Government Payments: The Fastest-Growing Source of Income for Americans

A recent study has revealed that government payments have become the fastest-growing source of income for Americans. The Economic Innovation Group (EIG), a public policy research organization, has released a report titled “The Great Transfer-mation,” which indicates that Americans have become substantially more dependent on government support. Over the past 50 years, the share of national income coming from transfer payments has more than doubled.

Understanding Transfer Payments

Transfer payment programs include Medicare, Medicaid, Social Security, unemployment and disability, food stamps, and veterans’ benefits. The report shows that transfer payments increased from 8 percent of U.S. total income in 1970 to 18 percent today, crowding out private income from wages and investments. Benjamin Glasner, EIG economist and one of the report’s authors, stated that transfer reliance has grown rapidly across the country and it’s something we need to deal with.

The Growth of Government Transfer Payments

According to Federal Reserve data, government transfer payments increased from about $70 billion in 1970 to more than $6 trillion in 2020, during the COVID-19 pandemic, before falling back to the current level of $4.3 trillion. The EIG report suggests that if government transfer payments were spread evenly among all Americans, they would have amounted to an annual payment of $11,500 per person in 2022.

Demographics and Government Dependence

One factor driving much of the shift from private income to government dependence is that the U.S. population is, on average, getting older. The percentage of Americans 65 years and older increased from 13.1 percent of the population in 2010 to 17.3 percent in 2022. During the same period, the percentage of Americans under the age of 20 fell from 26.9 percent to 24.4 percent.

The Impact on Public Finances

The growth in transfer payments has put a strain on state and federal budgets. The 2024 Pension Solvency and Performance Report states that public pensions are increasingly falling behind on their ability to pay. As of 2023, total unfunded public pension liabilities across the United States hit $1.59 trillion, and the median funded ratio was 76 percent. The U.S. federal deficit is currently $1.8 trillion, and interest payments on U.S. government debt increased from $31 billion in 1970 to more than $1 trillion today.

The Cost of Government Dependence

Some analysts argue that this growing dependence on government comes at the cost of personal autonomy and responsibility. Steve Hanke, professor of Applied Economics at Johns Hopkins University and a member of the board of directors of the Federal Fiscal Sustainability Foundation, expressed concern about the trend to politicize and tangle up all aspects of Americans’ lives with the government.

Aging, Shrinking Populations

The reasons for this dependence varied from region to region, but aging populations, and outward migration were common themes, particularly in rural counties. As societies industrialize, people migrate from farms to cities, and women enter the labor force in larger numbers, and fertility rates fall. This trend has been observed over the past several decades throughout the world, and the United States has been experiencing this trend for two centuries.

Economic Security Versus Prosperity

The increasing dependence on the government for income raises the issue of how the United States can balance economic security for its dependents against overall economic growth and prosperity.

Potential Solutions

According to Glasner, there are three options for governments to continue providing transfer payments. The first is cutting benefits, but that appears to be politically untenable. The second is raising taxes, but there’s some risk to that, because overdoing increases in taxation can potentially cut off sources of economic growth. The third and most viable option, Glasner argues, is to increase economic growth and private income.

Bottom Line

The increasing reliance on government support is a complex issue with no easy solutions. It raises questions about the balance between providing economic security and fostering economic growth. What are your thoughts on this matter? Do you think the government should continue to provide these transfer payments, or should there be a shift towards encouraging private income? Share your thoughts and this article with your friends. Don't forget to sign up for the Daily Briefing, delivered to your inbox every day at 6pm.