Impact of Government Transfer Payments on Disposable Income

September 13, 2012 | Mike Spychalski, CAIA, Vice President

This week’s Chart of the Week shows the impact of government transfer payments (Social Security, Medicare/Medicaid, unemployment insurance, veterans benefits, food stamps, training & education programs, etc.) on disposable income (defined as personal income minus personal income taxes) in the U.S. over the past several years.

As the chart illustrates, since the recession began in December of 2007, real disposable personal income in the U.S. has increased from $9,974.7 billion to $10,354.8 billion (an increase of 3.8%). However, when excluding government transfer payments, real disposable income has decreased from $8,203.4 billion to $7,979.3 billion (a decrease of 2.7%). There are several reasons for the discrepancy between discretionary income and discretionary income excluding transfer payments, but the two primary reasons are: the U.S. economy has approximately 3.5 million fewer jobs now than in December 2007, and the population of the U.S. is aging. The loss of 3.5 million jobs results in both a drag on income (fewer people working results in lower incomes) and a boost in government transfer payments (fewer people working results in increased payments for unemployment insurance, food stamps, Medicaid, and job training programs.). The aging population of the country drives a boost in spending on programs such as Social Security and Medicare.

Over the past 30 years, government transfer payments have represented 13.9% of total personal income in the U.S. From January 2008 to July 2012, government transfer payments have represented 17.4% of total personal income in the country. Given the persistently high unemployment rate, the current budget deficit, the looming fiscal cliff, and the potential for cuts to government transfer payments in the near term, it is important to understand where the growth in government transfers has come from. The table below shows the current breakdown of government transfers by category as well as the average from January 2008 to present and the 30 year average.

Breakdown of Government Transfers

	Social Security	Medicare/ Medicaid	Unemployment Insurance	Veterans’ Benefits	Other*
Current	32.7%	42.0%	3.4%	3.2%	18.8%
Jan 08-Present	31.8%	41.7%	4.9%	2.6%	19.0%
30 Year Avg.	36.2%	39.3%	3.6%	2.7%	18.2%

* Other includes programs such as welfare payments, food stamps, earned income tax credits, job training, and disaster relief.

As the table shows, part of the increase in government transfers are cyclical in nature and come from programs such as unemployment insurance, food stamps, and job training. These programs have begun to shrink and should continue to shrink as the economy improves. However, the aging population of the country will have a significant impact on the largest components of government transfers, Social Security and Medicare. These problems are structural in nature, and as the population continues to age, spending on these programs should continue to increase. This means that unless there are significant cuts to Social Security and Medicare, it is likely that government transfer payments will remain at this elevated level well into the future.