system, workers whose earnings are low receive benefits that are worth far more than their contributions. And after age 72, even someone with no history of contributions receives the minimum benefit.
The second-largest category of transfers occurs in health programs. The Social Security system provides health-related benefits to everyone aged 62 and over through Medicare. This is a health insurance plan in which people can go to any doctor they choose, as often as they want, and Medicare will pay 80 percent of the bills. Reform of Medicare to reduce its rapidly growing cost has been proposed, but little reduction in growth has been achieved so far. In addition to funding Medicare, the federal government helps finance state-operated health plans for the poor, through a program called Medicaid. The costs of these programs have been rising rapidly as well.
The third and smallest of the three categories of transfers is income security— programs to help poor families. Within this category, the largest component is the food stamp program, which gives coupons or special credit cards—good only for buying food—to qualified families. Welfare payments to poor families are also in this category, but these payments are much smaller than outlays on food stamps.
Have transfer payments been growing as a fraction of GDP? Indeed, they have. All three categories of transfer programs have grown rapidly in recent decades. And Figure 3 shows that total transfer payments as a percentage of GDP have trended upward as well.
In recent decades, transfers have been the fastest-growing part of federal government spending and are currently equal to about 8 percent of GDP.
Growth in transfers relative to GDP was most rapid in the 1970s during the Nixon administration. During this period, government-financed retirement benefits became much more generous, food stamps were introduced, and Medicare expanded. Since then, transfers have remained high, but they have not shown any long-term growth in relation to GDP.
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