What is Transfer Payment?

The government uses tax money to reallocate funds to every citizen equally through welfare services or social benefits in the United States. It could be for various reasons except for bailouts or subsidies. The transfer payments include unemployment benefits, civil service pensions, supplemental security income, state pensions, and survivor benefits.

Key Takeaways

  • Transfer payments are payments made, typically by government or governmental agencies, to individuals who are in need of such assistance. Unlike common payment, there is no reception of goods and services in return. Transfer services are typically sent as mailed checks but can also be sent via EFT or RGTS to a bank. The point of transfer payments is to improve the livelihood of less fortunate members of the society, typically by taking the tax money from the rich and using it to redistribute wealth.

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How Does Transfer Payment in Economics Work?

A transfer payment is a uni-directional discharge of money sent from one party to another. The distribution of income levels the playing field so that society can afford a certain quality of life standards. However, this can take a long time to achieve and requires both fair policies and firm implementation from the governmental side.

In the 4th quarter of 2020, the US Government had released approximately 3 billion US dollars in transfer payments, with the amount likely to grow over the years. 

Some of the money disbursed through such payments eventually end up with the government itself through taxation. For instance, individuals who receive unemployment benefits may buy products and pay taxes on them. 

The main goal of these payments is to redistribute government benefits equally to raise the standards of living of the poor. The fact that the government targets the rich to raise funds for these payments often makes people think that it is taking a socialist stand. However, the transfer payment services and socialism are very different things.  

One has to follow a certain set of rules to be eligible to receive transfer payments from the government.

Transfer payment programs

The government pays the deserving recipients through different programs, including: 

  • Health Services, such as public health insurance and other free health programsCivil servant benefits, that the government allottes when the employees are sick or out of work.Defense spending constitutes one of the largest uses of taxes in the American economy. The United States spends more on the military than any other country globally. Social benefits such as social security, welfare, and unemployment benefits.

Mailed checks are the most common ways to make these payments. The amount received per individual depends on the type of program they enroll for, the size of their families, and other issues such as disabilities. An individual can also enroll in more than one program simultaneously if they are qualified. 

Transfer payments can suffer a blow if a country’s economy starts dwindling. In such cases, the government reduces the funding of or brings changes to such programs. It can lead to unfavorable outcomes for the people whose livelihoods depend on these programs. While some get lower reimbursementReimbursementReimbursement refers to the monetary compensation made by companies, organizations, or governments to employees, customers, taxpayers, or other entities for incurring expenses out of their pocket.read more than before, the revised eligibility criteria make others feel left out.

Just like foreign aidForeign AidForeign aid or international aid refers to the voluntary transfer of resources like money, goods like food, drugs, weapons, or technical services, and training from a developed country to a developing one in the form of a loan. Governments or international or non-governmental organizations provide it to address issues like terrorism, environmental degradation, pandemics, etc.read more, these payments are not a form of investment that will yield income or increase the amount of taxes collected. Therefore, the government does not indulge in local or international borrowing for the same purpose.

Transfer Payment Example

An example of a transfer payment is pension. A pension fundPension FundA pension fund refers to any plan or scheme set up by an employer which generates regular income for employees after their retirement. This pooled contribution from the pension plan is invested conservatively in government securities, blue-chip stocks, and investment-grade bonds to ensure that it generates sufficient returns.read more is a money the government pools from people during their working life. It then provides this money to them when they retire and can no longer work. The amount deducted monthly is usually relatively small. During old age, they can use this money for subsistence rather than work again. Typically, the pension total is more than the total sum of money they contributed to the firms throughout their working lives. A person can use pension fund pools as investment vehicles, such as hedge funds. In some cases, the money can also fund lottery pots. It is a great investment with a high yield, which grows a person’s pension. 

Types of Transfer Payments

Different government bodies may use different types of transfer payments. For example, governments tend to provide direct cash transfers during economic recessionsEconomic RecessionsEconomic recession is defined as the phase in which economic activities of a country become stagnant, leading to a disturbance in the business cycle and affecting the overall demand-supply balance. read more or natural disasters. However, the government restricts such payments for extreme cases due to the possibility of inflation or discouragement to find real sources of income.

 The most common federal payments in the United States are:

  • PensionsPublic health servicesSocial security benefitsSupplementary security incomeSurvivors benefits

The government also makes transfer payments in kind, which means that the beneficiary does not receive cash. Common types of in-kind transfer payments include:

  • Social security reimbursementsFood stampsSocial assistanceTransfers of services or goods not found within a market but which are critical for the populationLottery

This has been a guide to What is Transfer Payment & its Definition. Here we explain how it works in Economics along with types & examples. You may also have a look at the following articles to learn more –

Transfer payments are money transfers that flow from one party( usually government bodies) to another ( people of low financial conditions). These payments do not represent purchases of value, include zero consumption, and are not intended to bring material output. Therefore, they are excluded from the GDP since nothing measurable gets generated.

Transfer payments improve people’s living standards and attempt to balance out the distribution of wealth. However, there are some criticisms that transfer payments are not so advantageous in the long run as the benefits are disbursed unequally among poor people. It may also increase people’s dependency on governmental aid instead of them looking for real sources of income.

Examples of transfer payments include social security benefits, state pension, unemployment benefits, civil service benefits, survivor benefits, public health services, etc.

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