Latest Data on Government Transfers and Income

by: Donald Marron

In a series of posts (most recent here), I’ve documented that Americans are getting an increasing portion of their income from the government.

BEA released new data on incomes a couple weeks ago, including revisions back to 1995. These data reinforce the story I’ve described in my previous posts:

  • Transfers accounted for 17.3% of personal income in June. That’s the second highest in history, topped only by the 18.2% recorded in May, when transfers were boosted by one-time payments from this year’s stimulus act:

Transfers June 2009

  • The increasing importance of transfers reflects both short-run developments and long-run trends. In the past year, the importance of transfers has grown because of (a) weakness in other forms of income, (b) the natural expansion of transfers due to economic weakness (e.g., increases in unemployment insurance payments), and (c) policies to expand benefits (e.g., as an attempt at stimulus). Over the longer run, however, the growth of transfers has been driven by the expansion of entitlement programs.

To get a handle on these different factors, it’s useful to distinguish three different types of transfer payments: Old-age, survivors, disability, and health insurance (which I have labeled Social Security and Health Insurance), unemployment benefits, and other (which includes food stamps, welfare, and other programs):

Transfer Components June 2009

Among other things, this chart shows:

  • Unemployment benefits have grown rapidly in recent months. They remain small, however, relative to other transfer programs.
  • Other transfers spiked in May because of the special payments, but remained elevated in June. A similar spike occurred in mid-2008 due to tax rebates from the first stimulus; a portion of those rebates were characterized as transfer payments (rather than tax reductions) because they went to individuals who didn’t have any tax liability.
  • Transfer payments for Social Security and health insurance have grown the most over the past few decades.

That last factor is, of course, the reason that our long-run budget situation looks so grim.