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This book evaluates concepts and procedures for deriving the poverty threshold, definitions of family resources, and procedures for annual updates of poverty measures. It explores issues underlying the poverty measure, analyzes effects of any changes in poverty rates, and discusses the impact on eligibility for public benefits.
A New Approach
Copyright © 1995 National Academy of Sciences
All right reserved.
Summary and Recommendations
The U.S. measure of poverty is an important social indicator that affects not only public perceptions of well-being in America, but also public policies and programs. The current measure was originally developed in the early 1960s as an indicator of the number and proportion of people with inadequate family incomes for needed consumption of food and other goods and services. At that time, the poverty "line" for a family of four had broad support. Since then, the poverty measure has been widely used for policy formation, program administration, analytical research, and general public understanding.
Like other important indicators, the poverty measure should be evaluated periodically to determine if it is still serving its intended purposes and whether it can be improved. This report of the Panel on Poverty and Family Assistance provides such an evaluation. Our major conclusion is that the current measure needs to be revised: it no longer provides an accurate picture of the differences in the extent of economic poverty among population groups or geographic areas of the country, nor an accurate picture of trends over time. The current measure has remained virtually unchanged over the past 30 years. Yet during thattime, there have been marked changes in the nation's economy and society and in public policies that have affected families' economic well-being, which are not reflected in the measure. Improved data, methods, and research knowledge make it possible to improve the current poverty measure.
The panel proposes a new measure that will more accurately identify the poor population today. For example, for 1992, the year for which the panel had data available for analysis, the proposed measure, compared with the current measure, finds a lower poverty rate for people in families on public assistance and a higher poverty rate for people in working families. The differences are largely the result of two factors: first, the proposed measure counts not only cash assistance, but also the value of such in-kind benefits as food stamps; second, the proposed measure counts net earnings, after deductions for taxes and work expenses, instead of gross earnings. Equally important, the proposed measure will more accurately describe changes in the extent of poverty over time that result from new public policies and further social and economic change.
THE CURRENT POVERTY MEASURE: EVALUATION
The current poverty measure has a set of lines, or thresholds, that are compared with families' resources to determine whether or not they are poor. The thresholds differ by the number of adults and children in a family and, for some family types, by the age of the family head. The resources are families' annual before-tax money income.
The current thresholds were originally developed as the cost of a minimum diet times three to allow for expenditures on all other goods and services. The multiplier of three represented the after-tax money income of the average family in 1955 relative to the amount it spent on food. The central threshold for 1963 was about $3,100 for a family of four (two adults and two children). Because the thresholds have been adjusted only for estimated price changes, the 1992 threshold for a two-adult/two-child family of $14,228 represents the same purchasing power as the threshold of $3,100 did 30 years ago.
From the beginning, the poverty measure had weaknesses, and they have become more apparent and consequential because of far-reaching changes in the U.S. society and economy and in government policies.
First, because of the increased labor force participation of mothers, there are more working families who must pay for child care, but the current measure does not distinguish between the needs of families in which the parents do or do not work outside the home. More generally, the current measure does not distinguish between the needs of workers and nonworkers.
Second, because of differences in health status and insurance coverage, different population groups face significant variations in medical care costs, but the current measure does not take account of them.
Third, the thresholds are the same across the nation, although significant price variations across geographic areas exist for such needs as housing.
Fourth, the family size adjustments in the thresholds are anomalous in many respects, and changing demographic and family characteristics (such as the reduction in average family size) underscore the need to reassess the adjustments.
Fifth, more broadly, changes in the standard of living call into question the merits of continuing to use the values of the original thresholds updated only for inflation. Historical evidence suggests that poverty thresholds-including those developed according to "expert" notions of minimum needs -follow trends in overall consumption levels. Because of rising living standards in the United States, most approaches for developing poverty thresholds (including the original one) would produce higher thresholds today than the current ones.
Finally, because the current measure defines family resources as gross money income, it does not reflect the effects of important government policy initiatives that have significantly altered families' disposable income and, hence, their poverty status. Examples are the increase in the Social Security payroll tax, which reduces disposable income for workers, and the growth in the Food Stamp Program, which raises disposable income for beneficiaries. Moreover, the current poverty measure cannot reflect the effects of future policy initiatives that may have consequences for disposable income, such as changes in the financing of health care, further changes in tax policy, and efforts to move welfare recipients into the work force.
The Panel on Poverty and Family Assistance concludes that the poverty measure should be revised to reflect more accurately the trends in poverty over time and the differences in poverty across population groups. Without revision, and in the face of continuing socioeconomic change as well as changes in government policies, the measure will become increasingly unable to inform the public or support research and policy making.
It is not easy to specify an alternative measure. There are several poverty concepts, each with merits and limitations, and there is no scientific basis by which one concept can be indisputably preferred to another. Ultimately, to recommend a particular concept requires judgement as well as science.
Our recommended changes are based on the best scientific evidence available, our best judgement, and three additional criteria. First, a poverty measure should be acceptable and understandable to the public. Second, a poverty measure should be statistically defensible. In this regard, the concepts underlying the thresholds and the definition of resources should be consistent. Third, a poverty measure should be feasible to implement with data that are available or can fairly readily be obtained.
RECOMMENDATION: A NEW POVERTY MEASURE
The official U.S. poverty thresholds should comprise a budget for the three basic categories of food, clothing, shelter (including utilities), and a small additional amount to allow for other needs (e.g., household supplies, personal care, non-work-related transportation). Actual expenditure data should be used to develop a threshold for a reference family of four-two adults and two children. Each year, that threshold should be updated to reflect changes in spending on food, clothing, and shelter over the previous 3 years and then adjusted for different family types and geographic areas of the country. The resources of a family or individual that are compared with the appropriate threshold to determine poverty status should be consistently defined to include money and near-money disposable income: that is, resources should include most in-kind benefits and exclude taxes and certain other nondiscretionary expenses (e.g., work expenses).
The procedure for updating the poverty thresholds over time is an integral part of the proposed measure. Poverty measures tend to reflect their time and place. At issue is whether the thresholds ought to be updated for real changes in living standards only occasionally, or on a regular basis, and by how much. We propose a regular updating procedure to maintain the time series of poverty statistics. We also propose a conservative updating procedure that adjusts the thresholds for changes in consumption that are relevant to a poverty budget, rather than for changes in total consumption.
We recommend that the proposed measure be adopted for official government use. We also urge the Statistical Policy Office in the U.S. Office of Management and Budget (which we presume will oversee the consideration and implementation of our recommendations) to establish a mechanism for regular review of the poverty measure on a 10-year cycle. No measure is without flaws, and it is important to have periodic reviews to identify improvements in concepts, methods, and data that may be needed. Altering a key social indicator is always difficult, but if a measure becomes markedly out of step with societal conditions, its utility as a barometer and guide to policy is greatly reduced.
Recommendation 1.1. The official U.S. measure of poverty should be revised to reflect more nearly the circumstances of the nation's families and changes in them over time. The revised measure should comprise a set of poverty thresholds and a definition of family resources-for comparison with the thresholds to determine who is in or out of poverty-that are consistent with each other and otherwise statistically defensible. The concepts underlying both the thresholds and the definition of family resources should be broadly acceptable and understandable and operationally feasible.
Recommendation 1.2. On the basis of the criteria in Recommendation 1.1, the poverty measure should have the following characteristics:
The poverty thresholds should represent a budget for food, clothing, shelter (including utilities), and a small additional amount to allow for other needs (e.g., household supplies, personal care, non-work-related transportation).
A threshold for a reference family type should be developed using actual consumer expenditure data and updated annually to reflect changes in expenditures on food, clothing, and shelter over the previous 3 years.
The reference family threshold should be adjusted to reflect the needs of different family types and to reflect geographic differences in housing costs.
Family resources should be defined-consistent with the threshold concept-as the sum of money income from all sources together with the value of near-money benefits (e.g., food stamps) that are available to buy goods and services in the budget, minus expenses that cannot be used to buy these goods and services. Such expenses include income and payroll taxes, child care and other work-related expenses, child support payments to another household, and out-of-pocket medical care costs, including health insurance premiums.
Recommendation 1.3. The U.S. Office of Management and Budget should adopt a revised poverty measure as the official measure for use by the federal government. Appropriate agencies, including the Bureau of the Census and the Bureau of Labor Statistics, should collaborate to produce the new thresholds each year and to implement the revised definition of family resources.
Recommendation 1.4. The Statistical Policy Office of the U.S. Office of Management and Budget should institute a regular review, on a 10-year cycle, of all aspects of the poverty measure: reassessing the procedure for updating the thresholds, the family resource definition, etc. When changes to the measure are implemented on the basis of such a review, concurrent poverty statistics series should be run under both the old and the new measures to facilitate the transition.
SETTING AND UPDATING THE POVERTY THRESHOLD
We propose that the poverty-level budget for the reference family start with a dollar amount for the sum of three broad categories of basic goods and services-food, clothing, and shelter (including utilities). The amount should be determined from actual Consumer Expenditure Survey (CEX) data as a percentage of median expenditures on food, clothing, and shelter by two-adult/ two-child families. This sum should then be increased by a modest additional amount to allow for other necessities. The allowance for "other expenses" is intended to cover such goods and services as personal care, household supplies, and non-work-related transportation. However, it does not include such nondiscretionary expenses as taxes and child care and other costs of working, which are treated as deductions from income (see below).
Once a new reference family threshold is determined, it should be updated each year with more recent expenditure data. The recommended updating procedure will automatically, over time, reflect real changes in the consumption of basic goods and services without the need for a periodic and, inevitably, disruptive readjustment in the level. It represents a middle ground between the approach of simply updating the thresholds for price changes, which ignores changes in living standards over time, and the approach of updating the thresholds for changes in total consumption.
As part of implementing the proposed poverty measure, the current official threshold should be reevaluated in light of the proposed threshold concept, which treats certain expenses as deductions from income rather than as elements of the poverty budget. That evaluation should also consider the real growth in the standard of living that has occurred since the current threshold was first set for 1963.
We do not as a panel recommend a specific threshold with which to initiate the new poverty measure. Ultimately, that decision is a matter of judgement. We do, however, offer our conclusion about a range for that initial threshold. This conclusion represents our own judgement, informed by analysis of thresholds developed from other commonly used concepts, such as expert budgets, relative thresholds expressed as one-half median income or expenditures, and thresholds derived from responses to sample survey questions about the poverty line.
We believe that a reasonable range for the initial threshold for the reference family of two adults and two children is $13,700 to $15,900 (in 1992 dollars). The lower number equals the expenditures for food, clothing, and shelter ($11,950) by families at the 30th percentile of all two-adult/two-children families, with a multiplier of 1.15 for other needed expenditures; the higher number equals the expenditures for food, clothing, and shelter ($12,720) by families at the 35th percentile of all two-adult/two-children families, with a multiplier of 1.25 for other needed expenditures.
Recommendation 2.1. A poverty threshold with which to initiate a new series of official U.S. poverty statistics should be derived from Consumer Expenditure Survey data for a reference family of four persons (two adults and two children). The procedure should be to specify a percentage of median annual expenditures for such families on the sum of three basic goods and services-food, clothing, and shelter (including utilities)-and apply a specified multiplier to the corresponding dollar level so as to add a small amount for other needs.
Excerpted from Measuring Poverty Copyright © 1995 by National Academy of Sciences. Excerpted by permission.
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|Summary and Recommendations||1|
|1||Introduction and Overview||17|
|3||Adjusting Poverty Thresholds||159|
|5||Effects of the Proposed Poverty Measure||247|
|6||Other Issues in Measuring Poverty||293|
|7||Use of the Poverty Measure in Government Assistance Programs||317|
|8||The Poverty Measure and AFDC||335|
|App. A Dissent||385|
|App. B Data Sources for Measuring Poverty||391|
|App. C The Interdependence of Time and Money||421|
|App. D Assistance Programs for People With Low Incomes||433|
|References and Bibliography||449|
|Biographical Sketches of Panel Members and Staff||483|