prompt_front: You are given two reports by the government agency.



Question: Write a one-page summary of the report 1.

Report 1: The Federal Reserve's (the Fed's) responsibilities as the nation's central bank fall into four main categories: monetary policy, provision of emergency liquidity through the lender of last resort function, supervision of certain types of banks and other financial firms for safety and soundness, and provision of payment system services to financial firms and the government  Congress has delegated responsibility for monetary policy to the Fed, but retains oversight responsibilities to ensure that the Fed is adhering to its statutory mandate of "maximum employment, stable prices, and moderate long-term interest rates " The Fed has defined stable prices as a longer-run goal of 2% inflation—the change in overall prices, as measured by the Personal Consumption Expenditures (PCE) price index  By contrast, the Fed states that "it would not be appropriate to specify a fixed goal for employment; rather, the Committee's policy decisions must be informed by assessments of the maximum level of employment, recognizing that such assessments are necessarily uncertain and subject to revision " Monetary policy can be used to stabilize business cycle fluctuations (alternating periods of economic expansions and recessions) in the short run, while it mainly affects inflation in the long run  The Fed's conventional tool for monetary policy is to target the federal funds rate —the overnight, interbank lending rate  This report provides an overview of how monetary policy works and recent developments, a summary of the Fed's actions following the financial crisis, and ends with a brief overview of the Fed's regulatory responsibilities  In December 2008, in the midst of the financial crisis and the "Great Recession," the Fed lowered the federal funds rate to a range of 0% to 0 25%  This was the first time rates were ever lowered to what is referred to as the zero lower bound   The recession ended in 2009, but as the economic recovery consistently proved weaker than expected in the years that followed, the Fed repeatedly pushed back its time frame for raising interest rates  As a result, the economic expansion was in its seventh year and the unemployment rate was already near the Fed's estimate of full employment when it began raising rates on December 16, 2015  This was a departure from past practice—in the previous two economic expansions, the Fed began raising rates within three years of the preceding recession ending  Since then, the Fed has continued to raise rates in a series of steps to incrementally tighten monetary policy  The Fed raised rates once in 2016, three times in 2017, and four times in 2018, by 0 25 percentage points each time  The Fed has stated that "some further gradual increases in     the federal funds rate" are necessary to fulfill its mandate  The Fed describes its plans as "data dependent," meaning they would be altered if actual employment or inflation deviate from its forecast  Although monetary policy is now less stimulative than it had been at the zero lower bound, the Fed is still adding stimulus to the economy as long as the federal funds rate is below what economists call the "neutral rate" (or the long-run equilibrium rate)  To illustrate, the federal funds rate is currently similar to the inflation rate, meaning that the real (i e , inflation-adjusted) federal funds rate is around zero  However, there is uncertainty as to what constitutes a neutral rate today  By historical standards, a zero real interest rate would be well below the neutral rate, but the neutral rate appears to have fallen following the financial crisis, so that current rates may be close to the neutral rate today  Typically, the Fed keeps interest rates below the neutral rate when the economy is operating below full employment, at neutral levels when the economy is near full employment, and above the neutral rate when the economy is at risk of overheating  Indeed, the Fed identifies this as one of its "three key principles of good monetary policy " Because of lags between changes in interest rates and their economic effects, in the past, the Fed has often preemptively changed its monetary policy stance before the economy reaches the state that the Fed is anticipating  In this business cycle, the Fed has maintained a (progressively less) stimulative monetary policy throughout the expansion, boosting economic activity  In one sense, this policy could be viewed as having successfully delivered on the Fed's mandated goals of full employment and stable prices  The unemployment rate has been below 5% since 2015 and is now lower than the rate believed to be consistent with full employment  Other labor market measures are also consistent with full employment, with the possible exception of the still-low labor force participation rate  Economic theory posits that lower unemployment will lead to higher inflation in the short run, but inflation has not proven responsive to lower unemployment in recent years  After remaining persistently below the Fed's 2% target from mid-2012 to early 2018 as measured by core PCE, inflation has remained around 2% in 2018 as measured by headline or core PCE  Economic growth has also picked up beginning in the second quarter of 2017, after being persistently low by historical standards throughout the expansion  Contributing to the 2018 growth acceleration, a more expansionary fiscal policy (larger structural budget deficit) added more stimulus to the economy in the short run  Two notable policy changes contributing to fiscal stimulus in 2018 were the 2017 tax cuts ( P L  115-97 ) and the boost to discretionary spending in FY2018 and FY2019 agreed to in P L  115-123   The Fed did little to offset this fiscal stimulus, as the pace of monetary tightening in 2018 was only slightly faster than in 2017  Despite strong economic data (which is only available with a lag), the Fed announced in January 2019 that it would be "patient" before raising rates again in light of increased economic uncertainty and financial volatility  The Fed's intended policy path poses risks  If the Fed waits too long to raise rates again, the economy could overheat, resulting in high inflation and posing risk to financial stability  As an example of how overly stimulative monetary policy can lead to the latter, critics contend that the Fed contributed to the precrisis housing bubble by keeping interest rates too low for too long during the economic recovery starting in 2001  Critics see these risks as outweighing any marginal benefit associated with monetary stimulus when the economy is already so close to full employment  Raising rates more quickly would also provide more "headroom" for the Fed to lower rates more aggressively during the next economic downturn  The potential percentage point reduction in rates before hitting the zero bound is currently smaller than the rate cuts that the Fed has undertaken in past recessions  Alternatively, there is uncertainty about whether strong growth, low unemployment, inflation around 2%, and the generally benign economic environment will continue  Economic expansions do not "die of old age"; nevertheless, the current expansion is already the second longest on record and cannot last forever  The flattening of the yield curve (i e , long-term Treasury yields are similar to short-term Treasury yields) is seen by some as a warning signal that rates are too high  Although there is a risk of stimulative monetary policy causing the economy to overheat, there is also a risk that tightening too quickly could be harmful if the economy slows  Some critics would prefer clear evidence that inflation is above the Fed's target or financial conditions are unstable before the Fed raises rates again  Monetary policy refers to the actions the Fed undertakes to influence the availability and cost of money and credit to promote the goals mandated by Congress, a stable price level and maximum sustainable employment  Because the expectations of households as consumers and businesses as purchasers of capital goods exert an important influence on the major portion of spending in the United States, and because these expectations are influenced in important ways by the Fed's actions, a broader definition of monetary policy would include the directives, policies, statements, economic forecasts, and other Fed actions, especially those made by or associated with the chairman of its Board of Governors, who is the nation's central banker  The Fed's Federal Open Market Committee (FOMC) meets every six weeks to choose a federal funds target and sometimes meets on an ad hoc basis if it wants to change the target between regularly scheduled meetings  The FOMC is composed of the 7 Fed governors, the President of the Federal Reserve Bank of New York, and 4 of the other 11 regional Federal Reserve Bank presidents serving on a rotating basis  The Fed targets the federal funds rate to carry out monetary policy  The federal funds rate is determined in the private market for overnight reserves of depository institutions (called the federal funds market)  At the end of a given period, usually a day, depository institutions must calculate how many dollars of reserves they want or need to hold against their reservable liabilities (deposits)  Some institutions may discover a reserve shortage (too few reservable assets relative to those they want to hold), whereas others may have reservable assets in excess of their wants  These reserves can be borrowed and lent on an overnight basis in a private market called the federal funds market  The interest rate in this market is called the federal funds rate  If it wishes to expand money and credit, the Fed will lower the target, which encourages more lending activity and, thus, greater demand in the economy  Conversely, if it wishes to tighten money and credit, the Fed will raise the target  The federal funds rate is linked to the interest rates that banks and other financial institutions charge for loans  Thus, whereas the Fed may directly influence only a very short-term interest rate, this rate influences other longer-term rates  However, this relationship is far from being on a one-to-one basis because longer-term market rates are influenced not only by what the Fed is doing today, but also by what it is expected to do in the future and by what inflation is expected to be in the future  This fact highlights the importance of expectations in explaining market interest rates  For that reason, a growing body of literature urges the Fed to be very transparent in explaining what its policy is, will be, and in making a commitment to adhere to that policy  The Fed has responded to this literature and is increasingly transparent in explaining its policy measures and what these measures are expected to accomplish  The Federal Reserve uses two methods to maintain its target for the federal funds rate: The Fed can also change the federal funds rate by changing reserve requirements, which specify what portion of customer deposits (primarily checking accounts) banks must hold as vault cash or on deposit at the Fed  Thus, reserve requirements affect the liquidity available within the federal funds market  Statute sets the numerical levels of reserve requirements, although the Fed has some discretion to adjust them  Currently, banks are required to hold 0% to 10% of customer deposits that qualify as net transaction accounts in reserves, depending on the size of the bank's deposits  This tool is used rarely—the percentage was last changed in 1992  Each of these tools works by altering the overall liquidity available for use by the banking system, which influences the amount of assets these institutions can acquire  These assets are often called credit because they represent loans the institutions have made to businesses and households, among others  The Fed's control over monetary policy stems from its exclusive ability to alter the money supply and credit conditions more broadly  The Fed directly controls the monetary base , which is made up of currency (Federal Reserve notes) and bank reserves  The size of the monetary base, in turn, influences broader measures of the money supply, which include close substitutes to currency, such as demand deposits (e g , checking accounts) held at banks  The Fed's definition of monetary policy as the actions it undertakes to influence the availability and cost of money and credit suggests two ways to measure the stance of monetary policy  One is to look at the cost of money and credit as measured by the rate of interest relative to inflation (or inflation projections), and the other is to look at the growth of money and credit itself  Thus, it is possible to look at either interest rates or the growth in the supply of money and credit in coming to a conclusion about the current stance of monetary policy—that is, whether it is expansionary (adding stimulus to the economy), contractionary (slowing economic activity), or neutral  During the high inflation experience of the 1970s the Fed placed greater emphasis on money supply growth, but since then, most central banks including the Fed have preferred to formulate monetary policy in terms of the cost of money and credit rather than in terms of their supply  The Fed conducts monetary policy by focusing on the cost of money and credit as proxied by the federal funds rate  A simple comparison of market interest rates over time as an indicator of changes in the stance of monetary policy is potentially misleading, however  Economists call the interest rate that is essential to decisions made by households and businesses to buy capital goods the real interest rate  It is often proxied by subtracting from the market interest rate the actual or expected rate of inflation  If inflation rises and market interest rates remain the same, then real interest rates have fallen, with a similar economic effect as if market rates (called nominal rates) had fallen by the same amount with a constant inflation rate  The federal funds rate is only one of the many interest rates in the financial system that determines economic activity  For these other rates, the real rate is largely independent of the amount of money and credit over the longer run because it is determined by the interaction of saving and investment (or the demand for capital goods)  The internationalization of capital markets means that for most developed countries the relevant interaction between saving and investment that determines the real interest rate is on a global basis  Thus, real rates in the United States depend not only on U S  national saving and investment but also on the saving and investment of other countries  For that reason, national interest rates are influenced by international credit conditions and business cycles  How do changes in short-term interest rates affect the overall economy? In the short run, an expansionary monetary policy that reduces interest rates increases interest-sensitive spending, all else equal  Interest-sensitive spending includes physical investment (i e , plant and equipment) by firms, residential investment (housing construction), and consumer-durable spending (e g , automobiles and appliances) by households  As discussed in the next section, it also encourages exchange rate depreciation that causes exports to rise and imports to fall, all else equal  To reduce spending in the economy, the Fed raises interest rates and the process works in reverse  An examination of U S  economic history will show that money- and credit-induced demand expansions can have a positive effect on U S  GDP growth and total employment  The extent to which greater interest-sensitive spending results in an increase in overall spending in the economy in the short run will depend in part on how close the economy is to full employment  When the economy is near full employment, the increase in spending is likely to be dissipated through higher inflation more quickly  When the economy is far below full employment, inflationary pressures are more likely to be muted  This same history, however, also suggests that over the longer run, a more rapid rate of growth of money and credit is largely dissipated in a more rapid rate of inflation with little, if any, lasting effect on real GDP and employment  Economists have two explanations for this paradoxical behavior  First, they note that, in the short run, many economies have an elaborate system of contracts (both implicit and explicit) that makes it difficult in a short period for significant adjustments to take place in wages and prices in response to a more rapid growth of money and credit  Second, they note that expectations for one reason or another are slow to adjust to the longer-run consequences of major changes in monetary policy  This slow adjustment also adds rigidities to wages and prices  Because of these rigidities, changes in the growth of money and credit that change aggregate demand can have a large initial effect on output and employment, albeit with a policy lag of six to eight quarters before the broader economy fully responds to monetary policy measures  Over the longer run, as contracts are renegotiated and expectations adjust, wages and prices rise in response to the change in demand and much of the change in output and employment is undone  Thus, monetary policy can matter in the short run but be fairly neutral for GDP growth and employment in the longer run  In societies in which high rates of inflation are endemic, price adjustments are very rapid  During the final stages of very rapid inflations, called hyperinflation, the ability of more rapid rates of growth of money and credit to alter GDP growth and employment is virtually nonexistent, if not negative  Either fiscal policy (defined here as changes in the structural budget deficit, caused by policy changes to government spending or taxes) or monetary policy can be used to alter overall spending in the economy  However, there are several important differences to consider between the two  First, economic conditions change rapidly, and in practice monetary policy can be more nimble than fiscal policy  The Fed meets every six weeks to consider changes in interest rates and can call an unscheduled meeting any time  Large changes to fiscal policy typically occur once a year at most  Once a decision to alter fiscal policy has been made, the proposal must travel through a long and arduous legislative process that can last months before it can become law, whereas monetary policy changes are made instantly  Both monetary and fiscal policy measures are thought to take more than a year to achieve their full impact on the economy due to pipeline effects  In the case of monetary policy, interest rates throughout the economy may change rapidly, but it takes longer for economic actors to change their spending patterns in response  For example, in response to a lower interest rate, a business must put together a loan proposal, apply for a loan, receive approval for the loan, and then put the funds to use  In the case of fiscal policy, once legislation has been enacted, it may take some time for authorized spending to be outlayed  An agency must approve projects and select and negotiate with contractors before funds can be released  In the case of transfers or tax cuts, recipients must receive the funds and then alter their private spending patterns before the economy-wide effects are felt  For both monetary and fiscal policy, further rounds of private and public decisionmaking must occur before multiplier or ripple effects are fully felt  Second, monetary policy is determined based only on the Fed's mandate, whereas fiscal policy is determined based on competing political goals  Fiscal policy changes have macroeconomic implications regardless of whether that was policymakers' primary intent  Political constraints have prevented increases in budget deficits from being fully reversed during expansions  Over the course of the business cycle, aggregate spending in the economy can be expected to be too high as often as it is too low  This means that stabilization policy should be tightened as often as it is loosened, yet increasing the budget deficit has proven to be much more popular than implementing the spending cuts or tax increases necessary to reduce it  As a result, the budget has been in deficit in all but five years since 1961, which has led to an accumulation of federal debt that gives policymakers less leeway to potentially undertake a robust expansionary fiscal policy, if needed, in the future  By contrast, the Fed is more insulated from political pressures, as discussed in the previous section, and experience shows that it is willing to raise or lower interest rates  Third, the long-run consequences of fiscal and monetary policy differ  Expansionary fiscal policy creates federal debt that must be serviced by future generations  Some of this debt will be "owed to ourselves," but some (presently, about half) will be owed to foreigners  To the extent that expansionary fiscal policy crowds out private investment, it leaves future national income lower than it otherwise would have been  Monetary policy does not have this effect on generational equity, although different levels of interest rates will affect borrowers and lenders differently  Furthermore, the government faces a budget constraint that limits the scope of expansionary fiscal policy—it can only issue debt as long as investors believe the debt will be honored, even if economic conditions require larger deficits to restore equilibrium  Fourth, openness of an economy to highly mobile capital flows changes the relative effectiveness of fiscal and monetary policy  Expansionary fiscal policy would be expected to lead to higher interest rates, all else equal, which would attract foreign capital looking for a higher rate of return, causing the value of the dollar to rise  Foreign capital can only enter the United States on net through a trade deficit  Thus, higher foreign capital inflows lead to higher imports, which reduce spending on domestically produced substitutes and lower spending on exports  The increase in the trade deficit would cancel out the expansionary effects of the increase in the budget deficit to some extent (in theory, entirely if capital is perfectly mobile)  Expansionary monetary policy would have the opposite effect—lower interest rates would cause capital to flow abroad in search of higher rates of return elsewhere, causing the value of the dollar to fall  Foreign capital outflows would reduce the trade deficit through an increase in spending on exports and domestically produced import substitutes  Thus, foreign capital flows would (tend to) magnify the expansionary effects of monetary policy  Fifth, fiscal policy can be targeted to specific recipients  In the case of normal open market operations, monetary policy cannot  This difference could be considered an advantage or a disadvantage  On the one hand, policymakers could target stimulus to aid the sectors of the economy most in need or most likely to respond positively to stimulus  On the other hand, stimulus could be allocated on the basis of political or other noneconomic factors that reduce the macroeconomic effectiveness of the stimulus  As a result, both fiscal and monetary policy have distributional implications, but the latter's are largely incidental whereas the former's can be explicitly chosen  In cases in which economic activity is extremely depressed, monetary policy may lose some of its effectiveness  When interest rates become extremely low, interest-sensitive spending may no longer be very responsive to further rate cuts  Furthermore, interest rates cannot be lowered below zero so traditional monetary policy is limited by this "zero lower bound " In this scenario, fiscal policy may be more effective  As is discussed in the next section, some argue that the U S  economy experienced this scenario following the recent financial crisis  Of course, using monetary and fiscal policy to stabilize the economy are not mutually exclusive policy options  But because of the Fed's independence from Congress and the Administration, the two policy options are not always coordinated  If Congress and the Fed were to choose compatible fiscal and monetary policies, respectively, then the economic effects would be more powerful than if either policy were implemented in isolation  For example, if stimulative monetary and fiscal policies were implemented, the resulting economic stimulus would be larger than if one policy were stimulative and the other were neutral  Alternatively, if Congress and the Fed were to select incompatible policies, these policies could partially negate each other  For example, a stimulative fiscal policy and contractionary monetary policy may end up having little net effect on aggregate demand (although there may be considerable distributional effects)  Thus, when fiscal and monetary policymakers disagree in the current system, they can potentially choose policies with the intent of offsetting each other's actions  Whether this arrangement is better or worse for the economy depends on what policies are chosen  If one actor chooses inappropriate policies, then the lack of coordination allows the other actor to try to negate its effects  When the United States experienced the worst financial crisis since the Great Depression, the Fed undertook increasingly unprecedented steps in an attempt to restore financial stability  These steps included reducing the federal funds rate to the zero lower bound, providing direct financial assistance to financial firms, and "quantitative easing " These unconventional policy decisions continue to have consequences for monetary policy today, as the Fed embarks on monetary policy "normalization " The bursting of the housing bubble led to the onset of a financial crisis that affected both depository institutions and other segments of the financial sector involved with housing finance  As the delinquency rates on home mortgages rose to record numbers, financial firms exposed to the mortgage market suffered capital losses and lost access to liquidity  The contagious nature of this development was soon obvious as other types of loans and credit became adversely affected  This, in turn, spilled over into the broader economy, as the lack of credit soon had a negative effect on both production and aggregate demand  In December 2007, the economy entered a recession  As the housing slump's spillover effects to the financial system, as well as its international scope, became apparent, the Fed responded by reducing the federal funds target and the discount rate  Beginning on September 18, 2007, and ending on December 16, 2008, the federal funds target was reduced from 5 25% to a range between 0% and 0 25%, where it remained until December 2015  Economists call this the zero lower bound to signify that once the federal funds rate is lowered to zero, conventional open market operations cannot be used to provide further stimulus  The Fed attempted to achieve additional monetary stimulus at the zero bound through a pledge to keep the federal funds rate low for an extended period of time, which has been called forward guidance or forward commitment   The decision to maintain a target interest rate near zero was unprecedented  First, short-term interest rates have never before been reduced to zero in the history of the Federal Reserve  Second, the Fed waited much longer than usual to begin tightening monetary policy in the current recovery  For example, in the previous two expansions, the Fed began raising rates less than three years after the preceding recession ended  With liquidity problems persisting as the federal funds rate was reduced, it appeared that the traditional transmission mechanism linking monetary policy to activity in the broader economy was not working  Monetary authorities became concerned that the liquidity provided to the banking system was not reaching other parts of the financial system  As noted above, using only traditional monetary policy tools, additional monetary stimulus cannot be provided once the federal funds rate has reached its zero bound  To circumvent this problem, the Fed decided to use nontraditional methods to provide additional monetary policy stimulus  First, the Federal Reserve introduced a number of emergency credit facilities to provide increased liquidity directly to financial firms and markets  The first facility was introduced in December 2007, and several were added after the worsening of the crisis in September 2008  These facilities were designed to fill perceived gaps between open market operations and the discount window, and most of them were designed to provide short-term loans backed by collateral that exceeded the value of the loan  A number of the recipients were nonbanks that are outside the regulatory umbrella of the Federal Reserve; this marked the first time that the Fed had lent to nonbanks since the Great Depression  The Fed authorized these actions under Section 13(3) of the Federal Reserve Act, a seldom-used emergency provision that allowed it to extend credit to nonbank financial institutions and to nonfinancial firms as well  The Fed provided assistance through liquidity facilities, which included both the traditional discount window and the newly created emergency facilities mentioned above, and through direct support to prevent the failure of two specific institutions, American International Group (AIG) and Bear Stearns  The amount of assistance provided was an order of magnitude larger than normal Fed lending, as shown in Figure 1   Total assistance from the Federal Reserve at the beginning of August 2007 was approximately $234 million provided through liquidity facilities, with no direct support given  In mid-December 2008, this number reached a high of $1 6 trillion, with a near-high of $108 billion given in direct support  From that point on, it fell steadily  Assistance provided through liquidity facilities fell below $100 billion in February 2010, when many facilities were allowed to expire, and support to specific institutions fell below $100 billion in January 2011  The last loan from the crisis was repaid on October 29, 2014  Central bank liquidity swaps (temporary currency exchanges between the Fed and central foreign banks) are the only facility created during the crisis still active, but they have not been used on a large scale since 2012  All assistance through expired facilities has been fully repaid with interest  In 2010, the Dodd-Frank Act changed Section 13(3) to rule out direct support to specific institutions in the future  From the introduction of its first emergency lending facility in December 2007 to the worsening of the crisis in September 2008, the Fed sterilized the effects of lending on its balance sheet (i e , prevented the balance sheet from growing) by selling an offsetting amount of Treasury securities  After September 2008, assistance exceeded remaining Treasury holdings, and the Fed allowed its balance sheet to grow  Between September 2008 and November 2008, the Fed's balance sheet more than doubled in size, increasing from less than $1 trillion to more than $2 trillion  The loans and other assistance provided by the Federal Reserve to banks and nonbank institutions are considered assets on this balance sheet because they represent money owed to the Fed  With the federal funds rate at its zero bound and direct lending falling as financial conditions began to normalize in 2009, the Fed faced the decision of whether to try to provide additional monetary stimulus through unconventional measures  It did so through two unconventional tools—large-scale asset purchases (quantitative easing) and forward guidance  With short-term rates constrained by the zero bound, the Fed hoped to reduce long-term rates through large-scale asset purchases, which were popularly referred to as quantitative easing (QE)  Between 2009 and 2014, the Fed undertook three rounds of QE, buying U S  Treasury securities, agency debt, and agency mortgage-backed securities (MBS)  These securities now comprise most of the assets on the Fed's balance sheet  To understand the effect of quantitative easing on the economy, it is first necessary to describe its effect on the Fed's balance sheet  In 2009, the Fed's emergency lending declined rapidly as market conditions stabilized, which would have caused the balance sheet to decline if the Fed took no other action  Instead, asset purchases under the first round of QE (QE1) offset the decline in lending, and from November 2008 to November 2010, the overall size of the Fed's balance sheet did not vary by much  Its composition changed because of QE1, however—the amount of Fed loans outstanding fell to less than $50 billion at the end of 2010, whereas holdings of securities rose from less than $500 billion in November 2008 to more than $2 trillion in November 2010  The second round of QE, QE2, increased the Fed's balance sheet from $2 3 trillion in November 2010 to $2 9 trillion in mid-2011  It remained around that level until September 2012, when it began rising for the duration of the third round, QE3  It was about $4 5 trillion (comprised of $2 5 trillion of Treasury securities, $1 7 trillion MBS, and $0 4 trillion of agency debt) when QE3 ended in October 2014, and has remained at that level since  Table 1 summarizes the Fed's QE purchases  In total, the Fed's balance sheet increased by more than $2 5 trillion over the course of the three rounds of QE, making it about five times larger than it was before the crisis  This increase in the Fed's assets must be matched by a corresponding increase in the liabilities on its balance sheet  The Fed's liabilities mostly take the form of currency, bank reserves, and cash deposited by the U S  Treasury at the Fed  QE has mainly resulted in an increase in bank reserves, from about $46 billion in August 2008 to $820 billion at the end of 2008  Since October 2009, bank reserves have exceeded $1 trillion, and they have been between $2 5 trillion and $2 8 trillion since 2014  The increase in bank reserves can be seen as the inevitable outcome of the increase in assets held by the Fed because the bank reserves, in effect, financed the Fed's asset purchases and loan programs  Reserves increase because when the Fed makes loans or purchases assets, it credits the proceeds to the recipients' reserve accounts at the Fed  The intended purpose of QE was to put downward pressure on long-term interest rates  Purchasing long-term Treasury securities and MBS should directly reduce the rates on those securities, all else equal  The hope is that a reduction in those rates feeds through to private borrowing rates throughout the economy, stimulating spending on interest-sensitive consumer durables, housing, and business investment in plant and equipment  Indeed, Treasury and mortgage rates have been unusually low since the crisis compared with the past few decades, although the timing of declines in those rates does not match up closely to the timing of asset purchases  Determining whether QE reduced rates more broadly and stimulated interest-sensitive spending requires controlling for other factors, such as the weak economy, which tends to reduce both rates and interest-sensitive spending  The increase in the Fed's balance sheet has the potential to be inflationary because bank reserves are a component of the portion of the money supply controlled by the Fed (called the monetary base ), which grew at an unprecedented pace during QE  In practice, overall measures of the money supply have not grown as quickly as the monetary base, and inflation has remained below the Fed's goal of 2% for most of the period since 2008  The growth in the monetary base has not translated into higher inflation because bank reserves have mostly remained deposited at the Fed and have not led to increased lending or asset purchases by banks  Another concern is that by holding large amounts of MBS, the Fed is allocating credit to the housing sector, putting the rest of the economy at a disadvantage compared with that sector  Advocates of MBS purchases note that housing was the sector of the economy most in need of stabilization, given the nature of the crisis (this argument becomes less persuasive as the housing market continues to rebound); that MBS markets are more liquid than most alternatives, limiting the potential for the Fed's purchases to be disruptive; and that the Fed is legally permitted to purchase few other assets, besides Treasury securities  On October 29, 2014, the Fed announced that it would stop making large-scale asset purchases at the end of the month  Now that QE is completed, attention has turned to the Fed's "exit strategy" from QE and zero interest rates  The Fed laid out its plans to normalize monetary policy in a statement in September 2014  It plans to continue implementing monetary policy by targeting the federal funds rate  The basic challenge to doing so is that the Fed cannot effectively alter the federal funds rate by altering reserve levels (as it did before the crisis) because QE has flooded the market with excess bank reserves  In other words, in the presence of more than $2 trillion in bank reserves, the market-clearing federal funds rate is close to zero even if the Fed would like it to be higher  The most straightforward way to return to normal monetary policy would be to remove those excess reserves by shrinking the balance sheet through asset sales  The Fed does not intend to sell any securities, however  Instead, it is gradually reducing the balance sheet by ceasing to roll over securities as they mature, which began in September 2017—almost three years after QE ended  Initially, it allowed only $6 billion of Treasuries and $4 billion of MBS to run off each month, which was gradually increased to $30 billion of Treasuries and $20 billion of MBS per month, where it will remain until normalization is completed  The Fed believes that it would only cease shrinking the balance sheet or use QE again in the future if it its ability to stimulate the economy using reductions in the federal funds rate were insufficient  The Fed intends to ultimately reduce the balance sheet until it holds "no more securities than necessary to implement monetary policy efficiently and effectively " The Fed has stated that it foresees a balance sheet size that is consistent with this goal will be larger than it was before the crisis  In part, that is because other liabilities on the Fed's balance sheet are larger—there is more currency in circulation now than there was before the crisis, and the Treasury has kept larger balances on average in its account at the Fed  But the balance sheet will also be significantly larger because the Fed decided in January 2019 to continue using its new method of targeting the federal funds rate even after normalization is completed  Under the new method, the federal funds rate is not determined by supply and demand in the market for bank reserves, and the Fed would prefer to maintain abundant bank reserves so that it does not have to use open market operations to respond to changes in banks' demand for reserves  By contrast, if it went back to the pre-crisis method of targeting the federal funds rate, only minimal excess reserve balances would be necessary (but perhaps more than before the crisis), so its balance sheet could be much smaller  The Fed has not yet announced when the wind-down will be completed or how large the balance sheet would be upon completion, but the January 2019 FOMC minutes noted the wind-down could be completed as soon as this year  In that case, the balance sheet would not be much smaller than its current size of $4 trillion when normalization is completed—more than four times larger than its pre-crisis size  Although the Fed has stated that it intends to eventually stop holding MBS, the Fed would still have sizable MBS holdings in 2025, according to projections from the New York Fed  In order to raise the federal funds rate in the presence of large reserves, the Fed has raised the two market interest rates that are close substitutes—it has directly raised the rate it pays banks on reserves held at the Fed and used large-scale reverse repurchase agreements (repos) to alter repo rates  In 2008, Congress granted the Fed the authority to pay interest on reserves  Because banks can earn interest on excess reserves by lending them in the federal funds market or by depositing them at the Fed, raising the interest rate on bank reserves should also raise the federal funds rate  In this way, the Fed can lock up excess liquidity to avoid any potentially inflationary effects because reserves kept at the Fed cannot be put to use by banks to finance activity in the broader economy  In practice, the interest rate that the Fed has paid banks on reserves has been slightly higher than the federal funds rate, which some have criticized as a subsidy to banks  Reverse repos are another tool for draining liquidity from the system and influencing short-term market rates  They drain liquidity from the financial system because cash is transferred from market participants to the Fed  As a result, interest rates in the repo market, one of the largest short-term lending markets, rise  The Fed has long conducted open market operations through the repo market, but since 2013 it has engaged in a much larger volume of reverse repos with a broader range of nonbank counterparties, including the government-sponsored enterprises (such as Fannie Mae and Freddie Mac) and certain money market funds, through a new Overnight Reverse Repurchase Operations Facility  The Fed is currently not capping the amount of overnight reverse repos offered through this facility  There has been some concern about the potential ramifications of the Fed becoming a dominant participant in this market and expanding its counterparties  For example, will counterparties only be willing to transact with the Fed in a panic, and will the Fed be exposed to counterparty risk with nonbanks that it does not regulate? The Fed has distinct roles as a central bank and a regulator  Its main regulatory responsibilities are as follows: B ank regulation   The Fed supervises bank holding companies (BHCs) and thrift holding companies (THCs), which include all large and thousands of small depositories, for safety and soundness  The Dodd-Frank Act requires the Fed to subject BHCs with more than $50 billion in consolidated assets to enhanced prudential regulation (i e , stricter standards than are applied to similar firms) in an effort to mitigate the systemic risk they pose  The Fed is also the prudential regulator of U S  branches of foreign banks and state banks that have elected to become members of the Federal Reserve System  Often in concert with the other banking regulators, it promulgates rules and supervisory guidelines that apply to banks in areas such as capital adequacy, and examines depository firms under its supervision to ensure that those rules are being followed and those firms are conducting business prudently  The Fed's supervisory authority includes consumer protection for banks under its jurisdiction that have $10 billion or less in assets  P rudential regulat ion of nonbank systemically important financial institutions   The Dodd-Frank Act allows the Financial Stability Oversight Council (FSOC) to designate nonbank financial firms as systemically important (SIFIs)  Designated firms are supervised by the Fed for safety and soundness  Since enactment, the number of designated firms has ranged from four, initially, to none today  R egulation of the payment system   The Fed regulates the retail and wholesale payment system for safety and soundness  It also operates parts of the payment system, such as interbank settlements and check clearing  The Dodd-Frank Act subjects payment, clearing, and settlement systems designated as systemically important by the FSOC to enhanced supervision by the Fed (along with the Securities and Exchange Commission and the Commodity Futures Trading Commission, depending on the type of system)  M argin requirements   The Fed sets margin requirements on the purchases of certain securities, such as stocks, in certain private transactions  The purpose of margin requirements is to mandate what proportion of the purchase can be made on credit  The Fed attempts to mitigate systemic risk and prevent financial instability through these regulatory responsibilities, as well as through its lender of last resort activities and participation on the FSOC (whose mandate is to identify risks and respond to emerging threats to financial stability)  The Fed has focused more on attempting to mitigate systemic risk through its regulations since the financial crisis, and has also restructured its internal operations to facilitate a macroprudential approach to supervision and regulation 


Report 2: Executive branch agencies are required to take various steps regarding improper payments under IPIA, as amended by IPERA and IPERIA, and related OMB guidance  The steps include the following: 1  reviewing all programs and activities and identifying those that may be susceptible to significant improper payments (commonly referred to as a risk assessment), 2  developing improper payment estimates for those programs and activities that the agency identified as being susceptible to significant improper payments, 3  analyzing the root causes of improper payments and developing corrective actions to reduce them for those programs and activities that the agency identified as being susceptible to significant improper payments, and 4  reporting on the results of addressing the foregoing requirements  Figure 1 lays out these steps, as well as the major components of developing an improper payment estimate  IPERA also directs executive branch agencies’ inspectors general to annually determine and report on whether their respective agencies complied with six criteria listed in the law  On an annual basis, agencies are required to develop improper payment estimates for programs that they consider susceptible to significant improper payments  This generally involves selecting a sample of program payments (or other items, such as invoices) and reviewing them in order to determine whether the relevant payments were proper  OMB guidance for developing improper payment estimates focuses on the statistical nature of the estimates and provides agencies with flexibility in developing their estimates  IPIA, as amended, provides the definition of “improper payment” with IPERIA further instructing OMB to issue guidance requiring agencies to include in the estimate all improper payments, regardless of whether those payments have been or are being recovered  OMB incorporated this requirement into Appendix C to Circular No  A-123, Requirements for Effective Estimation and Remediation of Improper Payments  In accordance with these relevant laws and OMB guidance, agencies must apply “improper payment” in the context of their programs when developing improper payment estimates  The 10 programs we reviewed serve a variety of purposes and are administered by various agencies across the federal government  Table 2 summarizes each of these programs  IPIA, as amended, requires agencies to develop statistically valid improper payment estimates or estimates that are otherwise appropriate using a methodology approved by the Director of OMB  The six agencies we reviewed reported using either statistically valid or alternative sampling approaches for the 10 selected programs, and some agencies reported additionally incorporating actual improper payment amounts into their estimates, as shown in table 3  If an agency is unable to produce a statistically valid improper payment estimate, it can use an alternative approach if approved by OMB  For example, the Department of Education (Education) reported using an alternative methodology for the Direct Loan program after conducting a cost-benefit analysis comparing use of a statistical and an alternative methodology  Similarly, the Department of Health and Human Services (HHS) reported using an alternative methodology for Medicaid to better manage resources needed to conduct the required reviews  In addition to their statistical approaches, two agencies reported incorporating actual improper payment amounts into the estimates for 2 of the programs we reviewed  Officials at the Department of Defense (DOD) stated that the agency calculates its Military Pay improper payment estimate by adding the amount of debts due to DOD entered into its financial system based on overpayments (i e , debts due to DOD by a recipient of an overpayment) identified during the fiscal year to a projected estimate of improper payments  Officials at the Office of Personnel Management (OPM) stated that the agency calculates its Retirement program improper payment estimate by adding the amount of debts due to OPM entered into its financial system based on overpayments (i e , debts due to OPM by a recipient of an overpayment) identified during the fiscal year to a projected estimate of underpayments  To implement their sampling approaches, agencies select a sample of data to test from a larger, specified population of data  For the six agencies we reviewed, data sampled varied by program and include payments, claims, tax returns, and pay accounts  For example, according to their policies and procedures DOD samples invoices related to payments made from 12 financial systems for Defense Finance and Accounting Service Commercial Pay, HHS samples medical claims for Medicare Fee-for-Service, and DOD samples pay accounts for Military Pay  Agencies subject specific data populations to sampling, which may not include all payments made for a program  Reasons for sampling exclusions varied across programs, as shown by the examples in table 4  Some of the selected agencies reported sampling multiple sets of data  For example, for its Direct Loan improper payment estimate, Education officials stated that the agency reviews Program Review Reports to identify improper payments in originations and also samples loan consolidation and refund payments  According to agency officials, Direct Loan origination, consolidation, and refund transactions carry different risks of improper payment  To estimate improper payments for fiscal year 2017, the six agencies we reviewed reported sampling and testing data that varied in age from calendar year 2013 to fiscal year 2017  Figure 2 shows the range of data used  OMB guidance states that to the extent possible, data used for estimating improper payments should coincide with the fiscal year being reported, but agencies may use a different 12-month reporting period with approval from OMB  OMB staff acknowledged there are costs and benefits to sampling newer or older data  OMB staff stated that although they review agencies’ sampling and estimation plans, they defer to the agencies regarding the appropriateness of the age of data used to estimate improper payments  OMB staff stated that they approve the timeframe of the data used in alternative methodologies as part of the approval of the methodology overall, whereas OMB silence provides tacit approval (i e , no communication to the agency) for statistically valid methodologies  After agencies determine what subsets of data and types of transactions to review, they generally test the data and calculate their improper payment estimates  Testing processes varied among the 10 programs, with some of the six agencies using processes designed specifically to estimate improper payments and others leveraging existing processes designed for other purposes  Some of the selected agencies reported using multiple testing processes and combining the results to develop a program’s improper payment estimate  For example, according to their policies and procedures the Direct Loan estimate comprises three component estimates for loan originations, consolidations, and refunds and the Medicaid estimate includes fee-for-service, managed care, and eligibility components  Table 5 summarizes the processes used by the six agencies we reviewed  Although agencies’ testing processes varied, most included steps to address aspects of eligibility of beneficiaries, goods, or services—a key component of determining the appropriateness of a payment—in their programs  For example, according to their policies and procedures for Medicare Fee-for-Service, reviewers examine the medical necessity, compliance with documentation requirements, and coding of services provided, among other things; for the Earned Income Tax Credit (EITC), auditors examine whether the taxpayer properly reported income and whether the taxpayer meets eligibility criteria, including income and qualifying child requirements, and auditors examine, among other things, whether the taxpayer is subject to a disallowance period on receiving EITC; for Medicaid, reviewers examine fee-for-service claims and managed care payments to determine the eligibility status of the beneficiary and the provider, as well as support for the medical necessity of fee-for- service claims, among other things; for Old-Age, Survivors, and Disability Insurance (OASDI), reviewers examine factors to support the beneficiary’s eligibility, including, among other things, citizenship, relationship (in the case of survivor benefits), and receipt of other government benefits; and although Education’s Direct Loan program reviews can vary in scope, they may include, among other things, steps to verify educational institution eligibility (such as licensing and accreditation) and student eligibility (such as enrollment status and satisfactory academic progress)  In contrast, per their policies and procedures, eligibility is not tested for DOD’s Military Pay or the overpayment component of OPM’s Retirement estimate  DOD Military Pay  DOD reported using the results of monthly payment reviews to calculate a projected improper payment amount for Military Pay  However, DOD’s policies and procedures do not require a review of servicemember eligibility for special pay or allowances as part of these monthly reviews  DOD’s Standard Operating Procedures (SOP) direct reviewers to recalculate payments to servicemembers solely based on the pay account data included in DOD systems (i e , to verify that components of servicemember pay were calculated appropriately)  DOD’s SOP does not direct reviewers to verify that servicemembers were eligible for special pay or allowances by verifying the information included in the pay account (such as pay grade) with supporting documentation  According to DOD officials, reviewers may investigate potential inconsistencies in pay account data identified during their reviews—which may include eligibility issues—but this process is not consistently performed or documented  According to DOD officials, an example of a potential inconsistency is when a servicemember receives jump pay (a hazard pay for parachute jumps) but is located at a site where no jump activity occurred  According to DOD officials, to help compensate for the limitations of its monthly reviews, DOD calculates the final reported Military Pay improper payment estimate by adding actual debts due to DOD (related to overpayments) identified during the year to the projected estimate of the monthly reviews  DOD identifies the actual overpayments through various methods, including other postpayment reviews and servicemember self- reporting  Standards for Internal Control in the Federal Government states that management should identify, analyze, and respond to risks related to achieving the defined objectives  DOD has acknowledged internal control deficiencies related to the Military Pay program, which—if addressed in improper payment testing—could have an impact on the program’s improper payment rate  However, these deficiencies were identified through other internal control reviews not related to estimating improper payments  For the purposes of estimating improper payments, DOD has not fully assessed the risks in its Military Pay program and evaluated whether its approach for estimating improper payments effectively addresses these risks  As a result, DOD’s process for estimating Military Pay improper payments may not reflect significant risks of improper payment in the program, specifically whether servicemembers are eligible for the special pay or allowances they receive, calling into question the improper payment estimate and its usefulness for developing effective corrective actions  OPM Retirement  OPM relies on its existing Quality Assurance (QA) process to estimate Retirement underpayments  The QA process is designed to determine whether new Retirement claims (i e , claims paid for the first time) have been adjudicated correctly  Therefore, only new Retirement claims are sampled and tested for accuracy  OPM applies historical results of QA testing to older claims; however, these historical results do not reflect any different risks of underpayment that the older claims may face  Although OPM’s QA process also produces an estimate of overpayments, the agency’s policies and procedures instead use actual debts due to OPM (related to overpayments) that were identified during the fiscal year as its overpayment amount (i e , the overpayment amount does not reflect any testing of Retirement payments to verify eligibility or accuracy)  These actual overpayments represent amounts that have been identified through various means, such as inspector general fraud referrals  OPM officials stated that the agency uses actual amounts because the QA estimate may overstate overpayments  However, the fiscal year 2016 QA overpayment estimate was lower than the actual amount of debts identified as due to OPM  Standards for Internal Control in the Federal Government states that management should identify, analyze, and respond to risks related to achieving the defined objectives  OPM has not fully assessed the risks of improper payments in its Retirement program—particularly related to the risk of underpayments in older claims and the risk of overpayments— and evaluated whether its approach for estimating improper payments effectively addresses these risks  As a result, OPM’s processes for estimating Retirement improper payments may not reflect significant risks of improper payment in the program, calling into question the improper payment estimate and its usefulness for developing effective corrective actions  OMB guidance  OMB issues guidance for agencies to implement various requirements of the improper payment laws  Specifically, OMB is required by IPERIA to issue guidance to set standards for agencies to follow in determining the underlying validity of sampled payments to ensure that amounts being billed, paid, or obligated for payment are proper  Although existing OMB guidance addresses requirements for sampling, it does not address how agencies test to identify improper payments, such as using a risk-based approach to help ensure that key risks of improper payments, like eligibility, are addressed through testing processes  Without such guidance, there is increased risk that agencies’ processes may not address key risks of improper payments in their programs—for example, the cases of DOD Military Pay and OPM Retirement described above—calling into question the improper payment estimates for such programs and their usefulness for developing effective corrective actions  According to OMB guidance, when an agency’s review is unable to determine whether a payment was proper because of insufficient or lack of documentation, the payment must be considered an improper payment  Among the six agencies and 10 programs we reviewed, treatment of insufficient documentation varied by program, as did the classification of these issues for root cause reporting in the AFRs  HHS’s programs were the only ones we reviewed that reported improper payments in the insufficient documentation root cause category for fiscal years 2016 or 2017, as shown in table 6  Some agencies stated that they report insufficient documentation in other root cause categories that they consider more appropriate  For example, Education officials stated that for the Direct Loan program, payments that lack sufficient supporting documentation may be placed in the “Administrative or Process Error Made by Other Party” root cause category  In these cases, a third party—such as a loan servicer—is unable to provide sufficient documentation supporting that the sampled payment was proper  OMB guidance states that in cases where the agency believes that more than one root cause category might be suitable, the agency should determine which category it believes to be the most appropriate  Additionally, some agencies stated that the “insufficient documentation” category was not always relevant when they recreated sampled cases to estimate a program’s improper payments  For example, according to officials, to complete an OASDI stewardship review of a sampled case, a Social Security Administration (SSA) quality reviewer reviews the documentation related to the original determination and then independently re-develops all factors of the payment and interviews the associated beneficiary  According to agency officials, insufficient documentation would not apply as all improper payments identified in the stewardship sample are supported by documentation and payment has been verified in all reviewed cases  As noted previously, the processes for estimating DOD Military Pay and OPM Retirement improper payments were limited, and these limitations may have an impact on the agencies’ ability to identify improper payments related to insufficient documentation  Treatment of cases of nonresponse  Some agencies contact outside entities—such as payees or beneficiaries—as part of their improper payment testing processes  Among the six agencies we reviewed, treatment of cases of nonresponse differed  For example: SSA officials stated that in cases where quality reviewers do not receive responses from OASDI beneficiaries they contact, they exclude the cases from review (unless the reviewer identifies an improper payment in the initial review that is completed prior to reaching out to the beneficiary)  For EITC improper payment estimation purposes, the Internal Revenue Service (IRS) stated that the agency does not consider the sampled payment associated with a nonresponse case to be proper or improper  It sets the sampling weight of nonresponse cases to zero and adjusts the sampling weights of respondents upward to account for the nonresponse cases  IRS’s methodology assumes nonresponse and response cases have an equal likelihood of improper payment  For Medicare Fee-for-Service and Medicaid, HHS’s policies and procedures consider payments associated with nonresponse cases to be improper  OMB guidance states that when an agency’s review is unable to discern whether a payment was proper as a result of insufficient or lack of documentation, this payment must be considered an improper payment  However, it does not specifically address the appropriate treatment of nonresponse cases for improper payment estimation purposes  As a result, without clearer guidance there is increased risk that agencies’ improper payment estimates may be understated and that estimates for similar programs may not be comparable  When agencies identify improper payments, they must determine the amount of the payment that was improperly made  The six agencies we reviewed generally reported using the definition of improper payment in relevant laws and OMB guidance to determine the amount of improper payments identified  OMB guidance provides agencies with instructions on how to calculate the amount of improper payments  However, when developing its improper payment estimate for EITC, IRS subtracted overpayments that were paid out and later recovered  By subtracting recovered overpayments, IRS excluded them from the EITC improper payment estimate  For 2013—the tax year used to produce the fiscal year 2017 improper payment estimate—IRS estimated that $1 2 billion in EITC overpayments would be recovered  IPERIA directed OMB to provide guidance that requires agencies to include all improper payments in their improper payment estimates, regardless of whether they have been or are being recovered  Although the OMB guidance was revised in October 2014 to implement this requirement, IRS has not updated its estimation methodology for EITC  By not updating its guidance and continuing to remove EITC overpayments that may be subsequently recovered, IRS is understating its improper payment estimate and potentially limits its ability to address these types of improper payments before they occur  Improper payments are a long-standing, significant problem in the federal government  Estimation of improper payments is key to understanding the extent of the problem and to developing effective corrective actions to address it  Among the six agencies we reviewed, processes to estimate improper payments in their programs varied, and certain differences in these processes may affect the quality of the resulting estimates and consequently these agencies’ efforts to reduce improper payments  Specifically, policies and procedures for DOD’s Military Pay and OPM’s Retirement programs’ improper payment estimation methodologies do not address certain key risks, like eligibility, in part because these agencies have not fully assessed their processes  Further, although OMB guidance addresses requirements for sampling, it does not address how agencies test to identify improper payments  Without such assessments and guidance, there is increased risk that agencies’ processes may not address key risks of improper payments in their programs, calling into question the improper payment estimates for such programs and their usefulness for developing effective corrective actions  Additionally, for agencies we reviewed that contact outside entities as part of their improper payment estimation processes, the treatment of cases of nonresponse varied  OMB guidance does not specifically address the appropriate treatment of nonresponse cases for improper payment estimation purposes  Without clearer guidance there is increased risk that agencies’ improper payment estimates may be understated and that estimates for similar programs may not be comparable  Finally, although IPERIA directed OMB to provide guidance that requires agencies to include all improper payments in their improper payment estimates, regardless of whether they have been or are being recovered, IRS has not updated its processes to reflect the change  By not updating its guidance and continuing to remove EITC overpayments that may be subsequently recovered, IRS is understating its improper payment estimate and potentially limits its ability to address these types of improper payments before they occur  We are making two recommendations to the Director of OMB that have government-wide implications and specific recommendations to DOD, OPM, and IRS regarding their programs included in this review  The Director of OMB should develop guidance on how agencies test to identify improper payments, such as using a risk-based approach to help ensure that key risks of improper payments, such as eligibility, are addressed through testing processes  (Recommendation 1) The Director of OMB should develop guidance clarifying the appropriate treatment of nonresponse cases during improper payment testing  (Recommendation 2) The Under Secretary of Defense (Comptroller) should assess the processes for estimating Military Pay improper payments to determine whether they effectively address key risks of improper payments— including eligibility for different types of pay and allowances—and take steps to update the processes to incorporate key risks that are not currently addressed  (Recommendation 3) The Director of OPM should assess the processes to estimate Retirement improper payments to determine whether they effectively address key risks of improper payments—including eligibility and whether older claims face different risks of improper payments than new claims—and take steps to update the processes to incorporate key risks that are not currently addressed  (Recommendation 4) The Commissioner of IRS should update IRS’s improper payment estimation methodology to not exclude recovered overpayments from its EITC improper payment estimate  (Recommendation 5) We provided a draft of this report for comment to OMB, DOD, Education, HHS, Treasury, OPM, SSA, and USDA  OMB provided oral comments, which are summarized below  OPM, DOD, and IRS provided written comments, which are reproduced in appendixes II through IV, respectively  Education, HHS, SSA, and USDA did not provide written comments on the draft report  In addition, HHS, IRS, OMB, OPM, and SSA provided technical comments, which we have incorporated, as appropriate  In oral comments provided on April 30, 2018, a Senior Policy Advisor in OMB’s Office of Federal Financial Management stated that OMB partially agreed with our first recommendation and agreed with our second recommendation  Regarding the first recommendation, the Senior Policy Advisor stated that OMB should not have to develop more specific guidance as each program and activity has its own risks  Instead, inspectors general are better equipped and positioned to review the sampling and estimation plans as part of their annual IPERA compliance audits and that agencies, their statisticians, and inspectors general should work out the best testing procedures for their agencies  OMB could provide suggestions during OMB’s annual town hall meeting related to improper payments for areas that inspectors general may consider  Although we agree that programs and activities may face different risks of improper payment, we continue to believe that guidance from OMB on how agencies test to identify improper payments—such as directing agencies to take a risk-based approach in developing their testing procedures—could help ensure that agencies address the specific risks they identify when developing improper payment estimates  Further, such guidance could also help ensure that testing processes are designed to address an agency’s identified risks before the estimate is developed, whereas an inspector general’s review—as well as related recommendations for improvement—would generally occur after the agency’s improper payment estimate had been developed and reported  Regarding the second recommendation, the Senior Policy Advisor noted that OMB plans to update its guidance to direct agencies to treat nonresponse cases as improper payments and to include a new category for tracking such cases  In its written comments, OPM partially concurred with our recommendation to assess the processes to estimate Retirement improper payments to determine whether they effectively address the key risks of improper payments  OPM agreed to conduct an audit of older claims to determine if they face different risks than new claims  However, OPM did not agree with the part of the recommendation to assess the risk of improper payments related to eligibility in the estimation process  OPM stated that eligibility is determined before annuity or survivor benefits are fully adjudicated  However, the objective of an improper payment estimate is to determine whether payments were made properly  To do so, an agency should determine whether the payee was eligible for the payment that was made, among other things  As such, we continue to believe that the recommendation—including the assessment of the risk of improper payments related to eligibility—is warranted  In their written comments, DOD and IRS both agreed with our recommendations directed to them and described the steps they plan to take to implement them  We are sending copies of this report to the appropriate congressional committees; the Secretaries of Agriculture, Defense, Education, Health and Human Services, and the Treasury; the Director of the Office of Personnel Management; the Administrator of the Social Security Administration; the Director of the Office of Management and Budget; and other interested parties  In addition, the report is available at no charge on the GAO website at http://www gao gov  If you or your staff have any questions about this report, please contact me at (202) 512-2623 or davisbh@gao gov  Contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of this report  GAO staff who made key contributions to this report are listed in appendix V  Table 7 lists the fiscal year 2017 improper payment estimates by agency and program, as reported by agencies in their fiscal year 2017 agency financial reports and compiled on the Office of Management and Budget’s payment integrity website, paymentaccuracy gov  In addition to the contact named above, Phillip McIntyre (Assistant Director), James M  Healy (Auditor in Charge), Daniel Flavin, and Fabiola Torres made key contributions to this report 

ground_truth: Congress has delegated responsibility for monetary policy to the Federal Reserve (the Fed), the nation's central bank, but retains oversight responsibilities for ensuring that the Fed is adhering to its statutory mandate of "maximum employment, stable prices, and moderate long-term interest rates." To meet its price stability mandate, the Fed has set a longer-run goal of 2% inflation. The Fed's control over monetary policy stems from its exclusive ability to alter the money supply and credit conditions more broadly. Normally, the Fed conducts monetary policy by setting a target for the federal funds rate, the rate at which banks borrow and lend reserves on an overnight basis. It meets its target through open market operations, financial transactions traditionally involving U.S. Treasury securities. Beginning in 2007, the federal funds target was reduced from 5.25% to a range of 0% to 0.25% in December 2008, which economists call the zero lower bound. By historical standards, rates were kept unusually low for an unusually long time to mitigate the effects of the financial crisis and its aftermath. Starting in December 2015, the Fed has been raising interest rates and expects to gradually raise rates further. The Fed raised rates once in 2016, three times in 2017, and four times in 2018, by 0.25 percentage points each time. In light of increased economic uncertainty and financial volatility, the Fed announced in January 2019 that it would be "patient" before raising rates again. The Fed influences interest rates to affect interest-sensitive spending, such as business capital spending on plant and equipment, household spending on consumer durables, and residential investment. In addition, when interest rates diverge between countries, it causes capital flows that affect the exchange rate between foreign currencies and the dollar, which in turn affects spending on exports and imports. Through these channels, monetary policy can be used to stimulate or slow aggregate spending in the short run. In the long run, monetary policy mainly affects inflation. A low and stable rate of inflation promotes price transparency and, thereby, sounder economic decisions. The Fed's relative independence from Congress and the Administration has been justified by many economists on the grounds that it reduces political pressure to make monetary policy decisions that are inconsistent with a long-term focus on stable inflation. But independence reduces accountability to Congress and the Administration, and recent legislation and criticism of the Fed by the President has raised the question about the proper balance between the two. While the federal funds target was at the zero lower bound, the Fed attempted to provide additional stimulus through unsterilized purchases of Treasury and mortgage-backed securities (MBS), a practice popularly referred to as quantitative easing (QE). Between 2009 and 2014, the Fed undertook three rounds of QE. The third round was completed in October 2014, at which point the Fed's balance sheet was $4.5 trillion—five times its precrisis size. After QE ended, the Fed maintained the balance sheet at the same level until September 2017, when it began to very gradually reduce it to a more normal size. The Fed has raised interest rates in the presence of a large balance sheet through the use of two new tools—by paying banks interest on reserves held at the Fed and by engaging in reverse repurchase agreements (reverse repos) through a new overnight facility. In January 2019, the Fed announced that it would continue using these tools to set interest rates permanently, in which case the balance sheet may not get much smaller than its current size of $4 trillion. With regard to its mandate, the Fed believes that unemployment is currently lower than the rate that it considers consistent with maximum employment, and inflation is close to the Fed's 2% goal by the Fed's preferred measure. Even after recent rate increases, monetary policy is still considered expansionary. This monetary policy stance is unusually stimulative compared with policy in this stage of previous expansions, and is being coupled with a stimulative fiscal policy (larger structural budget deficit). Debate is currently focused on how quickly the Fed should raise rates. Some contend the greater risk is that raising rates too slowly at full employment will cause inflation to become too high or cause financial instability, whereas others contend that raising rates too quickly will cause inflation to remain too low and choke off the expansion.

prompt_front: You are given two reports by the government agency.



Question: Write a one-page summary of the report 2.

Report 1: Over the last 3 decades employers have shifted away from sponsoring defined benefit (DB) plans and toward DC plans  This shift also transfers certain types of risk—such as investment risk—from employers to employee participants  DB plans generally offer a fixed level of monthly annuitized retirement income based upon a formula specified in the plan, which usually takes into account factors such as a participant’s salary, years of service, and age at retirement, regardless of how the plan’s investments perform  In contrast, benefit levels in DC plans—such as 401(k) plans—depend on the contributions made to the plan and the performance of the investments in individual accounts, which may fluctuate in value  As we have previously reported, some experts have suggested that the portability of DC plans make them better-suited for a mobile workforce, and that such portability may lead to early withdrawals of retirement savings  DOL reported there were 656,241 DC and 46,300 DB plans in the United States in 2016  Tax incentives are in place to encourage employers to sponsor retirement plans and employees to participate in plans  Under the Employee Retirement Income Security Act of 1974 (ERISA), employers may sponsor DC retirement plans, including 401(k) plans—the predominant type of DC plan, in which benefits are based on contributions to and the performance of the investments in participants’ individual accounts  To save in 401(k) plans, participants contribute a portion of their income into an investment account, and in traditional 401(k) plans taxes are deferred on these contributions and associated earnings, which can be withdrawn without penalty after age 59½ (if permitted by plan terms)  As plan sponsors, employers may decide the amount of employer contributions (if any) and how long participants must work before having a non-forfeitable (i e , vested) interest in their plan benefit, within limits established by federal law  Plan sponsors often contract with service providers to administer their plans and provide services such as record keeping (e g , tracking and reporting individual account contributions); investment management (i e , selecting and managing the securities included in a mutual fund); and custodial or trustee services for plan assets (e g , holding the plan assets in a bank)  Individuals also receive tax incentives to save for retirement outside of an employer-sponsored plan  For example, traditional IRAs provide certain individuals with a way to save pre-tax money for retirement, with withdrawals made in retirement taxed as income  In addition, Roth IRAs allow certain individuals to save after-tax money for retirement with withdrawals in retirement generally tax-free  IRAs were established under ERISA, in part, to (1) provide a way for individuals not covered by a pension plan to save for retirement; and (2) give retiring workers or individuals changing jobs a way to preserve assets from 401(k) plans by transferring their plan balances into IRAs  The Investment Company Institute (ICI) reported that 34 8 percent of households in the United States owned an IRA in 2017, a percentage that has generally remained stable since 2000  In 2017, IRA assets accounted for almost 33 percent (estimated at $9 2 trillion) of total U S  retirement assets, followed by DC plans, which accounted for 27 percent ($7 7 trillion)  Further, according to ICI, over 94 percent of funds flowing into traditional IRAs from 2000 to 2015 came from rollovers—primarily from 401(k) plans  IRS, within the Department of the Treasury, is responsible for enforcing IRA tax laws, while IRS and DOL share responsibility for overseeing prohibited transactions relating to IRAs  IRS also works with DOL’s Employee Benefits Security Administration (EBSA) to enforce laws governing 401(k) plans  IRS is primarily responsible for interpreting and enforcing provisions of the Internal Revenue Code (IRC) that apply to tax- preferred retirement savings  EBSA enforces ERISA’s reporting and disclosure and fiduciary responsibility provisions, which, among other things, include requirements related to the type and extent of information that a plan sponsor must provide to plan participants  Employers sponsoring employee benefit plans subject to ERISA, such as a 401(k) plans, generally must file detailed information about their plan each year  The Form 5500 serves as the primary source of information collected by the federal government regarding the operation, funding, expenses, and investments of employee benefit plans  The Form 5500 includes information about the financial condition and operation of their plans, among other things  EBSA uses the Form 5500 to monitor and enforce plan administrators and other fiduciaries, and service providers’ responsibilities under Title I of ERISA  IRS uses the form to enforce standards that relate to, among other things, how employees become eligible to participate in benefit plans, and how they become eligible to earn rights to benefits  In certain instances, sponsors of 401(k) plans may allow participants to access their tax-preferred retirement savings prior to retirement  Plan sponsors have flexibility under federal law and regulations to choose whether to allow plan participants access to their retirement savings prior to retirement and what forms of access to allow  Typically, plans allow participants to access their savings in one or more of the following forms: Loans: Plans may allow participants to take loans and limit the number of loans allowed  If the plan provides for loans, the maximum amount that the plan can permit as a loan generally cannot exceed the lesser of (1) the greater of 50 percent of the vested account balance, or $10,000 or (2) $50,000 less the excess of the highest outstanding balance of loans during the 1-year period ending on the day before the day on which a new loan is made over the outstanding balance of loans on the day the new loan is made  Plan loans are generally not treated as early withdrawals unless they are not repaid within the terms specified under the plan  Hardship withdrawals: Plans may allow participants facing a hardship to take a withdrawal on account of an immediate and heavy financial need, and if the withdrawal is necessary to satisfy the financial need  Though plan sponsors can decide whether to offer hardship withdrawals and approve applications for hardship withdrawals, IRS regulations provide “safe harbor” criteria regarding circumstances when a withdrawal is deemed to be on account of an immediate heavy financial need  IRS regulations allow certain expenses to qualify under the safe harbor including: (1) certain medical expenses; (2) costs directly relating to the purchase of a principal residence; (3) tuition and related educational fees and expenses for the participant, and their spouse, children, dependents or beneficiary; (4) payments necessary to prevent eviction from, or foreclosure on, a principal residence; (5) certain burial or funeral expenses; and (6) certain expenses for the repair of damage to the employee’s principal residence  Plans that provide for hardship withdrawals generally specify what information participants must provide to the plan sponsor to demonstrate a hardship meets the definition of an immediate and heavy financial need  Early withdrawals of retirement savings may have short-term and long- term impacts on participants’ ability to accumulate retirement savings  In the short term, IRA owners and participants in 401(k) plans who received a withdrawal before reaching age 59½ generally pay an additional 10 percent tax for early distributions in addition to income taxes on the taxable portion of the distribution amount  The IRC exempts certain distributions from the additional tax, but the exceptions vary among 401(k) plans and IRAs  Early withdrawals of any type can result in the permanent removal of assets from retirement accounts thereby reducing the amounts participants can accumulate before retirement, including the loss of compounded interest or other earnings on the amounts over the participant’s career  According to DOL’s Bureau of Labor Statistics (BLS), U S  workers are likely to have multiple jobs in their careers as average employee tenure has decreased  In 2017, BLS reported that from 1978 to 2014, workers held an average of 12 jobs between the ages of 18 and 50  BLS also reported in 2016 that the median job tenure for a worker was just over 4 years  Employees who separate from a job bear responsibility for deciding what to do with their accumulated assets in their former employer’s plan  Recent research estimated that 10 million people with a retirement plan change jobs each year, many of whom faced a decision on how to treat their account balance at job separation  Plan administrators must provide a tax notice detailing participants’ options for handling the balance of their accounts  When plan participants separate from their employers, they generally have one of three options: 1  They may leave the balance in the plan, 2  They may ask their employer to roll the money directly into a new qualified employer plan or IRA (known as a direct rollover), or 3  They may request a distribution  Once the participant receives the distribution he or she can (1) within 60 days, roll the distribution into a new qualified employer plan or IRA (in which case the money would remain tax-preferred); or (2) keep the distributed amount, and pay any income taxes or additional taxes associated with the distribution (known as a cashout)  Sponsors of 401(k) plans may cash out or transfer separating participant accounts if an account balance falls below a certain threshold  The Economic Growth and Tax Relief Reconciliation Act of 2001 (EGTRRA) amended the IRC to provide certain protections for separating participants with account balances between $1,000 and $5,000 by requiring, in the absence of participant direction, plan sponsors to either keep the account in the plan or to transfer the account balance to an IRA to preserve its tax-preferred status  Plan sponsors may not distribute accounts with balances of more than $5,000 without participant direction, but have discretion to distribute account balances of $1,000 or less  The IRC imposes an additional 10 percent tax (in addition to ordinary income tax) on certain early withdrawals from qualified retirement plans, which includes IRAs and 401(k) plans in an effort to discourage the use of plan funds for purposes other than retirement and ensure the favorable tax treatment for plan funds is used to provide retirement income  Employers are required to withhold 20 percent of the amount cashed out to cover anticipated income taxes unless the participant pursues a direct rollover into another qualified plan or IRA  Research has found that many employees are concerned about their level of savings and ability to manage their retirement accounts, and some employers provide educational services to improve employees’ financial wellness and financial literacy and encourage them to save for retirement  A 2017 survey on employee financial wellness in the workplace found more than one-half of workers experienced financial stress and that insufficient emergency savings was a top concern for employees  Research has also found that limited financial literacy is widespread among Americans over age 50, and those who lack financial knowledge are less likely to successfully plan for retirement  In 2018, the Federal Reserve reported that three-fifths of non-retirees with participant-directed retirement accounts had little to no comfort managing their own investments  As we have previously reported, some employers have developed comprehensive programs aimed at overall improvement in employees’ financial health  These programs, often called financial wellness programs, may help employees with budgeting, emergency savings, and credit management, in addition to the traditional information and assistance provided for retirement and health benefits  In 2013, individuals ages 25 to 55 withdrew at least $68 7 billion early from their retirement accounts  Of this amount, IRA owners in this age group withdrew the largest share (about 57 percent) and 401(k) plan participants in this age group withdrew the rest (about 43 percent) However, a total amount withdrawn from 401(k) plans cannot be determined due to data limitations  IRA withdrawals were the largest source of early withdrawals of retirement savings, accounting for an estimated $39 5 billion of the total $68 7 billion in early withdrawals made by individuals ages 25 to 55 in 2013  According to IRS estimates, 12 percent of IRA owners in this age group withdrew money early that year from their IRAs in 2013  The amount they withdrew early comprised a small percentage of their total IRA assets  Specifically, in 2013, the amount of early withdrawals was equivalent to 3 percent of the cohort’s total IRA assets and, according to IRS estimates, the total amount withdrawn by this cohort exceeded their total contributions to IRAs in that year  At least $29 2 billion left 401(k) plans in 2013 in the form of hardship withdrawals, cashouts at job separation, and unrepaid plan loans, according to our analysis of 2013 SIPP data and data from DOL’s Form 5500  Specifically, we found that: Hardship withdrawals were the largest source of early withdrawals from 401(k) plans with an estimated 4 percent (+/- 0 25) of plan participants ages 25 to 55 withdrawing an aggregate $18 5 billion in 2013  The amount of hardship withdrawals was equivalent to 0 5 percent (+/- 0 06) of the cohort’s total plan assets and 8 percent (+/- 0 9) of the cohort’s plan contributions made in 2013  Cashouts of account balances of $1,000 or more at job separation were the second largest source of early withdrawals from 401(k) plans  In 2013, an estimated 1 1 percent (+/- 0 11) of plan participants ages 25 to 55 withdrew an aggregate $9 8 billion from their plans that they did not roll into another qualified plan or IRA  Additionally, 86 percent (+/- 2 9) of these participants taking a cashout of $1,000 or more did not roll over the amount in 2013  The amounts cashed out and not rolled over were equivalent to 0 3 percent (+/- 0 05) of the cohort’s total plan assets and 4 percent (+/- 0 75) of the cohort’s total contributions made in 2013  Loan defaults accounted for at least $800 million withdrawn from 401(k) plans in 2013; however, the amount of distributions of unpaid plan loans is likely larger as DOL data cannot be used to quantify plan loan offsets that are deducted from participants’ account balances after they leave a plan  As a result, the amount of loan offsets among terminating participants ages 25 to 55 cannot be determined with certainty  Specifically, DOL’s Form 5500 instructions require plan sponsors to report unpaid loan balances in two separate places on the Form 5500, depending on whether the loan holder is an active or a terminated participant  For active participants, plan sponsors report loan defaults as a single line item on the Form 5500 (i e , the $800 million in 2013 listed above)  For terminated participants, plan sponsors report unrepaid plan loan balances as benefits paid directly to participants—a category that also includes rollovers to employer plans and IRAs  According to a DOL official, as a result of this commingling of benefits on this line item, isolating the amount of loan offsets for terminated participants using the Form 5500 data is not possible  Without better data of the amount of unrepaid plan loans, the amount of loan offsets and the characteristics of plan participants who did not repay their plan loans at job separation cannot be determined  IRA owners and plan participants taking early withdrawals paid $6 2 billion as a result of the additional 10 percent tax for early distributions in 2013, according to IRS estimates  Although the taxes are generally treated separately from the amounts withdrawn, IRA owners and plan participants are expected to pay any applicable taxes resulting from the additional 10 percent tax when filing their income taxes for the tax year in which the withdrawal occurred  Individuals with certain demographic and economic characteristics that we analyzed had higher incidence of early withdrawals of retirement savings, according to our analysis of SIPP data  The characteristics described below reflect statistically significant differences between comparison groups (a full listing of all demographic groups can be found in appendix III)  Age  The incidence of IRA withdrawals was higher among individuals ages 45 to 54 (8 percent) than individuals ages 25 to 34 and 35 to 44  Education  Individuals with a high school education or less had higher incidence of cashouts (97 percent) and hardship withdrawals (7 percent) than individuals with some college or some graduate school education  Family size  Individuals in families of seven or more (8 percent) or in families of five to six (7 percent) had higher incidence of hardship withdrawals than individuals in smaller family groups we analyzed  Individuals living alone had higher incidence of IRA withdrawals than individuals living in the larger family groups  Marital status  Widowed, divorced, or separated individuals had higher incidence of IRA withdrawals (11 percent) and hardship withdrawals (7 percent) than married or never married individuals  Race  The incidence of hardship withdrawals among African American (10 percent) and Hispanic individuals (6 percent) was higher than among individuals who were White, Asian, or Other  Residence  The incidence of IRA withdrawals and hardship withdrawals was higher among individuals living in nonmetropolitan areas (7 percent and 6 percent, respectively) than among individuals living in metropolitan areas  Similarly, individuals with certain economic characteristics that we analyzed had higher incidence of early withdrawals of retirement savings, according to our analysis of SIPP data  The characteristics described below reflect statistically significant differences between comparison groups (a full listing of all demographic groups can be found in appendix III)  Employer size  Individuals working for employers with fewer than 25 employees had higher incidence of IRA withdrawals (9 percent) than individuals working for employers with higher number of employees  Employment  Individuals working fewer than 35 hours per week had higher incidence of IRA withdrawals (7 percent) than employees working 35 hours or more  Household debt  Individuals with household debt of $5,000 up to $20,000 had higher incidence of IRA withdrawals (14 percent) than individuals with other debt amounts  Household income  Individuals with household income of less than $25,000 or $25,000 up to $50,000 had higher incidence of IRA withdrawals (12 percent and 9 percent, respectively) and hardship withdrawals (9 percent and 7 percent, respectively) than individuals with higher income amounts  Personal cash reserves  Individuals with personal cash reserves of less than $1,000 had higher incidence of IRA withdrawals (10 percent) and hardship withdrawals (6 percent) than individuals with larger reserves  Retirement assets  Individuals with combined IRA and 401(k) plan assets valued at less than $5,000 had higher incidence of hardship withdrawals (7 percent) than individuals with higher valued assets  Tenure in retirement plan  Individuals with fewer than 3 years in their retirement plan had higher incidence of hardship withdrawals (6 percent) than individuals with longer tenures  Stakeholders we interviewed said that plan rules related to the disposition of account balances at job separation can lead participants to remove more than they need, up to and including their entire balance  We previously reported U S  workers are likely to change jobs multiple times in a career  Plan sponsors may cash out balances of $1,000 or less at job separation, although they are not required to do so  As a result, plan participants with such balances, including younger employees and others with short job tenures, risk having their account balances distributed in full each time they change jobs  As shown in table 1, a separating employee must take multiple steps to ensure that an account balance remains tax-preferred  Participants who take a distribution from a plan with the intent of rolling it into another qualified plan or IRA must acquire additional funds to complete the rollover and avoid adverse tax consequences  Plan sponsors are required to withhold 20 percent of the account balance to pay anticipated taxes on the distribution  As a result, the sponsor then sends 80 percent of the account balance to the participant, who must acquire outside funds to compensate for the 20 percent withheld or forgo the preferential tax treatment of that portion of their account balance  For example, a participant seeking to roll over a retirement account with a $10,000 balance would receive an $8,000 distribution after tax withholding, requiring them to locate an additional $2,000 to complete the rollover within the 60-day period to avoid a taxable distribution of the withheld amount  If participants can replace the 20 percent withheld and complete the rollover within the 60-day period, they do not owe taxes on the distribution  Stakeholders said that the complexity of rolling a 401(k) account balance from one employer to another may encourage participants to take the relatively simpler route of rolling their balance into an IRA or cashing out altogether  They noted that separating participants had many questions when evaluating their options and had difficulty understanding the notice provided  For example, participants may not fully understand how the decisions made at job separation can have a significant impact on their current tax situation and eventual retirement security  One plan sponsor, describing concerns about giving investment advice, said she watched participants make what she judged to be poor choices with their account balances and felt helpless to intervene  Stakeholders also noted that the lack of a standardized rollover process sometimes bred mistrust among employers and complicated separating participants’ ability to successfully facilitate a rollover between plans  For example, one stakeholder told us that some plans were hesitant to accept funds from other employer plans fearing that the funds might come from plans that have failed to comply with plan qualification requirements and could create problems for the receiving plan later on  Another stakeholder suggested that the requirement for plan sponsors to provide a notice to separating participants likely caused more participants to take the distribution  Stakeholders described loans as a useful source of funds in times of need and a way to avoid more expensive options, such as high-interest credit cards  They also noted that certain plan loan policies could lead to early withdrawals of retirement savings  (See fig  1 ) Loan repayment at job separation: Stakeholders said loan repayment policies can increase the incidence of defaults on outstanding loans  When participants do not repay their loan after separating from a job, the outstanding balance is treated as a distribution, which may subject it to income tax liability and, possibly, an additional 10 percent tax for early distributions  According to stakeholders, the process of changing jobs can inadvertently lead to a distribution of a participant’s outstanding loan balance, when the participant could have otherwise repaid the loan  Extended loan repayment periods: Some plan sponsors allow participants to take loans to purchase a home  Stakeholders told us that the amounts of these home loans tended to be larger than general purpose loans and had longer repayment periods that these extended from 15 to 30 years  A stakeholder further noted that these loans could make it more likely that participants would have larger balances to repay if they lost or changed jobs  Multiple loans: While some plan sponsors noted that their plans limited the number of loans participants can take from their retirement plan, others do not  Some plan sponsors limited participants to between one and three simultaneous loans, and one plan administrator indicated that 92 percent of their plan-sponsor clients allowed no more than two simultaneous loans  Other plan sponsors placed no limit on the number of participant loans or limited loans to one or two per calendar year, in which case a participant could take out a new loan at the start of a calendar year regardless of whether or not outstanding loans had been repaid  Stakeholders described some participants as “serial” borrowers, who take out multiple loans and have less disposable income as a result of ongoing loan payments  One plan administrator stated that repeat borrowing from 401(k) plans was common, and some participants took out new loans to pay off old loans  Other loan restrictions: Allowing no loans or one total outstanding loan can cause participants facing economic shocks to take a hardship withdrawal, resulting in the permanent removal of their savings and subjecting them to income tax liability and, possibly, an additional 10 percent tax for early distributions and a suspension on contributions  Minimum loan amounts: Minimum loan amounts may result in participants borrowing more than they need to cover planned expenses  For example, a participant may have a $500 expense for which they seek a loan, but may have to borrow $1,000 due to plan loan minimums  Stakeholders said that plan participants take plan loans and hardship withdrawals for pressing financial needs  Many plan sponsors we interviewed said they used the IRS safe harbor exclusively as criteria when reviewing a participant’s application for a hardship withdrawal  Stakeholders said the top two reasons participants took hardship withdrawals were to prevent imminent eviction or foreclosure and to cover out-of-pocket medical costs not covered by health insurance  Participants generally took loans to reduce debt, for emergencies, or to purchase a primary residence  Stakeholders also said that participants who experienced economic shocks stemming from job loss made early withdrawals  They said retirement plans often served as a form of insurance for those between jobs or facing a sudden economic shock and participants accessed their retirement accounts because, for many, they were the only source of savings  They cited personal debt, health care costs, and education as significant factors that affected employees across all income levels  Stakeholders said some participants also used their retirement savings to pay for anticipated expenses  Two plan administrators said education expenses were one of the reasons participants took hardship withdrawals  They said that participants accessed their retirement savings to address the cost of higher education, including paying off their own student loan debt or financing the college costs for family members  For example, plan administrators told us that some participants saved with the expectation of taking a hardship withdrawal to pay for college tuition  Other participants utilized hardship withdrawals to purchase a primary residence  IRA owners generally may take withdrawals at any time and IRS does not analyze the limited information it receives on the reasons for IRA withdrawals  IRA owners can withdraw any amount up to their entire account balance at any time  In addition, IRAs have certain exceptions from the additional 10 percent tax for early distributions  For example, IRA withdrawals taken for qualified higher education expenses, certain health insurance premiums, and qualified “first-time” home purchases (up to $10,000) are excepted from the additional 10 percent tax  IRA owners who make an IRA distribution receive a Form1099-R or similar statement from their provider  On the Form 1099-R, IRA providers generally identify whether the withdrawal, among other things, can be categorized as a normal distribution, an early distribution, or a direct distribution to a qualified plan or IRA  For an early distribution, the IRA provider may identify whether a known exception to the additional 10 percent tax applies  For their part, IRA owners are required to report early withdrawals on their income tax returns, as well as the reason for any exception from the additional 10 percent tax for a limited number of items  In written responses to questions, an IRS official indicated that IRS collected data on the exemption reason codes, but did not use them  Some plan sponsors we interviewed had policies in place that may reduce the long-term impact of early withdrawals of retirement savings taken at job separation  Policies suggested by plan sponsors included: Providing a periodic installment distribution option: Although some plan sponsors may require participants wanting a distribution to take their full account balance at job separation, other plan sponsors provided participants with an option of receiving their account balance in periodic installments  For example, one plan sponsor gives separating participants an option to receive periodic installment distributions at intervals determined by the participants  This plan sponsor said separating participants could select distributions on a monthly, quarterly, semi-annual or annual basis  These participants could also elect to stop distributions at any time, preserving the remaining balance in the employer’s plan  The plan sponsor said the plan adopted this option to help separating participants address any current financial needs, while preserving some of the account balance for retirement  Another plan sponsor adopted a similar policy to address the cyclical nature of the employer’s business, which can result in participants being terminated and rehired within one year  Offering partial distributions: One plan sponsor provided separated participants with the option of receiving a one-time, partial distribution  If a participant opted for partial distribution, the plan sponsor issued the distribution for the requested sum and preserved the remainder of the account balance in the plan  The plan sponsor adopted the partial distribution policy to provide separating participants with choices for preserving account balances, while simultaneously providing access to address any immediate financial needs  Providing plan loan repayment options for separated participants: Some plan sponsors allowed former participants to continue making loan repayments after job separation  Loan repayments after job separation reduce the loan default risk and associated tax implications for participants  Some plan sponsors said that separating participants who have the option to continue repaying an outstanding loan balance generally have three options: (1) to continue repaying the outstanding loan, (2) to repay the entire balance of the loan at separation within a set repayment period, or (3) not to repay the loan  Those participants who continue repaying their loans after separation generally have the option to set up automatic debit payments to facilitate the repayment  Those separated participants who do not set up loan repayment terms within established timeframes, or do not make a payment after the loan repayment plan has been established, default on their loan and face the associated tax consequences, including, possibly, an additional 10 percent tax for early distributions  Some plan sponsors we spoke with placed certain limits on participant loan activity, which may reduce the incidence of loan defaults (see fig  2)  Limiting loan amounts to participant contributions: Some plan sponsors said they limited plan loans to participant contributions and any investment earnings from those contributions to reduce early withdrawals of retirement savings  For example, one plan sponsor’s policy limited the amount a participant could borrow from their plan to 50 percent of participant contributions and earnings, compared to 50 percent of the total account balance  Implementing a waiting period after loan repayment before a participant can access a new loan: Some plan sponsors said they had implemented a waiting period between plan loans, in which a participant, having fully paid off the previous loan, was temporarily ineligible to apply for another  Among plan sponsors who implemented a waiting period, the length varied from 21 days to 30 days  Reducing the number of outstanding loans: Some plan sponsors we spoke with limited the number of outstanding plan loans to either one or two loans  One plan sponsor had previously allowed one new loan each calendar year, but subsequently revised plan policy to allow participants to have a total of two outstanding loans  The plan sponsor said the rationale was to balance limiting participant loan behavior with the ability of participants to access their account balance  Some plan sponsors said they had expanded the definition of immediate and heavy financial need beyond the IRS safe harbor to better align with the economic needs of their participants


Report 2:  For example, one plan sponsor approved a hardship withdrawal to help a participant pay expenses related to a divorce settlement  Another plan sponsor developed an expanded list of qualifying hardships, including past-due car, mortgage, or rent payments; and payday loan obligations  Some plan sponsors implemented loan programs outside their plan, contracting with third-party vendors to provide short-term loans to employees  For example, one plan sponsor instituted a loan program that allowed employees to borrow up to $5,000 from a third-party vendor that would be repaid through payroll deduction  This plan sponsor said the loan program featured an 8 to 12 percent interest rate, and approval was not based on a participant’s credit history  The plan sponsor also observed that they had fewer 401(k) loan applications since the third- party loan program was implemented  A second plan sponsor instituted a similar loan program that allowed employees to borrow up to $500 interest free from a third-party vendor  According to this sponsor, to qualify for a loan, an employee must demonstrate financial hardship and have no outstanding plan loans, and is required to attend a financial counseling course if their loans are approved  Some plan sponsors said they have provided workplace-based financial wellness resources for their participants to improve their financial literacy  Some implemented optional financial wellness programs that covered topics such as investment education, how plan loans work, and the importance of saving for emergencies  These plan sponsors told us they offered on-site financial counseling with representatives of the plan administrator to help provide guidance on financial decision-making; however, other plan sponsors said that—despite their investment in participant-specific financial education—participation in these programs was low  Stakeholders suggested strategies that they believed could help mitigate the long-term effects of early withdrawals of retirement savings on IRA owners and plan participants  They noted that any of these proposed strategies, if implemented, could (1) increase the costs of administering IRAs and plans, (2) require changes to federal law or regulations, and (3) involve tradeoffs between providing access to retirement savings and preserving savings for retirement  Stakeholders suggested several strategies that, if implemented, could help reduce early withdrawals from IRAs  These strategies centered on modifying existing rules to reduce early withdrawals from IRAs (and subsequently the amount paid as a result of the additional 10 percent tax for early distributions)  Specifically, stakeholders suggested: Raising the age at which the additional 10 percent tax applies: Some stakeholders noted that raising the age at which the additional 10 percent tax for early distributions applies from 59½ to 62 would align it with the earliest age of eligibility to claim Social Security and may encourage individuals to consider a more comprehensive retirement distribution strategy  However, other stakeholders cautioned that it could have drawbacks for employees in certain situations  For example, individuals who lose a job late in their careers could face additional tax consequences for accessing an IRA before reaching the age 62  In addition, one stakeholder said some individuals may shift to a part-time work schedule later in their careers as they transition to retirement and plan on taking IRA withdrawals to compensate for their lower wages  Allowing individuals to roll existing plan loans into an IRA: Some stakeholders said that allowing individuals to include an existing plan loan as part of a rollover into an IRA, although currently not allowed, would likely reduce plan loan defaults by giving individuals a way to continue repaying the loan balance  One stakeholder suggested that rolling an existing plan loan into an IRA could be administratively challenging for IRA providers, but doing so to repay the loan may ultimately preserve retirement savings  Allowing IRA loans: While currently a prohibited transaction that could lead to the cessation of an IRA, some stakeholders suggested that IRA loans could theoretically reduce the amounts being permanently removed from the retirement system through early IRA withdrawals  One stakeholder said an IRA loan would present a good alternative to an early withdrawal from an IRA account because it would give the account holder access to the balance, defer any tax implications, and improve the likelihood the loaned amount would ultimately be repaid  However, another stakeholder said that allowing IRA loans could increase early withdrawals, given the limited oversight of IRAs, as well as additional administrative costs and challenges for IRA providers  Stakeholders suggested several strategies that, if implemented, could reduce the effect of cashouts at job separation from 401(k) plans  Simplifying the rollover process: Stakeholders proposed two modifications to the current rollover process that they believe could make the process more seamless and reduce the incidence of cashouts  First, stakeholders suggested that a third-party entity tasked with facilitating rollovers between employer plans for a separating participant would likely reduce the incidence of cashouts at job separation  Such an entity could automatically route a participant’s account balance from the former plan to a new one  One stakeholder said having a third-party entity facilitate the rollover would eliminate the need for a plan participant to negotiate the process  Such a service, however, would likely come at cost that may likely be passed onto participants  Stakeholders also suggested direct rollovers of account balances between plans could further reduce the incidence of cashouts  One stakeholder, however, cautioned that direct rollovers could have downsides for some participants  For example, participants who prefer to keep their balance in their former employer’s plan but provide no direction to the plan sponsor may inadvertently find their account balance rolled into a new employer’s plan  Restricting cashouts to participant contributions only: Some stakeholders suggested limiting the assets a participant may access at job separation  For example, some stakeholders said that participants should not be allowed to cash out vested plan sponsor contributions, thus preserving those contributions and their earnings for retirement  However, this strategy could result in participants overseeing and monitoring several retirement accounts  Stakeholders suggested several strategies that, if implemented, could limit the adverse effect of hardship withdrawals on retirement savings  Narrowing the IRS safe harbor: Although some plan sponsors are expanding the reasons for a hardship to align with perceived employee needs, some stakeholders said narrowing the IRS safe harbor would likely reduce the incidence of early withdrawals  For example, some stakeholders suggested narrowing the definition of a hardship to exclude the purchase of a primary residence or for postsecondary education costs  In addition, one stakeholder said alternatives exist to finance home purchases (mortgages) and postsecondary education (student loans)  Stakeholders noted that eliminating the purchase of a primary residence and postsecondary education costs from the IRS safe harbor would make hardship withdrawals a tool more strictly used to avoid sudden and unforeseen economic shocks  In combination with the two exclusions, one stakeholder suggested consideration be given to either reducing or eliminating the additional 10 percent tax for early distributions that may apply to hardship withdrawals  Replacing hardship withdrawals with hardship loans: Stakeholders said replacing a hardship withdrawal, which permanently removes money from the retirement system, with a no-interest hardship loan, which would be repaid to the account, would reduce early withdrawals  Under this suggestion, if the loan were not repaid within this predetermined time frame, the remaining loan balance could be considered a deemed distribution and treated as income (similar to the way a hardship withdrawal is treated now)  Incorporating emergency savings features into 401(k) plans: Stakeholders said incorporating an emergency savings account into the 401(k) plan structure may help participants absorb economic shocks and better prepare for both short-term financial needs and long-term retirement planning  (See fig  3 ) In addition, stakeholders said participants with emergency savings accounts could be better prepared to avoid high interest rate credit options, such as credit cards or payday loans, in the event of an economic shock  Stakeholders had several ideas for implementing emergency savings accounts  For example, one stakeholder suggested that, were it allowed, plan sponsors could revise automatic account features to include automatic contributions to an emergency savings account  Some stakeholders also said emergency savings accounts could be funded with after-tax participant contributions to eliminate the tax implications when withdrawing money from the account  However, another stakeholder said emergency savings contributions could reduce contributions to a 401(k) plan  In the United States, the amount of aggregate savings in retirement accounts continues to grow, with nearly $17 trillion invested in 401(k) plans and IRAs  Early access to retirement savings in these plans may incentivize plan participation, increase participant contributions, and provide participants with a way to address their financial needs  However, billions of dollars continue to leave the retirement system early  Although these withdrawals represent a small percentage of overall assets in these accounts, they can erode or even deplete an individual’s retirement savings, especially if the retirement account represents their sole source of savings  Employers have implemented plan policies that seek to balance the short- term benefits of providing participants early access to their accounts with the long-term need to build retirement savings  However, the way plan sponsors treat outstanding loans after a participant separates from employment has the potential to adversely affect retirement savings  In the event of unexpected job loss or separation, plan loans can leave participants liable for additional taxes  Currently, the incidence and amount of loan offsets in 401(k) plans cannot be determined due to the way DOL collects data from plan sponsors  Additional information on loan offsets would provide insight into how plan loan features might affect long-term retirement savings  Without clear data on the incidence of these loan offsets, which plan sponsors are generally required to include, (but not itemize) on the Form 5500, the overall extent of unrepaid plan loans in 401(k) plans cannot be known  To better identify the incidence and amount of loan offsets in 401(k) plans nationwide, we recommend that the Secretary of Labor direct the Assistant Secretary for EBSA, in coordination with IRS, to revise the Form 5500 to require plan sponsors to report qualified plan loan offsets as a separate line item distinct from other types of distributions  (Recommendation 1) We provided a draft of this product to the Department of Labor, the Department of the Treasury, and the Internal Revenue Service for review and comment  In its written comments, reproduced in appendixes IV and V, respectively, DOL and IRS generally agreed with our findings, but neither agreed nor disagreed with our recommendation  DOL said it would consider our recommendation as part of its overall evaluation of the Form 5500, and IRS said it would work with DOL as it responds to our recommendation  The Department of Treasury provided no formal written comments  In addition, DOL, IRS, Treasury and two third-party subject matter experts provided technical comments, which we incorporated in the report, as appropriate As agreed with your staff, unless you publicly announce the contents of this report earlier, we plan no further distribution until 30 days from the report date  At that time, we will send copies to the Secretary of Labor, Secretary of the Treasury, Commissioner of Internal Revenue, and other interested parties  In addition, the report will be available at no charge on the GAO website at http://www gao gov  If you or your staff have any questions about this report, please contact me at (202) 512-7215 or jeszeckc@gao gov  Contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of this report  GAO staff making key contributions to this report are listed in appendix VI  The objectives of this study were to determine: (1) what are the incidence and amount of retirement savings being withdrawn early; (2) what is known about the factors that might lead individuals to access their retirement savings early; and (3) what strategies or policies, if any, might reduce the incidence and amount of early withdrawals of retirement savings  To examine the incidence and amount of early withdrawals from individual retirement accounts (IRA) and 401(k) plans, we analyzed the most recent nationally representative data available in three relevant federal data sources, focusing our analysis on individuals in their prime working years (ages 25 to 55), when possible  For consistency, we analyzed data from 2013 from each data source because it was the most recent year that data were available for all types of early withdrawals we examined  We adjusted all dollar-value estimates derived from each data source for inflation and reported them in constant 2017 dollars  We determined that the data from these sources were sufficiently reliable for the purposes of our report  First, to examine recent incidence and amount of early withdrawals from IRAs and the associated tax consequences for individuals ages 25 to 55, we analyzed IRS estimates based on tax returns as filed by taxpayers before enforcement activity published by the Internal Revenue Service’s (IRS) Statistics of Income Division for tax year 2013  Specifically, we analyzed the number of taxpayers reporting early withdrawals from their IRAs in 2013 and the aggregate amount of these withdrawals  To provide additional context on the scope of these early withdrawals, we analyzed the age cohort’s total IRA contributions and the end-of-year fair market value of the IRAs, and compared these amounts to the aggregate amount withdrawn  To examine the incidence and amount of taxes paid as a result of the additional 10 percent tax for early distributions, we analyzed estimates on the additional 10 percent tax paid on qualified retirement plans in 2013  Although IRS did not delineate these data by age, we used these data as proxy because IRS assesses the additional 10 percent tax on distributions to taxpayers who have not reached age 59½  Given the delay between a withdrawal date and the date of the tax filing, it is possible that some of the taxes were paid in the year following the withdrawal  We reviewed technical documentation and developed the 95 percent confidence intervals that correspond to these estimates  Second, to examine the incidence and amount of early withdrawals from 401(k) plans, we analyzed data included in the 2014 panel of the U S  Census Bureau’s Survey of Income and Program Participation (SIPP)—a nationally representative survey of household income, finances, and use of federal social safety net programs—along with retirement account contribution and withdrawal data included in the SIPP’s Social Security Administration (SSA) Supplement on Retirement, Pensions, and Related Content  Specifically, we developed percentage and dollar-value estimates of the incidence and amount of lump sum payments received and hardship withdrawals taken by participants in 401(k) plans in 2013  Because the SIPP is based upon a complex probability sample, we used Balanced Repeated Replication methods with a Fay adjustment to derive all percentage, dollar-total, and dollar-ratio estimates and their 95 percent confidence intervals  To better understand the characteristics of individuals who received a lump sum and/or took a hardship withdrawal in 2013, we analyzed a range of selected individual and household demographic variables and identified characteristics associated with a higher incidence of withdrawals  We applied domain estimation methods to make estimates for these subpopulations  (For a list of variables used and the results of our analysis, please see appendix III ) We attempted to develop a multiple regression model to estimate the unique association between each characteristic and withdrawals, but determined that the SIPP did not measure key variables in enough detail to develop persuasive causal explanations  The sample size of respondents receiving lump sums was too small to precisely estimate the partial correlations of many demographic variables at once  Even with adequate sample sizes, associations between broad demographic variables, such as age and income, likely reflected underlying causes, such as retirement and financial planning strategies, which SIPP did not measure in detail  Third, to examine the incidence and amount of unrepaid plan loans from 401(k) plans, we analyzed the latest filing of annual plan data that plan sponsors reported on the Form 5500 to the Department of Labor (DOL) for the 2013 plan year  We looked at unrepaid plan loans reported by sponsors of large plans (Schedule H) and small plans (Schedule I)  For each schedule, we analyzed two variables related to unrepaid plan loans: (1) deemed distributions of participant loans (which captures the amount of loan defaults by active participants) and (2) benefits distributed directly to participants (which includes plan loan offsets for a variety of reasons, including plan loans that remain unpaid after a participant separates from a plan)  Because plan sponsors report data in aggregate and do not differentiate by participant age, we calculated and reported the aggregate of loan defaults identified as deemed distributions in both schedules  We could not determine the amount of plan loan offsets based on the way that plan sponsors are required to report them  Specifically, plan sponsors are required to treat unrepaid loans occurring after a participant separates from a plan as reductions or offsets in plan assets, and are required to report them as part of a larger commingled category of offsets that also includes large-dollar items like rollovers of account balances to another qualified plan or IRA  As a result, we were unable to isolate and report the amount of this category of unrepaid plan loans  To identify what is known about the factors that might lead individuals to access their 401(k) plans and IRAs and what strategies or policies might reduce the early withdrawal of retirement savings, we performed a literature search using multiple databases to locate documents regarding early withdrawals of retirement savings published since 2008 and to identify experts for interviews  The search yielded a wide variety of scholarly articles, published articles from various think tank organizations, congressional testimonies, and news reports  We reviewed these studies and identified factors that lead individuals to withdraw retirement savings early, as well as potential strategies or policies that might reduce this behavior  The search also helped us identify additional potential interviewees  To answer our second and third objectives, we visited four metropolitan areas and conducted 51 interviews with a wide range of stakeholders that we identified in the literature  In some cases, to accommodate stakeholder schedules, we conducted phone interviews or accepted written responses  Specifically, we interviewed human resource professionals from 22 private-sector companies (including 4 written responses), representatives from 8 plan administrators, 13 retirement research experts (including 1 written response), representatives from 4 industry associations, representatives from 2 participant advocacy organizations, and representatives from 2 financial technology companies  We conducted in-person interviews at four sites to collect information from three different groups: (1) human resource officials in private-sector companies, (2) top 20 plan administrators or recordkeepers, and (3) retirement research experts  We selected site visit locations in four metropolitan locations that were home to representatives of each group  To select companies for potential interviews, we reached out to a broad sample of Fortune 500 companies that offered a 401(k) plan to employees and varied by geographic location, industry, and number of employees  We selected plan administrators based on Pensions and Investments rankings for assets under management and number of individual accounts  We selected retirement research experts who had published research on early withdrawals from retirement savings, as well as experts that we had interviewed in our prior work  Based on these criteria, we conducted site visits in Boston, Massachusetts; Chicago, Illinois; the San Francisco Bay Area, California; and Seattle, Washington  We held interviews with parties in each category who responded affirmatively to our request  In each interview, we solicited names of additional stakeholders to interview  We also interviewed representatives of organizations, such as financial technology companies, participant advocacy organizations, industry associations, and plan administrators focused on small businesses, whose work we deemed relevant to our study  We developed a common question set for each stakeholder category that we interviewed  We based our interview questions on our literature review, research objectives, and the kind of information we were soliciting from each stakeholder category  In each interview, we asked follow-up questions based on the specific responses provided by interviewees  In our company interviews, we asked how companies administered retirement benefits for employees; company policies and procedures regarding separating employees and the disposition of their retirement accounts; company policies regarding plan loans, hardship withdrawals, and rollovers from other 401(k) plans; and company strategies to reduce early withdrawals from retirement savings  In our interviews with plan administrators, we asked about factors that led individuals to access their retirement savings early, how plan providers interacted with companies and separating employees, available data on loans and hardship withdrawals from client retirement plans, and potential strategies to reduce the incidence and amount of early withdrawals  In our interviews with retirement research experts, financial technology companies, participant advocacy organizations, and industry associations we asked about factors that led individuals to make early withdrawals from their retirement savings and any potential strategies that may reduce the incidence and amount of early withdrawals  In our interviews with plan administrators and retirement research experts, we also provided a supplementary table outlining 37 potential strategies to reduce early withdrawals from retirement savings  We asked interviewees to comment on the strengths and weaknesses of each strategy in terms of its potential to reduce early withdrawals, and gave them opportunity to provide other potential strategies not listed in the tables  We developed the list of strategies based on the results of our literature review  Some interviewees also provided us with additional data and documents to assist our research  For example, some companies and plan administrators we interviewed provided quantitative data on the number of plan participants, the average cashout or rollover amounts, the percentage of participants who took loans or hardship withdrawals from their retirement accounts, and known reasons for these withdrawals  Some research experts also provided us with documentation, including published articles and white papers that supplemented our interviews and literature review  All data collected through these methods are nongeneralizable and reflect the views and experiences of the respondents and not the entire population of their respective constituent groups  To answer our second and third objectives, we analyzed the content of our stakeholder interview responses and corroborated our analysis with information obtained from our literature review and quantitative information provided by our interviewees  To examine what is known about the factors leading individuals to access retirement savings early, we catalogued common factors that stakeholders identified as contributing to early withdrawals from retirement savings  We also collected information on plan rules governing early participant withdrawals of retirement savings  To identify potential strategies or policies that might reduce the incidence and amount of early withdrawals, we analyzed interview responses and catalogued (1) company practices that employers identified as having an effect in reducing early withdrawals and (2) strategies that stakeholders suggested that could achieve a similar outcome  GAO is not endorsing or recommending any strategy in this report, and has not evaluated these strategies for their behavioral or other effects on retirement savings or on tax revenues  Appendix II: Selected Provisions Related to Early Withdrawals from 401(k) Plans and Individual Retirement Accounts (IRAs) Requirements Provides an exception for distributions for qualified higher education expenses and for qualified “first-time” home purchases made before age 59½ from the additional 10 percent tax for early distributions Defines “qualified first-time homebuyer distribution” and “first-time homebuyer,” and prescribes the lifetime dollar limit on such distributions, among other things  Allows eligible individuals to make tax-deductible contributions to individual retirement accounts, subject to limits based, for example, on income and pension coverage  Provides for the loss of exemption for an IRA if the IRA owner engages in a prohibited transaction, which results in the IRA being treated as distributing all of its assets to the IRA owner at the fair market value on the first day of the year in which the transaction occurred  Defines a prohibited transaction to include the lending of money or other extension of credit between a plan and a disqualified person  Requirements Allows eligible individuals to make contributions to a Roth IRA that are not tax- deductible  Distributions from the account can generally be treated as a qualified distribution if a distribution is made on or after the Roth IRA owner reaches age 59½ and the distributions is made after the 5-taxable year period beginning when the account was initially opened  Defines a prohibited transaction to include the lending of money or other extension of credit between a plan and a disqualified person  Appendix III: Estimated Incidence of Certain Early Withdrawals of Retirement Savings 401(k) plans 401(k) plans ($1000 or more) 401(k) plans 401(k) plans ($1000 or more) 401(k) plans 401(k) plans ($1000 or more) Legend: * Sampling error was too large to report an estimate  In addition to the contact named above, Dave Lehrer (Assistant Director); Jonathan S  McMurray (Analyst-in-Charge); Gustavo O  Fernandez; Sean Miskell; Jeff Tessin; and Adam Wendel made key contributions to this report  James Bennett, Holly Dye, Sara Edmondson, Sarah Gilliland, Sheila R  McCoy, Ed Nannenhorn, Katya Rodriguez, MaryLynn Sergent, Linda Siegel, Rachel Stoiko, Frank Todisco, and Sonya Vartivarian also provided support  The Nation’s Fiscal Health: Action Is Needed to Address the Federal Government’s Future  GAO-18-299SP  Washington, D C : June 21, 2018  The Nation’s Retirement System: A Comprehensive Re-evaluation is Needed to Better Promote Future Retirement Security  GAO-18-111SP  Washington, D C : October 18, 2017  Retirement Security: Improved Guidance Could Help Account Owners Understand the Risks of Investing in Unconventional Assets  GAO-17-102  Washington, D C : December 8, 2016  401K Plans: Effects of Eligibility and Vesting Policies on Workers’ Retirement Savings  GAO-17-69  Washington, D C : October 21, 2016  Retirement Security: Low Defined Contribution Savings May Pose Challenges  GAO-16-408  Washington, D C : May 5, 2016  Retirement Security: Shorter Life Expectancy Reduces Projected Lifetime Benefits for Lower Earners  GAO-16-354  Washington, D C : March 25, 2016  Social Security’s Future: Answers to Key Questions  GAO-16-75SP  Washington, D C : October 27, 2015  Retirement Security: Federal Action Could Help State Efforts to Expand Private Sector Coverage  GAO-15-556  Washington, D C : September 10, 2015  Highlights of a Forum: Financial Literacy: The Role of the Workplace  GAO-15-639SP  Washington, D C : July 7, 2015  401(K) Plans: Greater Protections Needed for Forced Transfers and Inactive Accounts  GAO-15-73  Washington, D C : November 21, 2014  Older Americans: Inability to Repay Student Loans May Affect Financial Security of a Small Percentage of Retirees  GAO-14-866T  Washington, D C : September 10, 2014  Financial Literacy: Overview of Federal Activities, Programs, and Challenges  GAO-14-556T  Washington, D C : April 30, 2014  Retirement Security: Trends in Marriage and Work Patterns May Increase Economic Vulnerability for Some Retirees  GAO-14-33  Washington, D C : January 15, 2014  401(K) Plans: Labor and IRS Could Improve the Rollover Process for Participants  GAO-13-30  Washington, D C : March 7, 2013  Retirement Security: Women Still Face Challenges  GAO-12-699  Washington, D C : July 19, 2012  401(K) Plans: Policy Changes Could Reduce the Long-term Effects of Leakage on Workers’ Retirement Savings  GAO-09-715  Washington, D C: August 28, 2009 

ground_truth: Improper payments—which include payments that should not have been made or were made in an incorrect amount—are a long-standing, significant problem in the federal government, estimated at almost $141 billion for fiscal year 2017. Executive branch agencies are required to annually estimate improper payments for certain programs. Estimation of improper payments is key to understanding the extent of the problem and to developing effective corrective actions. Relevant laws and guidance provide agencies flexibility in developing estimates. This report describes agencies' processes to estimate improper payments in selected programs for fiscal year 2017 and the extent to which certain differences in these processes can affect the usefulness of the resulting estimates. GAO selected 10 programs across six agencies with the largest reported program outlays in fiscal years 2015 and 2016. For these programs, GAO reviewed relevant laws and guidance, analyzed agencies' policies and procedures, and interviewed officials at relevant agencies and OMB staff. The six agencies GAO reviewed reported taking various approaches related to key components of estimating improper payments—shown in the figure below—for 10 selected programs, which collectively reported outlays of over $2.5 trillion for fiscal year 2017. Sample selection. Eight of the 10 programs GAO reviewed reported using statistically valid approaches, and the remaining 2 reported using alternative methodologies approved by the Office of Management and Budget (OMB). The sampled data elements varied, including payments, medical claims, and tax returns. The age of the data used to develop fiscal year 2017 improper payment estimates also varied, ranging from calendar year 2013 to fiscal year 2017. Identification of improper payments. Some of the six agencies reported using processes designed specifically to estimate improper payments, whereas others reported leveraging existing reviews. These agencies' policies and procedures include a review of aspects of eligibility, except for those related to the Department of Defense's (DOD) Military Pay and the Office of Personnel Management's (OPM) Retirement overpayments. DOD and OPM have not fully assessed whether their estimation processes effectively consider key program risks. OMB guidance does not specifically address how agencies are to test to identify improper payments, such as using a risk-based approach to help ensure that key risks of improper payments are addressed. The six agencies also varied in the treatment of insufficient documentation, both in identifying and in reporting the root causes of improper payments. For the agencies that contact entities outside the agency to estimate improper payments, the treatment of nonresponse differed, with one agency including nonresponses as improper payments and another generally excluding the nonresponse cases from review. Although OMB guidance states that agencies should treat cases of insufficient documentation as improper payments, it does not specifically address the treatment of nonresponse cases. Calculation of the improper payment estimate. The six agencies generally reported using law and OMB guidance to calculate improper payment estimates for the selected programs, except for the Earned Income Tax Credit (EITC). The Internal Revenue Service (IRS) removed overpayments that were recovered when developing its estimate. OMB guidance requires agencies to include recovered amounts in their estimates. Removing these overpayments understates the EITC improper payment estimate and may limit IRS's ability to develop corrective actions to prevent improper payments. GAO recommends that OMB develop guidance on treatment of nonresponse cases and testing to identify improper payments, that DOD and OPM assess their estimation processes, and that IRS revise its methodology to not exclude recovered payments from its estimate. All of the agencies either agreed or partially agreed with the specific recommendations to them. GAO believes that the actions are warranted, as discussed in the report.