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Transfer payment (also called a government transfer, or simply transfer) is money paid to an individual, whilst expecting nothing in return.
It is usually issued by the government to individuals or entities. It comprises a donor and recipient.
In this scenario, the donor gives up something of value (which is the government), to an individual or organization in need.
We need it to boost the economy. These payments help during severe economic recessions. It helps to ease poverty and help humanity.
In this article, we’ll be looking at what transfer payments are, examples of transfer payments, and government transfer payments.
Let’s get started!
What are Transfer Payments?
A transfer payment is a one-way payment to a person or organization, usually without an exchange in return.
These payments do not take up resources or create output. That means that nothing in exchange is given.
The government is mostly in charge of issuing transfer payments, and these payments come in form of welfare, financial aid, social security, and government subsidies for certain businesses.
However, corporate bailouts and subsidies are not commonly referred to as transfer payments.
In the United States, transfer payments usually refer to payments made to individuals by the federal government through various social programs.
These payments are important because they help in redistributing wealth from the well-compensated to the poorly compensated. They are made both for humanitarian reasons and, to ease economic distress, to help improve the economy by putting more money into people’s hands.
There are other benefits of transfer payments. By providing people with social security payments, individuals are provided with the opportunity to live financially secure lives and spend money, which enters the circular flow of income, and also acts as a multiplier of financial resources in the economy.
It helps in redistributing income, by increasing the sales of goods and services that can be purchased with the income.
Transfer payments can be made both between people and entities. Entities such as private companies or governmental bodies.
Transfer Payments Definition
Wikipedia defines transfer payments as a redistribution of income and wealth through the government making a payment, without goods or services being received in return.
It is important to note that a huge proportion of the government’s expenditure is on transfer payments.
The federal, local, or state government often uses it to help individuals or organizations in need by redistributing money to them.
Redistributing this money amongst individuals improves the circular flow of income in an economy, which leads to economic development.
Examples of transfer payments
Transfer payments can come as cash or in-kind payments.
Other examples include old-age insurance, civil service pensions, state and local government pensions, survivors’ benefits, supplementary security income.
Most developed countries make these payments via electronic transfer methods, whereas over half of the world’s developing countries use paper payments such as cash or checks.
Transfer payment via cash is the most popular method of transferring benefits to beneficiaries.
However, there are certain limitations to cash transfer programs. They include financial resources, institutional capacity, and ideology.
Also, many governments in poorer countries, where cash transfers might have the most impressive impact, are often unwilling to implement such programs because of the fears of inflation.
#2. Payment in Kind
Payment in kind is the use of a good or service as payment. They include reimbursements, social help benefits in kind, food stamps, etc.
Cash and Payment-In-Kind are means of issuing transfer payments. However, the three most important transfer payments are for Social Security, unemployment compensation, and welfare.
The other examples include old-age insurance, civil service pensions, state and local government pensions, survivors’ benefits, supplementary security income.
Let’s look at these examples in detail:
Reimbursement is money received in form of cash for repayment of expenses made by an individual or a group of individuals on behalf of an entity for a business expense, insurance, or other costs.
Old age insurance
An old-age pension is a consistent amount of money that people receive from the government when they have retired from work.
We can also define it as monthly benefits to be given to qualified, retired, and disabled workers and their dependents and to survivors of injured workers.
The eligibility and benefit amounts are determined by the worker’s contributions to Social Security.
Civil service pension
The type of pension you get from the Civil Service depends on when you joined, but it’s one of the most generous of its kind. Civil service pension covers staff of employers composed of government departments and non-departmental public bodies, such as museums, commissions, and other organizations.
State and local government pensions
State and local government pensions typically provide pensions based on members’ years of service and average salary over a specified number of years of employment.
Many members also receive cost-of-living adjustments that help maintain the purchasing power of their benefits in retirement
The Survivor Benefit Plan (SBP) allows a retiree to ensure, after death, a continuous lifetime annuity for their dependents.
Your spouse, children, and parents could be eligible for benefits based on your earnings. You may receive survivors’ benefits when a family member dies.
You and your family could be eligible for benefits based on the earnings of a worker who died. The deceased person must have worked long enough to qualify for benefits.
Supplementary security income
Many people who are eligible for SSI may also be entitled to Social Security benefits. In fact, the application for SSI is also an application for Social Security benefits. However, SSI and Social Security are different.
For example, security benefits may be paid to you and certain members of your family if you are “insured” meaning you worked long enough and paid Social Security taxes. Unlike Social Security benefits, they do not base SSI benefits on your prior work or a family member’s prior work.
In most states, SSI recipients also can get medical help to pay for hospital stays, doctor bills, prescription drugs, and other health costs.
Unemployment compensation is a benefit paid to people who have recently lost their jobs to unavoidable circumstances, such as being laid off or if the business closed.
It provides a source of income for jobless workers until they can find employment.
In order to be eligible for it, certain criteria must be satisfied, such as having worked for a minimum stipulated period and actively looking for employment.
Government Transfer Payments
Government transfer payments involve payments for which no current services are performed and are a component of personal income.
Additionally, government payments to nonprofit institutions exclude payments by the federal government for work under research and development contracts.
It can also come in form of medical benefits (mainly Medicare and Medicaid), income maintenance benefits, unemployment insurance compensation, veterans’ benefits, and federal education and training assistance.
Let’s look at the examples in detail;
Income maintenance benefits
We can describe income maintenance benefits as a government program that provides financial assistance to needy people. It can be paid to a support former partner or a dependent child.
A veteran is a person who has served in the military or a person who has got a lot of experience in a particular field. He or she is a person who is no longer working in the military either by being discharged or released from service, under conditions other than dishonorable.
Elderly Veterans may be eligible for a wide variety of benefits, which include disability compensation, pension, education and training, health care, home loans, insurance, vocational rehabilitation and employment, and burial.
Federal education and training assistance
The federal government provides education opportunities for children who are finding it difficult to pay a large sum of money that private schools request.
The schools come in form of federal secondary schools and federal universities. The government also provides practical or material support provided to facilitate training; something used to help carry out training.
The government can also make transfers to companies or labor groups that provide educational services or operate apprenticeship programs.
Medical insurance is an insurance product that covers the medical and surgical expenses of an individual, especially someone that has been insured.
Health insurance is a way to pay for your health care.
How does it work?
It works the same way your car or home insurance works. An individual chooses a plan from an insurance company and agrees to pay a certain rate, or premium, each month.
In return, the health insurer agrees to pay a portion of his/her future medical costs.
Transfer payments are a one-way payment to a person or organization without an exchange in return, usually issued by the government.
Transfer payments can be in form of cash or in-kind payments. They can pay directly cash payments directly to the individual or through electronic transfer to individuals or organizations, while payment-in-kind is the use of a good or service as payment.
Other examples of transfer payments include welfare, pension, medical insurance, unemployment compensations, etc.