, 2020, Remain High,” May 10, 2021,
https://www.cbo.gov/system/files/2020-06/56387- https://www.treasury.gov/tigta/auditreports/2021reports
CBO-Grassley-Letter.pdf (accessed August 1, 2021). /202140036fr.pdf (accessed March 27, 2022).
32
Ibid.
11
permanently enact the American Rescue Plan’s Childcare Subsidies: Potentially High Error
expanded tax credits—which take the form of Rates, Risk for Children’s Identities.
monthly payments of $250 to $300 per child President Biden has proposed to spend $225
without any work requirement—could billion of taxpayers’ dollars to provide
significantly increase improper payments. subsidies for the childcare of virtually all
young children in the U.S. Setting aside the fact
For starters, the increased amount, from that these subsidies would disproportionately
between $1,400 and $2,000 per year to between benefit wealthy, city-dwelling families while
$3,000 and $3,600 per year, would entice more driving up the cost and limiting the supply of
people—whether criminals or family members childcare for others, 35 these payments would
who are not entitled to the payments—to likely have very high rates of improper
wrongly claim them. By removing the current payments, similar to the Earned Income Tax
child tax credit requirement that individuals Credit (27 percent improper payments in 2021)
have reported taxable income to claim the and Obamacare Subsidies (27 percent
credit, it would be easier for people to falsely improper payments in 2019—the most recent
claim monthly child payments. And the estimate available).36
monthly delivery of nearly 900 million child
payments (as opposed to the current 70 million In addition to improper payments, we already
annual payments) based on individuals’ prior know that many parents would lack access to
years’ tax filings could result in payments eligible childcare programs, the subsidies
delivered to the wrong addresses or wrong would drive up the cost of childcare by as much
bank accounts. 33 I estimate that improper as 100 percent, and the majority of families that
payments could increase by $19 billion to $40 use faith-based childcare would not be able to
billion per year.34 receive subsidies at those providers. Putting
government—instead of parents—in charge of
Most families, and the children in them who childcare would mean higher costs, fewer
will effectively have to pay for the child childcare options, and smaller after-tax
payments their parents receive through higher incomes.37
taxes on their future earnings, would be better
off with lower tax rates on their earnings Government Paid Family Leave Inferior for
throughout their lifetimes. Workers and Ripe with Privacy and Fraud
Concerns. Among the many other government
33
There were an estimated 74.1 million children ages March 19, 2021, https://taxfoundation.org/expanded-
zero through 17 in the U.S. in 2021. Multiplying this child-tax-credit-permanent/ (accessed August 1, 2021).
figure by 12 equals 890 million monthly child 35
Rachel Greszler, “Government Childcare Subsidies:
payments. The current Child Tax Credit excludes 17- Whom Will They Help Most?,” Heritage Foundation
year-olds, resulting in roughly 70 million children ages Issue Brief No. 5231, October 20, 2021,
16 and under in 2021. Child population figures: https://www.heritage.org/sites/default/files/2021-
Childstats.gov, “POP1 Child population: Number of 10/IB5231.pdf.
children (in millions) ages 0–17 in the United States by 36
U.S. Treasury, “Improper Payment Rates for
age, 1950–2019 and projected 2020–2050,” Refundable Tax Credits Remain High.”
https://www.childstats.gov/americaschildren/tables/pop 37
Rachel Greszler, “The Role of Childcare in an
1.asp (accessed August 1, 2021). Equitable Post-Pandemic Economy,” testimony before
34
Author’s estimates based on improper payment rates the Subcommittee on Economic Policy, Committee on
ranging from 12 percent (ACTC) to 27 percent (EITC) Banking and Urban Affairs, U.S. Senate, June 23, 2021,
and $1.6 trillion estimated cost of making the ARP https://www.banking.senate.gov/imo/media/doc/Greszl
child payments permanent in Erica York and Huaqun er%20Testimony%206-23-21.pdf (accessed March 28,
Li, “Making the Expanded Child Tax Credit Permanent 2022).
Would Cost Nearly $1.6 Trillion,” Tax Foundation,
12
programs the Biden Administration seeks to account for whatever needs arise.40
establish is a federal paid family leave When taxed less, Americans can
program. Unlike receiving paid family leave save more, and when they have more
through an employer—who already has the savings, they have less need to
individual’s information, regularly sends them navigate complex, eligibility-based
paychecks, and has a good gauge of the social programs.
legitimacy of the individual’s paid family leave
claim—qualifying for and receiving paid Summary
family leave benefits from a federal program
would require individuals to provide Improper government payments are at
significant personal, medical, and financial unacceptable levels, exceeding $281 billion in
information and then wait weeks or longer to 2021 (even excluding many programs like
find out if they are eligible to take leave from Obamacare subsidies), with some programs
work, including for an issue that may have improperly paying more than one of every four
required immediate leave.38 When Washington dollars.
State’s program began, workers were having to
wait weeks and months after they needed to Preventing improper payments requires three
take paid leave just to find out if they were key components: identifying whether
eligible for it. 39 This would also provide individuals filing for benefits are who they say
opportunities for criminals to file fraudulent they are, verifying that they are eligible for the
claims on behalf of individuals, and for benefits they claim, and limiting the number of
improper payments based on false or mistaken government programs Americans need to
eligibility claims. interact with in their everyday lives.
To simultaneously create a more efficient The disastrous pandemic UI programs
government, give individuals more demonstrate the massive consequences of
autonomy and income, and reduce improper failure on all three of these components. As
payments, policymakers should: cybersecurity threats will only continue to
grow and improper payments have been
• Reduce and/or eliminate tax expanding at an exponential rate, it is
credits in favor of lower overall tax imperative that policymakers learn from these
rates. failures and act now to better protect
• Reject new and expanded Americans’ hard-earned tax dollars and
entitlement programs in favor of personal identities.
policies that would empower
individuals over bureaucrats. While standards exist to significantly improve
• Enact Universal Savings Accounts identity verification, as do program-specific
(USAs) so that more Americans can policy reforms that would enhance eligibility
save in a single, simple, tax-free verification, many government agencies are
38
Rachel Greszler, “4 Reasons Why Liberal Politicians and-labor/commentary/coronavirus-shows-government-
Should Abandon Federal Takeover of Paid Family paid-leave-bad-fit-employees-needs.
Leave,” Daily Signal, October 28, 2021,
https://www.heritage.org/jobs-and- 40
Adam N. Michel, “Universal Savings Accounts Can
labor/commentary/4-reasons-why-liberal-politicians- Help All Americans Build Savings,” Heritage
should-abandon-federal-takeover-paid. Foundation Backgrounder No. 3370, December 4,
39
Rachel Greszler, “Coronavirus Shows Government 2018, https://www.heritage.org/taxes/report/universal-
Paid Leave a Bad Fit for Employees’ Needs,” Daily savings-accounts-can-help-all-americans-build-savings.
Signal, March 8, 2020, https://www.heritage.org/jobs-
13
not applying these standards or implementing
the necessary policy changes. This includes
failure of agencies to take actions that they are
already capable of or are supposed to be doing
on their own, and policy changes that require
administrative or legislative action.
In addition to taking needed measures to
protect the integrity of existing government
programs, policymakers should also seek to
limit the number of government programs with
which Americans need to interact. Not only are
government programs a source of improper
payments and a potential for identity theft, but
they replace personal autonomy and
opportunity with bureaucratic control and
smaller incomes, ultimately leaving many
people worse off. Policymakers could better
protect taxpayers’ dollars by taking less in
taxes to begin with so that Americans can
decide—without bureaucratic approval—what
they want to spend their money on and when
they want to spend it.
14
** * * * * * * * * * * * * * * * * * *
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exempt under section 501(c)(3) of the Internal Revenue Code. It is privately supported and receives
no funds from any government at any level, nor does it perform any government or other contract
work.
The Heritage Foundation is the most broadly supported think tank in the United States. During 2020,
it had hundreds of thousands of individual, foundation, and corporate supporters representing every
state in the U.S. Its 2020 operating income came from the following sources:
Individuals 66%
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Program revenue and other income 14%
The top five corporate givers provided The Heritage Foundation with 1% of its 2020 income. The
Heritage Foundation’s books are audited annually by the national accounting firm of RSM US, LLP.
Members of The Heritage Foundation staff testify as individuals discussing their own independent
research. The views expressed are their own and do not reflect an institutional position of The Heritage
Foundation or its board of trustees.
15
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