Is America Slowly Becoming a ‘Transfer’ Nation?

F or most Americans, Labor Day is a long weekend and the unofficial end of summer. But when President Grover Cleveland made it a federal holiday in 1894, it was originally meant to honor the contributions of workers. Today, some 163 million people out of an adult population of 270 million are employed in the United States, and we should pause to recognize them and highlight their achievements. But Labor Day isn’t what it used to be.

The labor force participation in July of this year was 61.4 percent. Excluding the period at the start of Covid, that’s the lowest employment rate since 1976, over two generations ago. Some of it is driven by early retirements, but a large part can be traced to the growth of government transfer programs.

Every year, federal entitlement programs add more recipients and grow in cost. Over 75 million people receive either Social Security or its disability payments. Just shy of 74 million are on Medicaid, the health program for lower-income people. Around 37 million people are on food stamps, though that number has declined from 42 million last year due to Trump administration reforms. Overall, over 30 percent of Americans receive one or more means-tested benefits every year, although many of them also work.

These transfer programs are highly popular, and in the case of Social Security and Medicare, most Americans believe they have already paid for the benefits they will receive through taxes. But the truth is that a median-wage worker retiring next year is projected to receive Social Security benefits that will be almost four times as large as the total of employer and employee payroll taxes paid and more than seven times as large as their own taxes paid. As for Medicare, in 1990 it spent $7,000 a year for every person 65 and over; now that spending has more than doubled to $16,000 in real terms.

The problem going forward is that the inexorable growth of the  U.S. welfare state is one of our biggest obstacles to economic growth. Transfer income — money that flows from government to individuals — has grown three times faster than non-transfer income in the last few decades.

Today, as noted in an Economic Innovation Group report, most U.S. counties depend on a level of government transfer income that was once found in only truly distressed places: “In 1970, not even 1 percent of counties derived a quarter or more of their total personal income from transfers. In 2000, just 10.4 percent did. But by 2022, 53 percent of counties were receiving a quarter or more of their income from transfers.”

In some growing counties, such as Arlington, Va., or San Mateo, Calif., less than 5 percent of total personal income is composed of transfers. But in rural Kentucky and New Mexico, transfers can compose 50 percent, per that report.

Transfer-dependent communities — where the economy’s strength isn’t so much from work, production, and income earned from labor but rather checks from the government — are often resistant to change. See the growing opposition to data centers and other forms of economic development even when they deliver real, tangible local benefits.

Economic growth remains the long-term answer to the rising concerns that people have about paying their bills, feeding their families, and putting a roof over their heads.

But the growth of the Transfer State teaches us that we are going to have to come up with creative reforms to the major entitlement programs. The funds that pay Social Security retiree benefits are projected to run out of money in 2032. Medicare is predicted to no longer be able to pay full benefits in 2033.

If Congress and whoever occupies the White House after President Trump leaves in 2029 don’t demonstrate a measure of political courage in addressing our nation’s growing dependency on government programs, we will inevitably see a transition from a Transfer Nation to an Insolvent Nation.