Thirty years ago last month, Congress replaced the open-ended Aid to Families with Dependent Children (AFDC) entitlement, the largest state-run, federally funded cash welfare program, with the Temporary Assistance for Needy Families (TANF) block grant.

This imposed stricter fiscal discipline on states running TANF, but Congress failed to extend similar restraints to other programs. Consequently, many states circumvented TANF’s budget constraints by shifting spending and enrollment to other, still open-ended entitlements.

Following the 1996 welfare reforms, states moved some recipients off TANF and onto the Supplemental Security Income (SSI) program. Today, state legislators are shifting costs onto federal taxpayers by exploiting eligibility loopholes in the Supplemental Nutrition Assistance Program (SNAP) and exploiting Medicaid’s waiver system to finance initiatives that are at best tangential to the delivery of health care services.

To reverse this trend, Congress should expand the 1996 TANF reforms to other welfare programs, block-grant Medicaid and SNAP to align policy choices with their associated costs, and limit federal taxpayer exposure.

According to the 2026 Social Security Trustees Report, the Social Security Trust Fund is projected to hit zero by the end of 2032. Under current law, that means a 22 percent benefit cut for all existing and future beneficiaries. 

It sounds horrific. Yet this outcome might be the most realistic option available.

Social Security collects taxes from the working-age population and pays benefits to the “retired” population. The taxes flow into, and the benefits out of, a trust fund. Thus, the system’s financial condition depends, under existing law, on the status of this trust fund.

Medicaid is one of the largest and fastest-growing items in the federal budget and is highly vulnerable to waste, fraud, and abuse.

We took that problem to Capitol Hill, hosting a panel featuring Michael F. Cannon of the Cato Institute, Chris Pope of the Manhattan Institute, and Brian Blase of the Paragon Health Institute to discuss Medicaid’s structural weaknesses and how to address them.

Every government benefit has a recipient, but it also has a payer. Politics tends to encourage us to focus on the first and forget the second.

Many hardships are visible, immediate, and emotionally compelling. They provide a rationale for Congress to pass a law, for an agency to distribute money, and for elected officials to congratulate themselves on their compassion. But almost no one asks the question that the pioneering American sociologist and political economist William Graham Sumner believed mattered most: Who provided the assistance and at what cost?

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Congress is vastly overspending, and federal debt is rising by $2 trillion a year. Without major spending reforms, the government is headed toward a financial crisis. But it is also true that even if the federal budget were balanced, many spending programs would continue undermining the economy because their costs outweigh their benefits. 

Such negative-value spending is the focus of my recent “Leaky Bucket” study with Ryan Bourne. We argue that the federal budget is riddled with wasteful “leaks.” The government scoops up trillions of dollars into its budget bucket, but many of them spill out due to inefficiencies and policy mistakes. The Trump administration has focused on reducing fraud, but that is only one type of leak from the federal budget bucket.

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Last month, the US Department of Agriculture (USDA) released its Supplemental Nutrition Assistance Program (SNAP, formerly known as Food Stamps) payment error rate report for fiscal year 2025.

The report confirms what has long been true: SNAP is structurally prone to waste, fraud, and abuse, and the states running it have little financial incentive to fix it.

The Problems with Spending Other People’s Money

According to the report, SNAP made $10.1 billion in improper payments last year, more than 1 of every 10 dollars spent on the program, at a national error rate of 10.62 percent. More than 87 percent of this total was from overpayments — beneficiaries receiving more money than they were owed — which cost federal taxpayers $8.8 billion.

This marks the fourth consecutive year that improper payments have been in the double digits, with the FY 2025 rate nearly three times its historic low in FY 2013 (Figure 1).

This is a marginal improvement over last year’s error rate (10.93 percent). But as USDA Secretary Brooke Rollins put it, “These payment error rates are further proof that state accountability is severely lacking in SNAP.”

That problem traces back to a mismatch in how the program is financed. The states administer SNAP, but federal taxpayers foot the bill for more than 90 percent of the program’s costs. This gives states an “all gain, no pain” arrangement in which the financial consequences of lax oversight and administrative inefficiency fall almost entirely on federal taxpayers.

Giving States Skin in the Game

The One Big Beautiful Bill Act (OBBBA) aimed to address this by requiring states to pay a share of the SNAP benefits they distribute when their error rates exceed 6 percent.

States may elect to use either their FY 2025 or FY 2026 error rate to calculate that share, making this report the opening benchmark for what states will owe when the cost-sharing requirements take effect in FY 2028.

Based on FY 2025 data, 41 states and the District of Columbia face potential cost-sharing obligations (Figure 2).

Some states showed improvements in their FY 2025 error rates. New Jersey saw the largest decline, reducing its error rate from 14.33 percent in FY 2024 to 6.86 percent, potentially reflecting the state’s efforts to work more closely with county offices and implement additional quality control protocols.

Meanwhile, Hawaii’s error rate shot up from 6.68 percent to 10.92 percent, likely due to dropping net income limits for some households and absorbing caseload increases from extending eligibility to Compact of Free Association (COFA) residents.

How the Alaska Carveout Undermines OBBBA

However, six states and DC qualify for a temporary exemption under the Alaska Carveout, a policy shoehorned into OBBBA to secure Senator Lisa Murkowski’s (R‑AK) vote. It grants states with improper payment rates above 13.34 percent up to a two-year exemption from financial penalties, rewarding the worst-performing states while penalizing those working to reduce their error rates.

Case in point: Florida, Maryland, Massachusetts, New Jersey, and New York no longer qualify for an exemption and now face cost-sharing requirements because their error rates dropped below the 13.34 percent threshold.

Meanwhile, states that saw an increase in their payment errors, such as Delaware and Illinois, are granted a reprieve until at least FY 2029. To qualify for the exemption, officials in New Mexico admitted to slowing down efforts to tighten the state’s verification standards, while in Maryland, whistleblowers allege that officials conspired to leave correctable errors uncorrected to keep their improper payment rates elevated.

States have exploited the system in the other direction, too. In 2014, the USDA flagged quality control issues in 42 of 53 state SNAP agencies, with many gaming their review processes to artificially lower their reported error rates.

It is also worth noting what the FY 2025 data cannot show. The report covers October 2024 through September 2025. OBBBA did not pass until July 2025, meaning states had at most two months to respond to the new requirements before the measurement period closed. The FY 2026 report will offer a clearer picture of how OBBBA’s SNAP reforms, including the Alaska Carveout, affect state behavior — for better or for worse.

How States Are Racing to Cut Errors

The more telling signal is what states have done in anticipation of those penalties in the year since OBBBA passed. With financial penalties potentially hitting their budgets, many states have pursued a wide range of approaches to drive down their error rates:

• Virginia’s “SNAP Forward” initiative is eliminating applicants’ ability to self-attest their eligibility information, contracting with third parties to help improve the state’s payment processes, and creating a quality assurance team to identify and correct payment errors.
• Louisiana is offering cash bonuses to staff who spot payment errors, intensifying case reviews, and updating its verification systems to automate wage checks.
• Kansas is bringing in outside consultants to reduce its error rate, is participating in a mandatory federal corrective plan to address errors driven by high staff turnover and complex casework, and has proposed $4.4 million in upgrades to its verification system, including a chatbot to help staff apply eligibility rules.
• Mississippi is updating its antiquated, 40-year-old eligibility and case management software by installing new IT systems to cross-check SNAP recipient information against other programs in real time. The state is also piloting an income verification program to check SNAP recipients’ incomes against credit bureau data.
• Arkansas is investing in AI tools to improve its eligibility systems to reduce human data errors and free up caseworkers to identify mistakes in other areas. It has also allocated an additional $5 million in its FY 2027 budget to the state inspector general’s office to detect vulnerabilities in the program.
• Minnesota lawmakers allocated $90 million to replace the 35-year-old software counties use to process SNAP applications, which requires workers to manually re-enter the same eligibility data multiple times across disconnected systems, plus $15 million to upgrade fraud detection technology.

Congress Should Finish the Job It Started

What the early state responses to OBBBA make clear is that accountability changes behavior. States facing financial penalties for poor performance are investing in better verification systems and strengthening oversight.

Congress should build on this, ideally by leaving the provision of nutrition assistance up to the states. The best way to curb waste, fraud, and abuse in programs like SNAP is for states to pay for it. A program funded by state taxpayers is one that state officials have a far greater incentive to run carefully.

Short of that, Congress can help states modernize their fraud-prevention processes, including directing them to add chips to EBT cards to prevent benefit theft and to strengthen and expand their access to the Treasury’s Do Not Pay system. Congress can also eliminate error-prone policies like broad-based categorical eligibility, which is associated with disproportionately high improper payments compared to traditional eligibility, in part because states have used it to streamline program administration by weakening their verification protocols.

At a minimum, Congress should not compromise on its commitment to combating waste, fraud, and abuse in SNAP last year by delaying the start of OBBBA’s cost-sharing requirements, as some senators are pushing amid Farm Bill negotiations.

States may have made marginal improvements to their payment processes in FY 2025. But a mere 0.3 percentage-point decline shows that states still have a long way to go to rein in improper payments and comply with OBBBA’s requirements and that Congress has yet to fix SNAP’s structural integrity problems.

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.