Transfer Payment: Definition & Examples

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  • 0:00 Transfer Payment Defined
  • 0:38 Size of Transfer Payments
  • 1:02 Categories of Transfer…
  • 2:13 Lesson Summary
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Lesson Transcript
Instructor: Shawn Grimsley

Shawn has a masters of public administration, JD, and a BA in political science.

Governments make a substantial number of transfer payments every year. In this lesson, you'll learn about transfer payments, and you'll be given some examples.

Transfer Payment Defined

A transfer payment, from the standpoint of government finance, is a payment of money or in-kind benefit (such as food stamps) that is given to individuals by the government without the government receiving any goods or services in exchange.

Transfer payments are not counted in calculating gross domestic product (GDP) because they are not compensation received in exchange for goods or services. Instead, transfer payments are considered a redistribution of income because the government uses revenue that it receives from income taxation to make the transfer payments.

Size of Transfer Payments

Federal, state, and local governments all make transfer payments. The level of transfer payments does fluctuate, especially in times of economic hardship, when unemployment and poverty tend to increase. According to the 1999 Economic Report of the President, federal, state, and local transfer payments make up 44% of government spending.

Categories of Transfer Payments

You can break government transfer payments down into two broad categories: social insurance and welfare programs. Let's look at each in a bit more detail.

Welfare programs - When you think of the phrase 'redistribution of wealth,' you are probably thinking about welfare. Welfare programs are aimed at helping the poorest segments of our society. Qualification for the programs requires means testing, which means applicants must meet certain financial criteria in order to qualify for the programs. Examples of welfare programs include Temporary Assistance for Needy Families (TANF), which is what most people consider 'welfare;' food stamps; Medicaid; and free health insurance.

Social insurance programs - Contrary to popular belief, the American middle class is probably the largest recipient of overall transfer payments, not the poor. Social insurance programs provide benefits to citizens regardless of their income or net worth. Familiar social insurance programs include Social Security, unemployment payments, and Medicare.

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