July 17, 2024 

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Payments made without any corresponding production or expectations of production. Unless otherwise noted (such as business transfer payments), the term transfer payments generally refers to payments by the government sector to the household sector. The three most important transfer payments are for Social Security, unemployment compensation, and welfare. The intent of these transfers payments is to redistribute income, and thus the goods and services that can be purchased with the income. Transfer payments surface as income received but not earned (IRBNE) that is added to national income to derived personal income.
A fundamental fact of economic life is that society is comprised of two groups, those with ownership of productive resources and those without. Throughout history, the income and production generated by those with resources have been used to support all members of society. On average, only about 60 percent of the members of any society provides for the entire population. Government transfer payments are one means of redistributing income from those with resources to those without. It probably goes without saying that the 40 percent who do not produce will quickly DIE if not supported by the 60 percent who do.

Transfer Systems

While the United States, like societies of the past, have long used private means of supporting the 40 percent who do not produce (families, charities, religious groups), it also uses an extensive array of government transfer payments. The three primary transfer payments in the United States--Social Security, unemployment compensation, and welfare--were all originally established by the Social Security Act of 1935. The Great Depression of the 1930s convinced government leaders that instability in the macroeconomy could impose serious hardships on many segments of society.
  • Social Security payments are intended to assist elderly and disabled workers, and especially their families, who left the labor force permanently through retirement, injury, or death. It has since become THE primary retirement system for many elderly.

  • Unemployment compensation is intended to assist workers who were temporarily laid off from their jobs due to business-cycle instability.

  • Welfare payments are intended to assist poor families, particularly single women with children. This system has been extensively tweaked and modified over the years, with the addition of food stamps, medicaid, earned income credits, workfare, and a host of others.
Each of these transfer systems comes under continual scrutiny. In particular, the 60 percent who produce output and support the rest of society generally prefers to keep as much of THEIR income as they can. And of course, the 40 percent who do not produce, but receive support would like to get as much income as possible transferred in THEIR direction.

Transfer Recipients

The members of a modern, complex society like that which pervades the United States who lack productive resources typically fall into one of five overlapping groups: children, elderly, disabled, institutionalized, and unemployed.
  • Children: In the United States, children under the age of 16 years are legally prevented from holding most types of jobs. The rationale is that youths need an extended period of development to become productive members of society. This group, of course, is typically supported by their parents. But when this is not possible (or perhaps because parents fall into one of the other groups), then income is transferred from other members of the society. Social Security and welfare are the two primary methods that the government uses to support children.

  • Elderly: The standard retirement age in the United State is 65 years, the time at which many workers leave the labor force. Of course, while retirees may cease productive labor activities, many retain ownership of capital, land, and entrepreneurship resources (especially through corporate stocks). However, those retiring workers who have no other income-generating productive activities must rely on other members of society for support. The Social Security system is a primary means of elderly support in the United States.

  • Disabled: The disabled are workers who through injury or illness are unable, or less able, to contribute productive services to the economy. Their disabilities could be total, preventing any sort of work; or partial, reducing the value of their productivity. The Social Security system is also a primary means of support for disabled workers, although support is also provided by families, a wide array of charitable organizations, and private insurance.

  • Institutionalized: A significant portion of any society is bound to be "institutionalized," that is, living their lives locked up in a building. Prisons are perhaps the highest profile method of institutionalization, concerned with that portion of the population convicted of criminal activity. Mental hospitals are another form of institutionalization that comes to mind. Folks residing in regular "physical" hospitals as well as nursing homes can also be included in this category. Prisoners are supported almost entirely through government taxes. Hospital patients and nursing home residents receive some support through Social Security and welfare transfers, but they are also supported by families, charitable organizations, and private insurance.

  • Unemployed: The need to support involuntarily unemployed workers seems to be a relatively recent phenomenon attributable to the growing complexity of modern economies. While all civilized societies of the past have undoubtedly found the need to support the young, old, disabled, and institutionalized members of society, the need to support people who are willing and able to work but who cannot find employment seems to have emerged with the onset of the industrial revolution of the 1700s and 1800s. Unemployment compensation is the primary government transfer payment used to support these folks. However, Social Security and welfare play key roles, too. And of course, support also comes from families and charities.


Recommended Citation:

TRANSFER PAYMENTS, AmosWEB Encyclonomic WEB*pedia,, AmosWEB LLC, 2000-2024. [Accessed: July 17, 2024].

Check Out These Related Terms...

     | personal income and national income | income earned but not received | income received but not earned | corporate profits distribution | factor payments | net domestic product | national income | disposable income | gross domestic income | personal taxes and nontax payments |

Or For A Little Background...

     | personal income | gross domestic product, income | gross domestic product | National Income and Product Accounts | Bureau of Economic Analysis | National Bureau of Economic Research |

And For Further Study...

     | disposable income and personal income | gross domestic product, expenditures | gross domestic product, ins and outs | gross domestic product, welfare | business cycles | circular flow | gross national product | real gross domestic product | national income and gross domestic product | national income and net domestic product |

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