The government raises old-age pensions paid to poor households. Which of the following is correct?
Answer & explanation
Correct answer: option 3
The correct answer is Option (3) → Pensions are transfer payments, added to national income while calculating personal income, and they help the redistribution function
A pension is paid with no service in return, so it is a transfer payment, added to national income to get personal income. Paying more to the poor serves the redistribution function.
Option (1) Pensions are factor payments, included in national income, and they help the allocation function — Incorrect. A pension is not a reward for a factor service. The allocation function is about providing public goods.
Option (2) Pensions are capital expenditure, as they create assets for the households — Incorrect. A pension creates no asset for the government. It is revenue expenditure.
Option (3) Pensions are transfer payments, added to national income while calculating personal income, and they help the redistribution function — Correct. All three parts hold.
Option (4) Pensions are transfer payments, deducted from national income while calculating personal income, and they help the stabilisation function only — Incorrect. Transfers are added, and the main aim of higher pensions for the poor is redistribution.
This question uses National Income Accounting and Government Budget and the Economy together.
NCERT (2026-27): “Redistribution Function of Government Budget From chapter two we know that the total national income of the country goes to either the private sector, that is, firms and households (known as private income) or the government (known as public income). Out of private income, what finally reaches the households is known as personal income and the amount that can be spent is the personal disposable income. The government sector affects the personal disposable income of households by making transfers and collecting taxes. It is through this that the government can change the distribution of income and bring about a distribution that is considered ‘fair’ by society. This is the redistribution function.” National Income Accounting: “2.3 Some Macroeconomic Identities … On the other hand, the households do receive interest payments from private firms or the government on past loans advanced by them. And households may have to pay interests to the firms and the government as well, in case they had borrowed money from either. So, we have to deduct the net interests paid by the households to the firms and government. The households receive transfer payments from government and firms (pensions, scholarship, prizes, for example) which have to be added to calculate the Personal Income of the households. …” |