Wouldn’t a means-tested Social Security system be subject to fraud?

One of the proposals that I’ve heard from politicians anxious to stem the tide of red ink in Washington is to adds “means testing” for Social Security payments to those who are currently under 55. Instead of a government-sponsored mandatory pension scheme like what other countries run and like what Social Security has sort of been (except that money wasn’t actually put aside and it was defined benefit rather than defined contribution, so it was done in a way that was most likely to lead to bankruptcy), Social Security would essentially become a Welfare system, providing poverty relief to older Americans who, in the opinion of a new group of government employees, needed it.

I’m wondering why this wouldn’t be subject to a lot of fraud. If the government rewards spenders and punishes savers, wouldn’t there be a large incentive to pretend that one had spent everything? The maximum Social Security benefit of just under $30,000 isn’t lavish, to be sure, but an inflation-adjusted annuity that would return that to a person from age 65 onward (and then continued payments to a surviving spouse) would cost close to $1 million. Plenty of criminal behavior has been motivated by a desire to get hold of $1 million. A person might sell all of his assets at age 65 and stuff the cash in a locker, then tell the government that the money had been spent on an extravagant round-the-world trip including visits to casinos.

Separately, given the high value of the inflation-protected annuity represented by Social Security, I’m surprised that fraud isn’t already common. What stops a family from moving to Mexico, living a middle class life based on the Social Security check, and then neglecting to inform the U.S. government that the beneficiary has died. Does the Social Security Administration have any way to verify that Grandpa Joe is not alive and well at age 107? Wouldn’t it keep direct depositing checks into Grandpa Joe’s bank account?

17 Comments

  1. Tom Welsh

    August 11, 2011 @ 11:50 am

    1

    Yes. One of the biggest problems governments have encountered since 1900 is that you cannot help the deserving without inadvertently helping (and sometimes enriching) the undeserving.

    Conservatives tend to think that means you shouldn’t help anyone. Radicals think you should help everyone anyway, and too bad about the waste and injustice.

    You can be fair, or you can be efficient, but you can’t be both.

  2. Chris

    August 11, 2011 @ 1:58 pm

    2

    The Social Security administration has a team of federal law enforcement employees who investigate such fraud (such as the “don’t tell them Grandpa Joe died” problem.) It happens a bunch, but charged as a federal crime when they’re caught.

    I have a friend who used to do this job, he told all kinds of fun stories of people trying to defraud the system.

  3. philg

    August 11, 2011 @ 3:20 pm

    3

    Chris: Is it a worldwide team? How do they verify that a beneficiary is alive as claimed if, for example, the beneficiary has been living in Thailand, Mexico, or some other corner of the planet? I don’t believe that any part of Social Security is conditional upon continued residence in the U.S.

    And I’m not sure how they would catch beneficiaries who were keeping cash secretly in an attempt to qualify for a need-based payment. After all, if the beneficiary appears to be living beyond his or her means it could be that an adult child was helping out with infusions of cash. It wouldn’t necessarily be the case that the cash was coming from the senior citizen’s mattress. Perhaps the government could hire thousands of additional fraud investigators but I don’t know what they would do if they caught these people. Put 75-year-olds in prison? That would hardly save the taxpayers money and it might not be a huge deterrent because federal prison might be more interesting than a nursing home. Could the government impose big fines on a 75-year-old asset-hider? Then the guy wouldn’t have any assets anymore and would genuinely qualify for his means-tested Social Security payments.

  4. Anon

    August 11, 2011 @ 5:02 pm

    4

    I’m a big fan of free market enforcement. You give the government a reliable lead and/or evidence of someone gaming the system and the perpetrator must then surrender all hidden assets and the guy who turns him in gets a cut.

    I also think this would be a great for parking enforcement. Just have an app for your phone. See an illegally parked car, turn on the app which will direct you to take a variety of photos of the situation. The offender gets a ticket, you get a reward, and the city doesn’t need to pay a parking enforcement attendant (who will get to retire at 45 with full pay).

  5. Rodney Topor

    August 11, 2011 @ 10:22 pm

    5

    Phil, I think you’re worrying unnecessarily. Australia has had a means-tested pension for a very long time. The point is that the pension is low, not much above the poverty line. So there’s little incentive to spend your savings so that you become eligible. Of course, you can try to hide your savings as you suggest, but most people are reasonably honest, and even if the pension was paid to a few cheaters, it’s still much cheaper for the government than paying the pension to everyone. Admittedly, in Australia, pensions are paid from general tax revenue, not from some kind of special fund, as in the US. Overall, I think this is a very fair, effective system.

  6. Chris Uhlik

    August 11, 2011 @ 11:26 pm

    6

    Quote from the link:

    However, the number of Japanese centenarians was called into question in 2010 following a series of reports showing that hundreds of thousands of elderly people had gone “missing” in the country. The deaths of many centenarians had not been reported, casting doubt on the reliability of not only the Japanese statistics, but also the country’s reputation for having a large population of centenarians.[13][14][15][16]

    Read more: http://www.answers.com/topic/centenarian#ixzz1UmW4yAyB

  7. Tiago

    August 12, 2011 @ 2:43 am

    7

    In Australia such social payments from Centrelink are closely monitored against the passport control. Many such benefits cease immediately as soon as the person leaves the country (and in Australia, it is very hard to do so without going through passport control, unlike in the US where there is none).

  8. Peter St Onge

    August 12, 2011 @ 8:44 am

    8

    The failure-to-inform issue has become big in Japan. Apparently many hundreds of thousands of people are collecting pensions on dead relatives. A frequent explanation is that the deceased (typically mummified in a spare bedroom) is not really dead, they just haven’t woken up in a long time.

  9. Surveillance Boy

    August 12, 2011 @ 11:15 am

    9

    @Anon

    I had a similar idea a while back. Why not a dash cam in your car? Every red light runner and illegal turn you catch and turn in you get a cut. I think I would make a couple of hundred dollars a day.

    Not that I would really be for this, or your idea either, but I am surprised nobody has ever suggested it.

    My serious suggestion is to require all on-duty police to wear AV recorders. I bet they can be made the size of an iPod Nano these days even with 50 hours of recording capability @ 720×480 15fps. That would both kill police misbehavior and stop suspects from inventing false claims out of their imagination.

  10. philg

    August 12, 2011 @ 11:29 am

    10

    Peter: Hundreds of thousands didn’t sound believable, especially since the Japanese are so competent at everything. But http://www.economist.com/blogs/freeexchange/2010/09/pensions confirms the number.

    Tiago: A system linked to passport control like you’re talking about could be useful for the U.S. depending on the country. http://ssa.gov/pubs/10137.html indicates that the practice of unlimited benefits being sent to Americans living abroad is restricted to certain countries, e.g., Greece, Chile, Canada, etc. The list is a lot broader for people who are citizens of foreign countries, e.g., Mali or Burundi. If they worked in the U.S. for 10 years they can return home and collect payments forever. It seems as though the regulations are tightening, with people who retired prior to 1956 and 1985 having more flexibility than people retiring today.

  11. Dan Weber

    August 12, 2011 @ 3:09 pm

    11

    There already is an industry for people who want to spend down / hide / pass on / donate / whatever their estate in order to get nursing home care from Medicaid.

    Scott Sumner has talked about how you should just change the way the pay-out formula is based on credits earned, because you don’t want to reward the spenders over savers among people who had the same lifetime earnings. You just make the formula yet more progressive.

    I’m a fan of no-questions-asked aid provided to everyone, instead of trying to determine the needy. (I know Phil mentioned this on his pre-blog about ten years ago.) You can give small cash payouts or tax credits to those who opt out so the plateau from leaving isn’t so rough, and is also self-selected. If it bugs you that “the rich” are getting benefits, just tax them more on the revenue side.

  12. zhenre

    August 14, 2011 @ 9:40 am

    12

    When I first started thinking about social security and its solvency, I thought the whole thing was a terrible idea and essentially a big ponzi scheme. After considering the issue further and thinking about potential alternatives (pensions, nothing at all, etc.), I’ve come to the opinion that in fact social security is organized in a very sensible way.

    People pay in over their lifetimes and get back some amount at a later age. The fact that in practice the government pays past obligations out of current revenues may seem unfair to some but I think that it makes the system very efficient (just take checks in and send checks out rather than having to try and invest/steward vast quantities of money like in pension funds see many postings on this blog for problems with the latter approach). That when demographics change the system can be stressed due to not enough working people to pay for retiring people is a general problem which rears its head in many ways.

    Being born at a certain time is the hand you are dealt and sometimes have historically been much better than others (anyone born now is probably lucky compared to being born in the middle of the black plague). Being born in the baby boom has been easier than those who suffered through the great depression and the world wars (for the most part). Paying a little more into SS than you statistically get out is really quite trivial compared with other timing issues. Even graduating from college in 2007 vs. 2008 probably has a larger financial impact than any changes that might come from SS.

    In terms of the solvency of SS it is pretty easy to adjust the eligibility age and payouts. Literally with one all night bargaining session you could adjust the age/payouts so that SS is easily affordable. You could argue that doing so is akin to a default on the expectations of contributors but the poor are getting a gift and shouldn’t complain, and the rich have already paid 3 times their expected benefit so they also lose comparatively little more than expected. It is much easier than a full pension system where under contribution can persist for many years and a single bad investment decision can transfer (even destroy) the wealth of a whole generation.

    To fix the incentive for hiding money is simple: everyone writes a check of a different size, everyone gets a check of the same size. You can make it as progressive or regressive as you like by adjusting the formula for how big a check you write and there is little incentive for fraud (other than the usual tax sheltering). Probably some people will try to collect for the dead and this should be investigated but I doubt it will be a sizable enough fraction to affect the solvency of the fund.

    Basically SS is not so bad as it is and in fact appears to be much better than many of the alternatives. With a mechanism to easily adjust the age and payouts without shutting down the government both its solvency and efficiency would be pretty good.

    Why does this sound so horrible?

  13. philg

    August 14, 2011 @ 11:33 am

    13

    zhenre: What’s wrong with the Ponzi-style method of funding government pensions? The people who receive them can vote and there is no logical connection between amounts paid in and amounts to be received. For example, http://en.wikipedia.org/wiki/Ida_May_Fuller put $24.75 into the system and received $22,888.92 in benefits. Was that more or less fair than if she had received $15,000 in benefits? $30,000 in benefits? Why shouldn’t she vote to give herself $40,000 in benefits?

    With a defined contribution system, on the other hand, there are some logical boundaries around what people can vote themselves to receive.

  14. Roberto

    August 14, 2011 @ 12:27 pm

    14

    Would a GAI or guaranteed annual income not be an efficient way to redistribute wealth, aka social security system? I.E. every tax payer is paid a minimal annual income of, say, $30,000.00 per year and this is then taken care of (gets paid back, or not) at tax time.

    Further, a universal health care system (paid for by all taxpayers), while disdained by Americans of a certain political stripe, would take one of the many economic burdens off the shoulders of employers. All employers would be on a level playing field in this regard. Just reading an older blog listing the myriad reasons why employers don’t hire (low income) workers.

    And, since there is no doubt that our obsession with technology has been a major player in the loss of jobs everywhere since the dawn of the industrial revolution – could a technology tax come to the rescue of displaced workers? Notwithstanding outrage from the above mentioned group which seems to feel that paying tax is a contravention of human rights, could a tax somehow be calculated to reimburse/relocate/retrain workers in a sector which would lose jobs because of a new technology? This tax, of course, might eliminate the need for the above mentioned GAI. This, not to eliminate innovation but to make it more egalitarian.

  15. Nick

    August 22, 2011 @ 12:39 pm

    15

    I always thought that we should only give Social Security benefits to those who need it and not everyone. And a person who earns a million dollars a year and spends it all doesn’t need it. We should base payments on yearly earnings and tax records. And those who have earned a sufficient amount to save for their retirement do not need it. Those who have lived in poverty their entire life probably do.

  16. philg

    August 22, 2011 @ 3:45 pm

    16

    Nick: People who’ve spent all of their money don’t need Social Security? How are they going to live? We don’t want them to be destitute, do we? Consider a guy who earned $1 million per year and spent 99% on fast cars, airplanes, hot young women, lavish travel and then wasted the rest. We are going to let him starve to death because he was living well prior to age 65? And if we aren’t going to let him starve, how do we know he didn’t stash cash with a relative or under a mattress?

    A separate issue is if you think poor people deserve a guaranteed income from the state, why should they have to wait until age 62 or 67 or whatever to receive that guaranteed income? If Social Security turns into Welfare, why should it be limited by age? Poverty isn’t any more fun at 40 than at 70.

  17. Paul A. Houle

    August 24, 2011 @ 1:28 pm

    17

    I used to joke back in the 1980’s that I couldn’t get a security clearance because I had dead relatives collecting social security in Eastern Europe. (Even if I didn’t know their names.)

    With means-testing I’d be more concerned that people who deserve benefits wouldn’t get them. After my mother died, I got the run-around endlessly from one of her 401K plans. They wouldn’t send me the funds or clear instructions as to how to get the funds until I sent a letter directing them to “send future correspondence to my lawyer” My guess is that they hope that sometimes the person trying to get the funds is going to die or give up so that they get to keep them.

    Most people aren’t that good at filling out paperwork, and throw dementia into the mix and you’ll find that millions of people who should be getting social security benefits will somehow miss their yearly deadline to fill it out.

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