What Is a Transfer Payment?

A transfer payment is a one-way payment to a person who has given or exchanged no money, good, or service for it. (In economics, payment is the transfer of one form of good, service or financial asset in exchange for another form of good, service or financial asset in proportions that have been previously agreed upon by all parties involved.) It is a process used by governments as a way to redistribute money through programs such as old age or disability pensions, student grants, and unemployment compensation.

These payments can be made at the federal, state, and local levels. Although no services are performed for them, government transfer payments are considered to be a component of personal income, and therefore subject to income tax.

Key Takeaways

  • A transfer payment is money paid to an individual who has not performed any service or rendered any goods for it.
  • Transfer payments are ways for local, state, and federal governments to redistribute money to those in need.
  • Transfer payments are considered income and are potentially taxable.
  • In the U.S., Social Security, Medicaid, and unemployment insurance are common types of transfer payments.

How a Transfer Payment Works

In the United States, transfer payments usually refer to payments made to individuals by the federal government through various social benefit programs, such as Social Security.

Government transfer payments span a wide range of uses and organizations. The funds for these payments also come from many different sources. Transfer payments do not include subsidies that are paid to domestic farmers, manufacturers, and exporters, even though they are technically a one-way payment to a person on behalf of the government.

Categories of Transfer Payments

The most common form of transfer payment includes retirement and disability insurance benefits. Social Security, officially known as the Old-Age, Survivors, and Disability Insurance program, falls into this category. These payments are made to those who qualify for OASDI benefits, railroad retirement and disability benefits, workers compensation programs, and others.

Medical benefits are the second most common form of transfer payments. These types of benefits are government payments made through intermediaries to beneficiaries of medical care. Specifically, medical benefits come from either public assistance medical care or military medical insurance benefits. Public assistance is received by low-income individuals and payments come through the federally assisted, state-run Medicaid program and the Children's Health Insurance Program (CHIP). Health insurance is provided to military personnel through the TRICARE Management Program. The Transitional Assistance Management Program (TAMP) provides 180 days of premium-free transitional health care benefits after regular TRICARE benefits end.

Unemployment insurance is perhaps the third most common type of government transfer payments. This insurance includes state unemployment, federal unemployment, and other organizations of unemployment compensation.

The Temporary Assistance to Needy Families (TANF) program, better known as "welfare," provides a type of transfer payment that involves both the federal government and state governments.

Veterans' benefits are also a fairly common form of transfer payment. Transfer payments that surround these types of benefits are made up of veterans' pension and disability benefits, veterans' life insurance benefits and other types of veteran assistance.

Finally, education and training assistance is considered a type of government transfer payment. This category consists of higher education student assistance, interest payments on student loans, and state educational assistance. The combination of these benefits helps individuals at all levels of education afford school. They also help people from all types of backgrounds. From those who need only a small amount of money to those who need full scholarships, all sorts of individuals can be helped with transfer payments.