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In a land of dollars: Deep poverty and its consequences

Emily Cuddy, Joanna Venator, and Richard V. Reeves

America is a rich country. But it contains lots of people surviving on incomes more common in developing countries. In this memo, we explore the consequences of being on the very bottom rung of the income ladder on families’ daily life, as well as the long-term life chances of their children.

Extreme poverty, deep poverty

In 2011, over 1.5 million families were living in “extreme” poverty, with $2 or less in cash income per person per day, according to a recent study by Luke Shaefer and Kathryn Edin. Many more—over six percent of the US population, including 7.1 million children— live in “deep” poverty, defined as having a household cash income under half the federal poverty threshold. In 2015, the threshold for being in deep poverty is an annual cash income of less than $5,885 for an individual, $7,965 for a single-parent with one child, or $12,125 for a married couple with two kids. For context, the median household income in the US in 2013 was nearly $52,000.

Recently, both extreme and deep poverty in the US have become more prevalent. As shown below, this holds true for most definitions of income, even those including non-cash benefits. Although there is some disagreement about these figures and their causes, many scholars suggest that the rise is a consequence of the 1996 welfare reforms. Strengthened work requirements and newly implemented time limits meant that many low-income families entered work, received higher tax credits and improved their situation. But those unable or unwilling to move from welfare to work as intended received less cash assistance from the government and became reliant on a hodgepodge of government support, such as SNAP, housing subsidies, Medicaid/CHIP.


DeepPoverty_Figure1

Who are the deeply poor?

The typical person in deep poverty is US-born, young, white, and living in a family, if only because most people in the US fall into these categories. But the risk of being in deep poverty varies very significantly across demographic groups:

  1. Over 10 percent of children younger than six live in families in deep poverty. 


DeepPoverty_Figure2

  1. 10 and 12 percent of black Americans and Hispanics, respectively, are in deep poverty as compared to only 5 percent of whites. 

DeepPoverty_Figure3

  1. Individuals and single-mother families are at greatest risk of falling into deep poverty.

DeepPoverty_Figure4

Given the lifecycle impacts of early childhood circumstances, especially for minority children, these demographic risks of deep poverty bode ill for social mobility.

Work—or lack of it—and deep poverty

The best defense against deep poverty is a paycheck. Although about 3 million of the deeply poor (aged 16 or older) work on a part-time basis, more than 10 million have no paid work at all. For some, especially those caring for children, this may be a choice, albeit a hard one. Others may simply fail to find a job; yet more may be distant from the labor market. As a recent Urban Institute report shows, many of the deeply poor suffer from “serious physical and mental health problems, disabilities, and addiction…[or] may be homeless, high school dropouts, functionally illiterate, or have criminal records.”

DeepPoverty_Figure5

Government support for the deeply poor

For the minority of those who are both in work and in deep poverty, the following tax credits are an important source of income: the Earned Income Tax Credit (EITC), Child Tax Credit (CTC), and Additional Child Tax Credit (ACTC). The EITC phases in with the first dollar of earnings, and the CTC and ACTC phase in after $3,000 in earnings. A married couple with two children and earnings of $10,000 are eligible for a $5,060 cash refund ($4,010 EITC and $1,050 ACTC), which boosts their disposable income by just over 50 percent.

Authors

Those without earnings must rely entirely on familial and government support. Typically, those in deep poverty are eligible for family-friendly tax credits and direct assistance with buying food, shelter, and health care—all programs without strict work requirements unlike TANF.

In-kind transfers do not lift incomes, but are a vitally important source of support for those in deep poverty, especially in terms of food, housing and health care

  1. Food. According to the USDA, the weekly cost of food for a family of four ranges anywhere from $130 (the “thrifty” plan) to $300 (the “liberal” plan), or over 52 weeks, $6,760 to $15,600, respectively. This is spending well beyond the reach of a family in deep poverty, which is where SNAP comes in. For qualifying individuals and families, SNAP effectively covers the difference between 30 percent of adjusted income and the cost of the appropriate “thrifty” food plan. So, that same married couple with two children and earnings of $10,000 would receive about $550 per month, or $6,600 annually. 
  2. Housing. Low-income families, including those in deep poverty) can also qualify for either a voucher or a rent subsidy. Although these types of programs have historically been plagued by over-enrollment, they do allow some low-income families to remain housed affordably. Like with SNAP, family contributions to housing are capped at 30 percent of adjusted income. Therefore, a single mother with one child and an annual income of $8,000 would only need to contribute about $200 per month to rent and the government would cover the difference. In high-rent areas like DC, where the fair market rent for a two-bedroom in 2015 is $1,458, this government contribution is critical to ensuring that such families remain housed.
  3. Health. The government also provides financial support for health care. Families with children in deep poverty can receive free or greatly subsidized care through Medicaid and CHIP programs. Given the average premium for a family health insurance plan is about $1,400 per month, premium savings alone for these families are significant. Given the across-the-board expansions in health insurance associated with the Affordable Care Act, many low-income individuals are eligible for insurance subsidies through the Health Insurance Marketplace.

Spending and deep poverty

Using 2013 Consumer Expenditure Survey data (CEX), we compare the spending of Americans living in deep poverty (income less than 50 percent of the federal poverty line for their household) to those who are poor but not in deep poverty (51 to 100 percent of the FPL), and those who are ‘middle class’ (the middle income quintile).

Table 1 shows the average pre- and post-tax 2013 income levels for these three groups, which includes cash transfers. As expected there are very wide gaps:

Table 1. Yearly Income in 2013, by income group

Deep Poverty

(0-50% of FPL)

Poverty

(51-100% of FPL)

Middle Income Quintile

Pre-tax income

$4,299.01

$14,049.25

$46,242.72

Post-tax income

$3,196.15

$14,549.56

$46,262.83

Adjusted pre-tax income

$6,117.48

$17,258.40

$47,718.49

For the purposes of defining the three groups, only cash income (i.e., wage and salary income plus cash benefits) was included; however, we also include income from food stamps and other electronic benefits in the average incomes shown here. Since there is good evidence that CEX income measures under-state receipts of government transfers, we adjust accordingly based on 2008 estimates by Meyer, Mok, and Sullivan. These adjusted estimates are shown below—deeply poor households have less than half the income of poor households and about one-eighth of the income of middle-tier households.

DeepPoverty_Figure6

Spending, however, is a different story. Total expenditures reported by the deeply poor are identical to those of the poor. Overall figures along with categories of spending are as follows:

Table 2. Yearly expenses in 2013, by income group

Type of Expense

Deep Poor

Poor

Middle Income

Total Expenditures

$15,329.42

$15,242.24

$27,202.01

Food

$3,138.77

$3,243.24

$4,559.21

Housing

$6,114.34

$5,897.36

$9,235.74

Transportation

$2,392.38

$2,172.19

$5,171.01

Clothes/ Apparel

$321.43

$329.69

$466.88

Health Care

$981.09

$887.73

$2,084.49

Entertainment

$540.63

$586.21

$1,188.87

Education

$718.40

$664.89

$343.65

Personal insurance and pensions

$223.79

$580.69

$2,366.35

Childcare

$65.28

$49.90

$108.45

The necessities of life account for the most spending for all three groups, as a proportion of income. Food, housing, and transportation make up about three-quarters of spending for all groups (76 percent for the deep poor, 74 percent for the poor, and 70 percent for the middle class). Of course, the absolute spending level of middle income households dwarfs that of their less fortunate peers. While the deeply poor spend on average $3,138 per year on food or about $260 a month, the middle income group spends $4,559 per year or about $380 a month. Middle income households spend 50 percent more on housing than the deeply poor and almost 120 percent more on transportation. And these higher spending levels continue across all spending types, with the exception of education:

DeepPoverty_Figure7

Income versus spending among the deeply poor: A paradox

Despite significant differences in reported income, the poor and the deeply poor have similar expenditures. How can the deeply poor be spending $9,000 more per year than they report in income? There are several possible explanations:

  1. Income under-reporting: The Bureau of Labor Statistics believes the primary reason for the discrepancy is either non-response to or under-reporting on income questions. If people are under-reporting their income, the deeply poor group will include some individuals who are not in deep poverty, though they may well be poor.
  2. Sample bias: The CEX may not be representative of the average person in deep poverty given that the poorest of those in deep poverty (e.g., homeless, institutionalized, etc.) are hard to reach and therefore may be excluded from the survey.
  3. Transitory state: For many, deep poverty may be transitory. According to Peter Edelman in So Rich, So Poor, only one in four in deep poverty remains there for three years in a row. Indeed, half escape within one year. As such, these individuals may try to smooth their consumption across this period to the extent that they can.
  4. “Non-standard” income: Because the deeply poor are cash poor, much of their consumption must be financed by non-cash sources like in-kind transfers, borrowing, or even illegal activity. For example, in the CEX sample, the average deeply poor person carries about $5,000 more in credit card debt than the average poor, but not deeply poor person

The implications of deep poverty for mobility

Even if the short-term consumption patterns for poor and deeply poor households are broadly similar, day-to-day spending struggles are only part of the deep poverty story. There is reason to believe that even a short amount of time in deep poverty damages the prospects of children’s success.  Using the benchmarks and data created for the Social Genome Project, we find that those born in families in deep poverty are less likely to succeed in all stages of life, and that the gaps between the poor and the deeply poor widen considerably as the children get closer to adulthood. Here are the Project’s benchmarks of success at six life stages:

ccf_20150507_reeves_1

And here are the proportion of children born into deep poverty, poverty and the middle class clearing each of those hurdles:

ccf_20150507_reeves_2

As well as being less likely to succeed against these benchmarks, children born into a deeply poor family are less likely to move up the income ladder, perhaps in part because they have further to climb simply to move up a rung. Deep poverty is “sticky”—14 percent of those who were born deeply poor will be in deep poverty at age forty, about three times as many as those who were not born in deep poverty.

Forty percent of those born deeply poor are in the bottom income quintile as adults, compared to 30 percent of the poor but not deeply poor, and 18 percent of those born in the middle:

 ccf_20150507_reeves_3

Many shades of poverty

The word “poverty” can conjure an image of a monolithic, homogenous group of households with incomes below a line specified by a formula. But this is a false picture. There are gradations of poverty and wide variations in the lived experience of poor people. For many, poverty is far from a fleeting experience. Poverty is “sticky” across generations, especially for those born into deep poverty. Many of the policies that help those closest to the poverty line do little for those at the bottom of the heap, who may not be in position to do much to help themselves. The danger is that they remain stuck at the bottom, the very poorest citizens of one of the wealthiest nations on earth.

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