Definition of payment by transfer


What is a transfer payment?

A transfer payment is a one-way payment to a person or organization that has not delivered or exchanged goods or services for them. This is in contrast to a simple “payment”, which in economics refers to a transfer of money in exchange for a product or service.

Generally, the phrase “transfer payment” is used to describe government payments to individuals through social programs such as welfare, student scholarships, and even Social Security. However, government payments to corporations, including unconditional bailouts and grants, are not commonly described as transfer payments.

Key takeaways

  • A transfer payment is a payment of money for which no goods or services are exchanged.
  • Transfer payments commonly refer to efforts by local, state, and federal governments to redistribute money to those in need.
  • In the US, Social Security and unemployment insurance are common types of transfer payments.
  • Corporate bailouts and grants are not commonly called transfer payments.

Understanding transfer payments

In the US, transfer payments generally refer to payments made to individuals by the federal government through various social programs. These payments are seen as a redistribution of wealth from the well-compensated to the badly compensated. They are made both for humanitarian reasons and, in times of economic hardship, to help stimulate the economy by putting more money in the hands of people.

Types of transfer payments

The best known form of transfer payment is probably Social Security payments, either for retirement or disability. These are considered transfer payments even though most of the beneficiaries have made contributions to the system during their working lives. Similarly, unemployment payments are also considered transfer payments.

There are many other types of transfer payments. They can be made from one person to another or even from an individual to an organization. These can include individual donations to charities or non-profit organizations, or even a simple gift of cash from one person to another.

Subsidies for education and training are also considered a type of government transfer payment. This includes transfers to companies or labor groups that provide educational services or operate apprenticeship programs.

Transfer payments do not include subsidies paid to farmers, manufacturers, and exporters, although they are one-way payments from the government.

Payment transfer and economy

Transfer payments are often introduced or expanded during severe economic downturns. Social Security, for example, was created by the Roosevelt administration during the Great Depression.

More recently, albeit on a smaller scale, in March 2020 Congress voted to provide direct cash payments of $ 1,200 to most Americans, totaling $ 250 billion, as well as additional direct assistance to affected American workers. by the economic collapse. (Congress also approved $ 500 billion in bailouts for US corporations.)

Many countries provide direct cash assistance to people during economic downturns as a way to support those in need and stimulate the economy. According to Keynesian economics, there is a “multiplier effect” to transfer payments, which means that each dollar in payments stimulates a chain reaction that results in more expenses than the original dollar.

www.investopedia.com

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Mark Holland

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