Wednesday, September 14, 2011

What is "Poverty?"

With new a new report on United States poverty just released by the U.S. Census Bureau, it seems a good time to review just how those murky poverty rates are calculated.

It all started back in 1964 when the Office of Management and Budget (OMB) directed the Social Security Administration (SSA) to develop the original poverty definition to be used by all federal agencies.

At the core of the definition of poverty was the “economy food plan,” the least costly of four nutritionally adequate food plans designed by the Department of Agriculture. At the same time, the Household Food Consumption Survey suggested that families of three or more persons spent approximately one-third of their money on food.

The SSA multiplied the cost of the economy food plan by three to obtain dollar figures for total family income. After some adjustments, these figures became the official poverty thresholds—which were, of course, adjusted for household size. Minor revisions to the definition were introduced in 1969 and 1981. But, for the most part, the federal government has retained the original methodology.

Of course, prices have risen dramatically since 1964. To reflect changes in the cost of living, poverty thresholds are adjusted annually using the Consumer Price Index.

The Census Bureau publishes thresholds (or income cutoffs) arranged in a two-dimensional matrix. The matrix consists of family size categorized by the presence and number of related children under 18 years old. Thresholds are also determined for “unrelated” individuals. The chart accompanying this article shows an example of 2004 thresholds for several different household sizes.

Of course, income must be measured to determine poverty status. In this case, the Census Bureau adds up the money income for the family or individual. Income includes before-tax dollars from employment earnings, retirement benefits, Social Security income, public assistance, interest, child support, etc. Noncash benefits such as food stamps or housing subsidies are not included in the income total. Capital gains and/or losses are also excluded.

Once income is determined, it is compared to the appropriate threshold for that family/individual. If the family’s income falls below the appropriate poverty threshold, all family members will be considered to be in poverty.

Some groups of people do not receive a poverty determination. For example, unrelated individuals (such as foster children) under the age of 15, or folks in institutional group quarters (nursing homes, prisons), college dormitories, and military barracks do not receive a poverty determination.

As with all data, there are issues with poverty data. Here are a few:

  • Thresholds are not adjusted based on geography. A person living in high-cost San Diego will have the same poverty threshold as a comparable person living in rural Utah where the cost of living is much lower.
  • Not counting noncash benefits (Medicaid, Medicare, food stamps) raises the poverty rate.
  • Not counting certain expenses (medical, work-related) changes who is considered poor.
  • How you define need (thresholds) changes who is in poverty.
  • Studies of how much those with poverty-level incomes spend suggest that "income" is vastly under-reported.

For more information on how poverty is measured, click here.

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