Why the United States Needs an Improved Measure of Poverty

Rebecca M. Blank
Rebecca M. Blank Chancellor - University of Wisconsin-Madison, Former Brookings Expert

July 17, 2008

Chairman McDermott, Ranking Member Weller, and distinguished members of the Committee, I appreciate the opportunity to talk with you today about the need for an improved measure of poverty in the United States. Our current poverty line is based on data more than 50 years old and our poverty count does not measure the actual resources that many families have available to them.

I have been involved in the discussion of poverty measurement for many years. I was a member of the National Academies of Science’s panel in the mid-1990s that recommended an improved poverty measure and which serves as the model for Representative McDermott’s draft legislation, the Measuring American Poverty Act of 2008. Many of my remarks this morning are taken from the Presidential Address that I gave to the Association for Public Policy Analysis and Management last fall, in which I talked about the reasons why we have been so unsuccessful in implementing an updated and effective poverty measure in the United States (Blank, 2008).

Measuring Poverty

An economic measure of poverty requires two definitions. First, one needs to define a poverty line or poverty threshold, the level of income or other resources below which a particular type of family is considered poor. Second, one needs to define a resource measure, which delineates the ways an individual family’s economic resources will be counted. The poverty count is the number of people who live in families with resources below the poverty threshold.

I emphasize these definitional items because it is important to think about poverty lines and resource definitions together. A statistically credible measure of poverty should have a poverty threshold that is consistent with its resource measure, so that the two can be used together. Unlike Representative McDermott’s proposed legislation, many proposed changes in poverty measurement in the past have emphasized changing the way in which family resources are counted, without proposing to change the poverty threshold in a consistent way.

There are serious problems in the current poverty measure with both the threshold definition and the resource definition. No simple, minor change will make this historical poverty measure accurate; a major redefinition is required.

The Historical Poverty Measure in the United States

The current poverty measure was defined in 1963 by Mollie Orshansky in the Social Security Administration. Let me discuss first the poverty line and then the resource definition that she used and that is still in use today. 

          The current poverty line. Orshansky created a poverty line using the calculation 

                                        Poverty line = 3 x Subsistence food budget

The subsistence food budget for a family of four was based on the Economy Food Plan developed within the USDA in 1961 using data from the 1955 Household Consumption Survey. It was described as the amount needed for “temporary or emergency use when funds are low.” The multiplier of 3 was used because the average family of three or more spent one-third of their after-tax income on food in the 1955 Household Food Consumption Survey. If the average family spent one-third of its income on food, then three times the subsistence food budget provided an estimated poverty threshold. This calculation was done for a family of 4, and so-called ‘equivalence scales’ were used to estimate how much was needed by smaller or larger families.

The current poverty line is this number, calculated in 1963 and based on 1955 data, updated by the Consumer Price Index in each year since.

While this methodology for calculating a poverty line was fine in 1963, and was based on the best data available, it is seriously flawed in 2008. There is no other economic statistic in use today that relies on 1955 data and methods developed in the early 1960s. All of our major statistics, from GDP to unemployment to the current account balance, are regularly updated and revised, and based on the most recent and best data available.

It is not too strong a statement to say that, 45 years after they were developed, the official poverty thresholds are numbers without any valid conceptual basis. If one sticks with a threshold based only on food costs, the current multiplier on food costs would be 7.8 rather than 3 because food is a much smaller share of family budgets now than 45 years ago. But basing the threshold numbers on a single commodity is almost surely not the correct way to calculate these thresholds because it leaves the numbers highly sensitive to the relative price of that commodity and insensitive to the price of any other necessary purchases. For instance, while food prices have fallen over the past 43 years, housing prices have risen. Our current poverty calculation is not responsive to these changes in price and spending patterns over time.

The current resource definition. The resource measure in Orshansky’s calculations was straightforwardly defined as cash income. In 1963 this was a reasonable definition. Few low-income families were paying federal taxes. In-kind programs like Food Stamps, which provide non-cash resources to low-income families, were nonexistent or very small. Thus, cash income and disposable income were largely the same among low-income households.

Forty-five years later, this resource definition is also seriously flawed, as cash income alone is no longer an adequate description of the economic resources available to low-income families. There is broad agreement that the resource measure should reflect a family’s disposable income; that is, the income that a family has available for buying necessities such as housing and food, and after taxes and other mandatory expenditures are deducted. For instance, the recent expansion of the Earned Income Tax Credit (EITC) should provide more resources to low-wage earners; this is income we should count when estimating if a family is poor. Furthermore, many of the public assistance programs that have been created or expanded since 1963 provide benefits to low-income families through in-kind payments, such as food stamps or rental subsidies, neither of which are paid to the recipient as cash income. In a country that wants able-bodied adults to work, work expenses are unavoidable and necessary. This includes transportation costs to work as well as child care expenses for single-parent or dual-earner couples. Similarly, out-of-pocket medical expenses are typically necessary expenditures; those with large prescription drug payments each month have fewer discretionary resources than those with no medical expenditures.

Because the historical poverty measure is calculated based only on family cash income, it is unaffected by many changes in disposable income: 

  • If a disabled individual starts to receive Medicaid assistance and has lower out-of-pocket medical expenses, this will not affect their current poverty status. 
  • If a family receives food stamps and has more income left over for other items, this will not affect their current poverty status. 
  • If a worker receives an EITC refund check, this will not affect their current poverty status.

Clearly, a cash income-based definition of family resources is highly insensitive to many of our nation’s most effective anti-poverty programs.

It is long past time to update both the definition of the poverty threshold and the resource definition to reflect the economic situation facing today’s low-income families.