Americans Now Get 17% of Their Income From the Government

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Government transfers have become an increasingly important source of personal income.  Transfers have averaged more than $2 trillion (at an annual pace) in recent months.  With personal income running at a $12 trillion annual pace, that means that American families are receiving more than one-sixth of their incomes from federal, state, and local governments.

That reliance on government transfers is the highest in U.S. history:

Government Transfers Are a Rising Share of Personal Income

The growth of government transfers reflects a combination of factors.

First, there is a long-term trend of increased spending on entitlement programs. The aging of the population has caused Social Security spending to increase faster than overall incomes. Aging has also boosted spending on Medicare and Medicaid, as has the ongoing increase in underlying health care costs.  These trends are the key drivers of the fiscal crisis that faces us in coming years.

Second, transfers grow during periods of economic weakness. The number of people eligible for unemployment and Medicaid benefits, for example, has increased sharply since the recession began. In addition, policymakers expanded spending on a host of transfer programs – unemployment benefits, Medicaid, food stamps, and special one-time payments, for example – in order to help struggling families and to provide some stimulus to the macroeconomy.

The combination of these factors – long-term trends, automatic spending increases in times of economic weakness, and policy expansions – have lifted the amount of transfers by more than 14% over the past year.

While transfers have been growing, private sources of income have declined during the current downturn. Employee compensation, for example, has fallen by more than 4% over the past year. The combination of rising transfers and falling private income has thus boosted transfers to a record share of personal income.

To get a sense of the relative importance of different types of transfers, the following chart divides them into three categories: Social Security and Health (which covers the retirement, disability, and survivors benefits in Social Security plus health benefits like Medicare and Medicaid), Unemployment Insurance, and Other Transfers (which includes food stamps, welfare, and other programs):

Government Transfers as a Share of Personal Income

As the chart illustrates, all three types of programs have contributed to the recent increase in transfers.

• Other Transfers have spiked because of the two rounds of stimulus. The first, signed by President Bush in early 2008, provided tax rebates to many families. A portion of those rebates are classified as transfers (rather than as tax reductions) because they went to individuals and families that didn’t have any tax liability. The second, signed by President Obama in early 2009, created a number of special payments (e.g., $250 to beneficiaries of various existing programs). Those payments account for the most recent spike, which lifted total transfer payments above 18% of personal income in May.
• In recent months, Social Security and Health Insurance transfers have increased primarily because of the expansion of Medicaid spending due to increased enrollment and policy expansions.
• Unemployment Insurance, finally, has increased sharply for the same reason: the number of unemployed workers has expanded and policymakers have extended benefits. As the chart shows, however, unemployment benefits are quite small compared to other types of government transfers. Even with the recent increases, unemployment benefits make up only a little more than 1% of overall personal income (compared, for example, to the more than 9% from Social Security and Health Insurance).

Over the longer term, unemployment benefits have played little, if any, role in the long-term growth of transfer payments. Unemployment benefits have spiked during economic downturns and, after a few years of recovery, have returned to more normal levels.

The other two types of transfers, however, have systematically increased over the past five decades.  Social Security and Health Insurance has grown the most, rising from 2.5% of personal income to more than 9.5%. Much of that increase was due to the introduction of Medicare and Medicaid in the mid-1960s, but the category has also been growing (relative to overall income) since the start of the decade.

Other Transfers, finally, have increased from about 2.5% of personal income in 1959 to about 6.7% in August (which may still be boosted by some stimulus spending).