From a Simmer to a Boil

Last week I was asked by a reader what determined poverty.  She specifically wanted to know what criterion the government used to label someone as suffering from poverty.  I answered her question briefly, but as I was doing so realized it would probably be beneficial to any reader as well as myself to explain how the government arrives at the Official Poverty Measure it publishes annually.  In addition to explaining the formula and the history of how it came to be used, I will discuss some of the criticism, from liberals and conservatives, surrounding this measure, as well as the suggestions that have been proposed in recent years to correct some of the faults associated with the Official Poverty Measure.

Every year the United States Census Bureau publishes poverty thresholds, which are a list of minimum level household incomes deemed adequate on which to exist.  These thresholds measure pre tax cash income and vary based on family size, composition and age of householder.  Any household with a gross annual income below the poverty threshold for a household matching its size and composition is considered to be in poverty.  For my household, with a family unit of 4, two of which are children under the age of 18, the poverty threshold is $24,036.  But where does that dollar figure come from?

In 1963 Mollie Orshansky, who worked for the Social Security Administration, was compiling a report on childhood poverty, but at the time no good system for measuring poverty existed.  To help with her report Ms. Orshansky created a measurement using a set of nutrition guidelines established by the Department of Agriculture called the Economy Food Plan.  The Economy Food Plan (now called the Thrifty Food Plan) was designed as an emergency use, short term cost guideline for families living on a meager budget.  In 1955 the Department of Agriculture reported that the average American family spent one third of its income on food, so Orshansky took the dollar amount of the Economy Food Plan and multiplied it by 3 to arrive at the poverty threshold for a given household size.  To this day, this is the method the U. S. Census Bureau uses to calculate annual poverty thresholds.  The threshold is updated annually, however, for changes in the price of food using the Consumer Price Index.

Even though the United States government has been using Orshansky’s method for determining annual poverty thresholds for over 50 years, this system has been criticized by both liberals and conservatives.  The first criticism centers on the use of the Economy Food Plan as the basis for establishing the poverty thresholds.  The cost of food over the past 50 years has dropped and the average American household no longer spends one third of its income on food.  Current estimates are that U. S. households spend only about 7% of their income on food.  During the same time, the cost of other household expenditures, like transportation, has risen greatly.  Another problem with relying on the Economy Food Plan as a basis for computing the poverty thresholds is that this guideline assumed the family would eat no meals outside of the home and that the household included a housewife who was a careful shopper and skilled cook who could stretch the family’s food budget as far as it could go.  For any of a variety of reasons this scenario exists in few American households today.

The second area of criticism of this method for determining poverty numbers concerns how the annual household incomes are calculated and applied.  When determining a household’s annual income, the Census Bureau uses that household’s gross annual cash income.   Not included in that figure are any noncash benefits households might receive, like SNAP or housing subsidies.  Additionally, the annual household income does not exclude household resources used for other non discretionary expenses, like tax payments, child support payments or out-of-pocket medical expenses, which can have a considerable impact on a household’s budget.  Finally, these poverty thresholds are national numbers.  In other words, they do not vary geographically,  even though the cost of living can vary greatly from one location in the United States to another.

In 1992, after years of criticism of the method for measuring poverty, Congress asked the National Academy of Sciences to convene a group consisting of academics and policy planners to study the issue and make recommendations.  The group, called The Panel on Poverty and Family Assistance, released its’ report, Measuring Poverty:  A New Approach, in 1995.  The panel recommended that the poverty threshold reflect the amount of money needed to meet a households’ basic needs for food, clothing, shelter and a little more for other necessary expenses.  They stated that all resources available to meet the household needs should be counted, including noncash benefits like tax credits, SNAP and housing subsidies.  Additionally, they recommended that any funds not available to meet the needs in the threshold, because they are to be used for other expenses like taxes, out of pocket healthcare costs or child support payments, not be counted as resources.  Finally the panel’s report urged that the thresholds should vary geographically to reflect the differing costs of meeting the needs in the threshold that exist throughout the United States.

This report recommends addressing almost all of the major complaints expressed about the poverty thresholds; however, for a decade and a half after the report’s release the panel’s recommendations were by and large ignored as neither Republican nor Democrat wanted to touch this political third rail topic.  Finally, in 2011, the Obama administration started publishing a supplemental poverty measure (SPM) based largely on the recommendations of the NAS panel.  The SPM is not the official measure of poverty and is not used when determining eligibility for poverty programs or allocation of funds for poverty programs; however it does give an alternative method to assess the status of low income American households.  Like the poverty thresholds, the SPM is published annually.  The report that accompanies the SPM data explains the difference between the Official Poverty Measure numbers and the SPM numbers,  as well as discusses the effects of noncash benefits, taxes and other nondiscretionary expenses on the economic well being of low income households.

Using the Supplemental Poverty Measures for 2014, which are the most recent numbers available, the percentage of Americans in poverty is higher than the Official Poverty Measure report, 15.3 % and 14.9% respectively.  What do either of these percentages tell us, really?  The SPM is a step in the right direction; however, the problem with both the Official Poverty Measure and the SPM is that they are an absolute measure, a line.  Make a dollar above the line and you are not considered to be in poverty, but your situation will likely not be any different than the person making $2 less than you who is considered to be below the poverty line.  A line only provides economic data.  It does not provide any information about what the person in poverty, or even just above the line, is experiencing, why he is there or show long he has been there.  This information would be vital in formulating any plan to address poverty.  To truly understand poverty, any measurement of it must encompass more than just a line.  Consequently, the United States government should continue to strive for a more accurate assessment of poverty.