In his State of the Union address earlier this month, President Joe Biden announced the appointment of a Chief Prosecutor to combat fraud in pandemic-related funding:

“In my administration, the
watchdogs are back. And we’re going after the criminals who stole billions of
relief money meant for small business and millions of Americans.”

My AEI colleague Matt Weidinger noted almost one year ago that unemployment insurance fraud had cost the federal government a staggering $200 billion, making the President’s announcement welcome. But the misuse of federal dollars is not a new problem to the pandemic. Medicaid is notorious for fraud and payment errors, as are the earned income tax credit (EITC) and child tax credit (CTC). Improper payments in these programs usually top 20 percent of their total budget.

Payment errors in the Supplemental Nutrition Assistance Program (SNAP) typically get less attention in the media, probably because the improper payment rate has been historically low compared to Medicaid and the EITC. Even so, SNAP improper payments have increased from 3.8 percent in 2010 to 7.3 percent in 2019. Further, a vast majority of these improper SNAP payments are overpayments and not underpayments. In the most recent quarter with data (Q4, FY2021), SNAP overpayments were 6.1 percent of total outlays — or $3.4 billion in overpayments. This problem will only worsen as SNAP caseloads grow and more federal dollars flow.

SNAP payment errors can result from inadvertent mistakes by government workers or benefit recipients (for example, mistaking weekly income for monthly income or misunderstanding household composition). But improper payments can also result from individuals who intentionally mislead to obtain benefits they do not qualify for. According to a GAO report from 2016, “FNS program officials have had long-standing concerns that some recipients can falsify information to receive benefits.” State agencies are tasked with catching and minimizing instances of error and fraud, but this job is harder when more money is at stake. As benefits increase, so does the likelihood of intentional fraud.

Improper payments are not the only problem in SNAP — some retailers and recipients “traffic” their benefits as well. According to the GAO, trafficking is “a practice in which retailers exchange recipients’ benefits for cash instead of food, often taking a fraudulent profit.” A report from September 2021 found that trafficking of SNAP benefits has also increased in recent years. Using a consistent definition of trafficking, the average annual amount trafficked has increased from $241 million in 2002–2005 to $1.2 billion by 2015–2017.

In practice, trafficking happens when a retailer charges an EBT
card (a restricted-use debit card carrying SNAP benefits) an amount such as
$100, but gives the individual a lesser amount of cash (say, $50) instead. The
individual gets unrestricted cash and the retailer charges the federal
government for the full $100, making a profit. Sometimes, retailers will also purchase
an EBT card from an individual, use it to purchase items from a bulk store, and
sell the items in their store for a profit.

Federal law requires the USDA to investigate retailers for
trafficking and researchers extrapolate the extent of the problem from their analysis
of EBT data. According to the most recent report and using a consistent
definition, in 2015–2017, “$1.271 billion in SNAP benefits annually were
trafficked and thereby diverted from their intended purpose.” This accounted
for between 1.6 and 2 percent of total SNAP benefits in 2015–2017.

Dramatic SNAP expansions throughout the pandemic have
prompted an equally significant increase in SNAP purchases at retailers — which
jumped by more than $20 billion in FY 2020, according to the USDA. More benefits
flowing through retailers will mean more SNAP benefits trafficked.

The Secretary of Agriculture, Tom Vilsack, who oversees SNAP, has prioritized increasing access to SNAP benefits and expanding retailers without mention of combatting retailer fraud and improper payments. Setting aside the merits and demerits of further SNAP expansions, channeling more money through SNAP without addressing these problems will mean billions more taxpayer dollars wasted and misused. President Biden is correct to be concerned about fraud and abuse in pandemic-related programs. But the problem of fraud extends far beyond programs that were new to the pandemic, and the current administration should turn their attention to those as well.

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