Romina Boccia and Tyler Turman
Congress is gearing up for another potential reconciliation bill. If it moves forward, Congress should pursue reforms that curb waste, fraud, and abuse in federal welfare programs.
A new Cato Institute briefing paper examines the design flaws that drive misspending in five major federal welfare programs and outlines reforms to address them. The programs are the Supplemental Nutrition Assistance Program (SNAP, formerly known as Food Stamps), Medicaid and the Children’s Health Insurance Program (CHIP), child nutrition programs, Temporary Assistance for Needy Families (TANF), and the Supplemental Security Income (SSI).
Financial mismanagement in these programs takes numerous forms:
- Improper payments, including underpayments and overpayments resulting from administrative errors and outright fraud. Minnesota’s Feeding Our Future nonprofit billed a federal child nutrition program for 125 million meals never served, defrauding federal taxpayers of nearly $250 million. One Arizona-based company fraudulently billed Medicaid $650 million for substance abuse services that were never or insufficiently provided.
- Manipulation of program rules, such as exploitation of financing gimmicks, waiver authorities, and eligibility loopholes to maximize federal funding, avoid accountability, or redirect federal dollars beyond programs’ intended purposes. Forty-three states and the District of Columbia use broad-based categorical eligibility in SNAP to circumvent federal eligibility requirements, in some cases enabling millionaires and lottery winners to qualify for food stamp benefits. States have also used TANF’s loose spending rules to turn it into a slush fund to plug budget shortfalls, directing federal funds toward volleyball stadiums and college scholarships.
These problems are largely driven by two reinforcing weaknesses:
- A financing mismatch, whereby states process applications and distribute benefits while federal taxpayers finance most, or all, of the expenditures. This leaves states with weak incentives to enforce eligibility standards, invest in fraud prevention, or control waste, since the consequences of financial mismanagement fall overwhelmingly on federal taxpayers. SNAP is more than 90 percent federally funded, and Medicaid is approximately 70 percent federally funded after accounting for the financing gimmicks states use to inflate their reported spending and draw additional federal matching funds.
- Administrative complexity is made worse by outdated verification systems, reliance on self-reported eligibility data, and underutilized fraud-prevention tools, such as the Treasury’s Do Not Pay system. The Social Security Administration has failed to use readily available verification tools to check recipients’ financial accounts for SSI eligibility, with the agency’s inspector general estimating that $2 billion in SSI overpayments in fiscal year 2023 could have been prevented.
Addressing these problems requires structural reforms that align incentives, modernize verification systems, and hold program administrators accountable for poor outcomes. Congress began that work with the One Big Beautiful Bill Act (OBBBA), which strengthened program integrity in Medicaid and SNAP.
This newly released brief recommends ways for Congress to build on those reforms and bring similar accountability measures to child nutrition programs, TANF, and SSI.
Congress can save federal taxpayers nearly $6 trillion over the next decade by adopting the structural reforms proposed in this brief, namely eliminating federal funding for SNAP ($550 billion), TANF ($91 billion), and child nutrition programs ($262 billion), and converting Medicaid and CHIP into a zero-growth block grant ($5 trillion).
These reforms would help address the structural incentive problems that drive widespread financial mismanagement in these programs by giving states a direct financial stake in their performance.
Short of significantly reducing the federal government’s role in welfare provision, Congress can pursue reforms that strengthen verification systems, enhance oversight, and reduce abuse to save federal taxpayers nearly $500 billion over the next decade by eliminating provider taxes in Medicaid ($386 billion), ending broad-based categorical eligibility in SNAP ($100 billion), raising the Community Eligibility Provision threshold to 60 percent in school food programs ($3 billion), and eliminating TANF’s contingency fund ($6 billion).
If the federal government continues to operate and fund welfare programs, it has an obligation to ensure that taxpayer dollars are not lost to preventable waste, fraud, and administrative failures.
Read the full briefing paper here.