Transfer Payment

A transfer payment is a mode of payment where a party recieves the money, but no goods or services are offered in return. The governments and governmental agencies typically disburse these payments to those who have no other means of income and have a poor quality of life.

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.

• 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.

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.

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

• Health Services, such as public health insurance and other free health programs
• Civil 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 reimbursement than before, the revised eligibility criteria make others feel left out.

Just like foreign aid, 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.

An example of a transfer payment is pension. A pension fund 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. 

Different government bodies may use different types of transfer payments. For example, governments tend to provide direct cash transfers during economic recessions 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:

• Pensions
• Public health services
• Social security benefits
• Supplementary security income
• Survivors 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 reimbursements
• Food stamps
• Social assistance
• Transfers of services or goods not found within a market but which are critical for the population
• Lottery

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 Agent
• Transfer Tax
• Risk Transfer