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How We Measure Poverty

February 2000

by Jessie Willis

There are two slightly different U.S. federal poverty measures: poverty thresholds, based on the "thrifty food plan" by the U.S. Department of Agriculture, and poverty guidelines, a simplification of the poverty thresholds used to determine eligibility for a number of programs. The poverty thresholds are established after the year is over, based on the Current Population Survey from March of the current year. For example, the 1998 poverty threshold, which reflects the 1998 calendar year, was calculated by the 1999 March Current Population Survey. Until it is calculated, the poverty threshold is merely an estimate. Poverty thresholds are used mainly for statistical purposes and research, such as preparing estimates of the number of Americans in poverty each year.

Poverty guidelines are issued at the beginning of each year, generally in February or March, and are used to determine eligibility for poverty programs such as the Oregon Health Plan. In most cases, guidelines and thresholds can be used interchangeably, except when precision is needed for administrative or legislative purposes. When people talk about the "federal poverty level," or "federal poverty line," they are usually referring to guidelines, unless it is in a research-oriented context. It is always good to check which is being used.

Poverty Thresholds

In 1963-1964, Molly Orshansky of the Social Security Administration developed poverty thresholds. Orshansky based her poverty thresholds on the "thrifty food plan," which was the cheapest of four food plans developed by the Department of Agriculture. The food plan was "designed for temporary or emergency use when funds are low," according to the USDA. Based on the 1955 Household Food Consumption Survey from the USDA (the latest available survey at the time), Orshansky knew that families of three or more persons spent about one third of their after-tax income on food. She then multiplied the cost of the USDA economy food plan by three to arrive at the minimal yearly income a family would need. Using 1963 as a base year, she calculated that a family of four, two adults and two children would spend $1,033 for food per year. Using her formula based on the 1955 survey, she arrived at $3,100 a year ($1,033 x3) as the poverty threshold for a family of four in 1963.

Orshansky differentiated her thresholds not only by family size, but also by farm/non-farm status, by the number of family members who were children, gender of the head of household, and by aged/non-aged status. The result was a detailed matrix of 124 poverty thresholds. Generally, the figures cited were weighted average thresholds for each family size.

In May 1965, one year after the Johnson Administration initiated the "War on Poverty," the Office of Economic Opportunity adopted Orshansky's poverty thresholds as a working definition of poverty. Soon after, Social Security Administration policymakers and analysts expressed concern about how to adjust the poverty thresholds for increases in the standard of living. In 1969, the Poverty Level Review Committee was designated to re-evaluate the poverty thresholds for the Bureau of the Budget. After doing so, the Committee decided to adjust the thresholds for price changes, and not for changes in the general standard of living. The thresholds would be indexed by the Consumer Price Index rather than the per capita cost of the thrifty food plan. The Bureau of the Budget—now the Office of Management and Budget -- designated the poverty thresholds, with their revisions, as the federal government's official statistical definition of poverty.

Since 1969, several committees and task forces have been formed to explore the question of whether the poverty thresholds need to be adjusted and how that might be done. In 1992, the National Research Council of the National Academy of Sciences appointed a Panel on Poverty and Family Assistance to conduct a study on Measuring Poverty. By May 1995, the Panel published its report called Measuring Poverty: A New Approach.[1] In the report, the Panel proposed a new way of developing an official poverty measure for the United States. It did not give any specific set of dollar figures. However, the federal government has made no significant changes to the method of calculation.

Each year, the U.S. Census Bureau updates the poverty threshold to account for inflation. The estimated 1998 threshold value of $16,700 for a family of four represents the same purchasing power as the threshold value of $3,100 in 1963.

Poverty Guidelines

Poverty guidelines differ slightly from poverty thresholds. The guidelines are a simplification of the poverty thresholds for administrative purposes such as determining the financial eligibility for certain federal programs. The Department of Health and Human Services issues poverty guidelines each year in the Federal Register. Poverty guidelines are designated by the year that they are issued. For instance, the guidelines issued generally in the beginning of 1999 are designated the 1999 poverty guidelines, but reflect only the price changes through the 1998 calendar year; they are approximately equal to the Census Bureau poverty thresholds for the 1998 calendar year.

Programs and policies that use poverty guidelines to determine eligibility include Head Start, the National School Lunch Program, the Food Stamp Program, the Low-Income Home Energy Assistance Program, the Oregon Health Plan, and the Oregon Working Families Child Care Credit. These guidelines are used for many, but not all, federal, state, and local poverty programs. The Federal Earned Income Tax Credit is one example that does not use the poverty guidelines. Public Housing programs, such as Section 8, uses the area median income to determine eligibility.

Poverty guidelines are often commonly called the "federal poverty level," or "federal poverty line."

Critiques of the Official Poverty Measure

Over the years there have been a number of critiques of the way the government measures poverty. One on-going critique is of the types of income that are included in (or excluded from) the poverty measure. By failing to include income that many low-income people receive in the form of public assistance, some critics maintain that the extent of poverty is over-stated. If the value of food stamps, publicly provided health insurance benefits, and cash welfare payments were counted as income in the poverty calculation, many people would no longer be considered poor.

Another important critique of the official poverty measure is that it is seriously flawed in continuing to assume that families spend one-third of their income on food. This may have been true when the measure was devised 30 years ago, but it is not an accurate reflection of current realities. Families no longer spend one-third of their income on food and two-thirds on other basic needs. Food now accounts for something closer to one-sixth of the family budget. Housing, transportation and utilities are much larger components of family spending.

Furthermore, expenses most families now regard as crucial elements of their household budget are simply excluded from consideration in the poverty calculation. The cost of childcare is not figured in to the thresholds because the families in the 1955 USDA household survey Orshansky used had one wage earner and a stay-at-home parent. Commuting and other travel and work-related expenses that are a part of modern life have a huge impact on family budgets. Expenses associated with today's living have grown. Additional basic expenses mean that more money is required to maintain the same standard of living in today's world. By ignoring these factors, the poverty measure underestimates poverty.

A key issue that critiques of the poverty measure have run in to is cost. Most attempts to establish a new measure of poverty would result in higher numbers of people being counted as poor. There are some corrections that, by themselves, would lower the poverty count (e.g. including public assistance). Correcting all of the acknowledged problems in the poverty count, however, would significantly increase the total number of poor. If the government recognizes the true number of people in poverty, the cost of providing assistance programs would be considerably higher.

New Challenges - The Living Wage

In recent years there have been more fundamental challenges to the poverty measure. Concerned that the poverty rate is far too low, community-based organizations around the country have advocated for "living wages." These groups have argued that instead of using "poverty" as the standard to measure people's economic well-being, we should develop a measure of "living wages." Policy and research institutes around the country have developed living wage budgets that take into account the full range of costs required for families of different sizes to maintain a decent standard of living.

The bottom line is that the current system of measurement is out-dated and seriously underestimates the count of the number of poor people in this country. If the government were to acknowledge the true extent of poverty, it would need to dedicate a greater share of its resources to pay the costs of programs to help the poor. It is unfortunately cheaper to use an outdated system of measurement so that fewer people will be in poverty by government standards.


[1] Citro, Constance F. & Michael, Robert T. (editors). Washington D.C., National Academy Press, 1995.

 

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