The Great
Transfer-mation
How American communities became
reliant on income from government
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Not long ago, money from government programs like Social Security or SNAP — known as transfers — featured minimally in Americans’ personal income.
Only people in areas of chronic economic distress depended on transfers for meaningful shares of their income in the 1970s.
By the 2000s, transfer income featured much more prominently in local economies.
Today, the majority of counties rely on transfers for a significant portion of their income, while low-transfer places have gone from the norm to nearly extinct.
How did the nation get to this point, and what does it mean for the future?
Tracking the Rise in
Transfer Income
Americans derive their income from three main sources: work, investments, and transfers. Transfer income comes from government programs, such as Social Security, Medicare, and veterans benefits.
In 2022, Americans received $3.8 trillion in transfer income from the government. If that were split evenly across the entire US population, it would be about $11,500 per person.
Transfers now account for almost 18% of total personal income in the United States, up from 8% in 1970.
Reasons
for the Rise
Three main forces are fueling the Great Transfer-mation: an aging population, rapidly rising healthcare costs, and growth in other earnings that just hasn’t kept up.
Aging Population
The number of Americans older than 65 rose by nearly 17 million from 2010 to 2022. One in six Americans is now over 65, up from 1 in 10 in 1970.
In percentage point terms, the 65 and over share of the population rose as much in the 10 years from 2010 to 2020 as it did in the 50 years from 1960 to 2010.
The largest transfer programs are designed for the elderly—56% of the $3.8 trillion in total transfer income goes to Medicare and Social Security—so a rapidly aging population rapidly increases the flow of transfer income.
Rising Healthcare Costs
All health-related safety net programs are becoming more expensive as healthcare costs rise, including Medicaid.
Programs focused on alleviating poverty, in contrast, remain relatively small sources of transfer income. Spending on them has climbed more in line with the rest of the social safety net.
Slow Growth In Other Earnings
Transfers make up an increasing portion of American personal income in part because growth in other earnings has been so slow.
Nationally, per capita transfer income has grown nearly three times faster than income from other sources over the last fifty years.
A Changing
Economic Landscape
The rise in the transfer share reflects a profound shift in how American communities sustain themselves.
In 2000, 10% of US counties relied on transfers for a significant portion of their personal income.
By 2022, this reached 53% of counties — a four-fold increase.
In general, areas that are older, more rural, and less wealthy tend to be significantly reliant on transfers.
In contrast, many metropolitan hubs, affluent suburbs and exurbs, and high-income, high-productivity farming and mining communities remain minimally reliant on transfer income to power their local economies.
Local
Comparisons
A closer look at individual counties reveals how aging and economic stagnation have driven up the transfer share in some places, but not others.
Take two counties with similar shares of the population aged 65 and over: Sarasota, Florida, and Roscommon, Michigan.
Sarasota has aged through the attraction of new residents. Its population growth helps support work-related earnings, and its relatively well-off retirees have considerable investment income on top of Social Security.
By contrast, Roscommon has aged through attrition, as workers and the young move away to find opportunity elsewhere. Its considerably less well-off older residents have little other income to support themselves, or the local economy.
Or two counties on very different economic trajectories: King County, Washington, home to Seattle, and Delaware County, Indiana, anchored by Muncie.
Residents’ earnings collapsed in Muncie as the nation’s manufacturing base hollowed out in the early 2000s. The county went from less transfer reliant than the nation to more reliant, and income growth continues to trail the national average.
On the other hand, thanks to two tech booms and a diversified knowledge economy, Seattle is one of the few places where the transfer share of total personal income has actually fallen over time.
Today, Muncie and Roscommon are much older, economically weaker, and more reliant on transfers to sustain themselves than they used to be. They are also much more representative of the experience of the median American community than Sarasota or Seattle.
Consequences
for Inaction
Not since the aftermath of World War II has the US confronted a fiscal situation as troubling as the one it now faces. Back then, it could count on favorable demographics to grow the economy back to fiscal sustainability.
This time is different. The demographic trends pushing the transfer share higher are set to continue, with the over-65 population projected to swell by 20 million people, while the working age population will grow by just 6 million.
The country is on a collision course with politically fraught trade-offs. Significantly raising taxes and dramatically cutting transfer programs could choke off the very economic activity that finances transfers and immiserate the lives of people who depend on them.
Faster economic growth is thus essential to regaining the path back to fiscal health. To restore the nation’s demographic vitality, a growth agenda should prioritize making it easier to start and sustain families. Other ideas include investments in research and innovation, an expansive and better designed immigration policy, and tax and regulatory policies that foster economic dynamism and participation in the workforce.
Together, these and other pro-growth policies represent the ideal way to decrease reliance on transfers—by lifting incomes earned from work and investing, raising the hopes and economic prospects of workers and their communities, and preventing the country from becoming an ever more dependent one.