Measuring Poverty: History and Current Issues

1. Measuring Poverty: History and Current Issues Daniel H. Weinberg Chief, Housing and Household Economic Statistics Division October 2003 This presentation reports the results of research and analysis undertaken by Census Bureau staff. It has undergone a more limited review than official Census Bureau publications. This has been released to inform interested parties of research and to encourage discussion.

2. Determining Poverty Status:The Principle (“Absolute Poverty”) • Poverty thresholds -- cost of meetingbasic needs • Resources -- resources available to meet basic needs • Unit of analysis -- who is included in the calculation • Data source -- what survey the government uses to estimate poverty POOR if resources are below the poverty threshold for the chosen unit of analysis as measured using the chosen data source Alternatives: Relative poverty: poor if below a specified percentage of median family income [adjusted for family size] Adjusted income: “income per equivalent person”

3. Current Official Poverty Thresholds • Vary by family size and number of children; this relationship is known as an equivalence scale (for example, a three-person family consisting of two adults and one child has a poverty threshold 1.5471 as high as a single adult under 65) • First adopted in 1965; based on work published by SSA analyst Mollie Orshansky in 1963 and popularized in Economic Report of the President, 1964, supporting the “War on Poverty” • Now under Office of Management and Budget (OMB) Statistical Policy Directive No. 14

4. Current Official Poverty Thresholds continued • Roughly three times the cost of food (a basic adequate diet); based on 1955 USDA Food Consumption Survey and 1961 Consumer Expenditure Survey • Updated each year by change in Consumer Price Index (CPI)

5. Current Official Poverty Measure: Resources, Unit of Analysis, Data Source • Resources • Before-tax money income • Unit of Analysis • Family; unrelated individuals • Data source • Annual Social and Economic Supplement to the Current Population Survey (CPS ASEC), formerly called the Annual Demographic Survey or the March supplement

6. Studies of the Poverty Measure (post-Orshansky) • 1969 Revision of poverty thresholds (CPI updating) • 1971-72 Technical Committee on Poverty Statistics • 1973 Interagency Subcommittees on Cash Income, on Non-Cash Income, and on Updating the Poverty Threshold • 1976 Poverty Studies Task Force under HEW (“The Measure of Poverty” + a number of technical reports) • 1980 Expanded content of CPS to include in-kind benefits • 1981 Revision of poverty thresholds (eliminated farm differential) • 1982 Census Bureau published first experimental poverty measures (Smeeding)…leads to 1984 conference on Noncash Benefits • 1990 Boskin task force considered proposing revisions • 1990 Ruggles, Drawing The Line • 1992 Congressional funding of National Academy of Sciences (NAS) panel

7. Common Criticisms • Poverty thresholds • Higher standards of living since 1965 • Less than 1/3 of family budget now spent on food • Cost-of-living differences among regions not reflected • Equivalence scale has anomalies • Inflation not measured correctly • Family resources • Non-cash (“in-kind”) benefits have grown substantially but are not counted as income • Necessary expenses (taxes, health care, transportation to work, childcare) are greater than in 1965 but are not subtracted from income

8. National Academy of Science Panel on Poverty and Family Assistance: 1995 Report • Poverty Threshold Recommendations • Set at 78-83% of median spent for food, clothing, shelter, utilities, and a small additional amount (15-25%) for other needs • Implement a geographic adjustment for cost-of-living differences among regions • Update using growth in median spending on the basics rather than on CPI

9. NAS Panel Report, continued • Family Resource Recommendations • Retain income as basis; investigate expenditures/consumption • Additions: food stamps, school lunches, subsidized housing, energy assistance, net realized capital gains • Subtractions: federal, state, and payroll taxes; work-related expenses including child care; medical out-of-pocket expenses (MOOP) • Deal with medical issues with a separate medical risk index

10. NAS Panel Report, continued • Unit of Analysis Recommendations • Consider cohabitors as families • Data Source Recommendations • Consumer Expenditure Survey (CE) for thresholds and updating • Survey of Income and Program Participation (SIPP) for income

11. NAS Panel Report: Reactions • OMB established a technical working group to assess; Census Bureau is lead agency for research • Census Bureau has issued a number of research reports with the help of the Bureau of Labor Statistics (BLS) • Special notice of work of Kathy Short (BOC) and Thesia Garner (BLS) • Consensus reached on some issues, but a few areas of controversy remain

12. Findings from 1999 BOC Report • Due to the Earned Income Tax Credit, deducting taxes from income on balance reduces the percent of people who are viewed as poor. • Adding in-kind benefits to income reduces poverty rates, but the reductions from any single program are generally quite small. • The resulting increase in poverty rates when one accounts for necessary expenses can be substantial but depends on the method used to value those expenses (particularly MOOP). • The experimental measures show a poverty population that is more like the total population in terms of socioeconomic characteristics than results from using the current official measure.

13. Findings of 2001 BOC Report • Experimental poverty rates are more comparable in magnitude to official rates than those reported in earlier studies • Updated estimates of work-related expenses, including child care, are lower than those used in previous experimental measures, resulting in lower experimental poverty rates overall • Improved methods for including the value of housing subsidies result in increased imputed income for those families who benefit from these programs. • Estimates of medical-out-of-pocket spending that are based on more recent data and alternative techniques have a considerably smaller effect on experimental poverty measures than those previously reported. • Alternative geographic adjustments yield slightly higher experimental poverty rates but may provide better estimates of state-level poverty than those presented in the NAS and earlier Census reports.

14. Areas of Consensus on Improving the Current Measure • Use an expanded measure of income as the measure of resources in an income-based measure • Include noncash benefits like food stamps and housing assistance, and the Earned Income [Tax] Credit • Subtract costs of earning an income: income and payroll taxes, commuting costs, child care expenses, and necessary work expenses (such as uniforms) • Some believe a consumption-based measure is preferable • Adjust equivalence scale (how the poverty thresholds vary by size of family and number of children) to eliminate existing anomalies -- Census Bureau/BLS three-parameter scale seems acceptable

15. Areas of Disagreement (1) • Whether to adjust for geographical differences in cost of living • Geographic adjustment requires agreement on the method used; Census Bureau now uses HUD’s Fair Market Rents (FMRs) designed for another purpose • In order to develop new cost-of-living indexes at a geographically disaggregated level to replace the FMRs, BLS would need to do a great deal of additional work • Likely to affect geographic distribution of poverty-dependent federal funds (illustrative analysis underway)

16. Areas of Disagreement (2a) • How to deal with the costs of medical care • Alternative #1: NAS panel proposed to subtract medical out-of-pocket expenses (MOOP) from income because these expenses are very skewed • Represents the skewed (ex-post) distribution of actual expenses; thus well above average health care expenses can push even a middle income family into poverty • Cannot be measured well by income surveys so CPS requires imputation of MOOP from another survey (Consumer Expenditure Survey or Medical Expenditure Panel Survey)

17. Areas of Disagreement (2b) • How to deal with the costs of medical care • Alternative #2: Include MOOP in the thresholds • Uses average expected expenses, adjusted for under-consumption by the uninsured to represent “need” • Provides thresholds that can be adopted by surveys that don’t measure or impute MOOP • Ignores skewed distribution of MOOP so some middle income families with high actual MOOP will be classified as “non-poor” (and some low-income families with low actual MOOP will be classified as “poor”)

18. Areas of Disagreement (2c) • How to deal with the costs of medical care • Alternative #3: Combine two above measures by including average expected MOOP in the thresholds but subtracting the net actual expenses • Thresholds cover average costs of medical care, excluded in NAS approach • Deals with skewed distribution of MOOP • Still requires MOOP imputation

19. Areas of Disagreement (3) • How to update the thresholds over time • Use the Consumer Price Index (CPI-U) as now • Use NAS-proposed 3-year moving average of median expenditures • Converts the thresholds from an absolute to a relative measure of poverty; expected to require income to grow faster than inflation to maintain the same level of measured poverty • May have “perverse” effects during a recession as expenditures tend to fall, thereby reducing the thresholds when prices have not declined • Create a CPI for low-income families (not under investigation)

20. 12 Alternative NAS-based Measures: 1999 to 2002 and beyond • Accounting for MOOP (MSI, MIT, CMB) 3 • Updating the thresholds (CPI or CE) 2 • Geographic adjustment (GA) or not (NGA) 2 • equals 12 alternatives • 6 are now presented annually in the official poverty report; the other 6 are on the Internet site

21. Other Alternatives Featured in 2002 Report • Money income plus four alternative comprehensive income measures 5 • Updating the official thresholds (CPI-U or CPI-U-X1) 2 • equals 10 alternatives TOTAL official measure + 21 alternatives • Issue: There is now a CPI-U-RS

22. Should SIPP be Used Instead of CPS? • SIPP not yet ready to be the basis for official measures -- modeling and analysis underway (working paper available) • SIPP does a better job at measuring income (when compared to independent benchmarks) • SIPP measures medical out-of-pocket spending, reducing the need for imputation • Since low-income families drop out (attrit) at a higher rate, SIPP needs overlapping panels (like CPS) to handle potential bias; this requires substantial additional funds as was requested by the President in FY 1999 and FY 2001 (but not approved by Congress)

23. Other Issues Requiring Research • Whether and how to correct for nonsampling error • Redesign the CPS ASEC questionnaire to reduce reporting error (last done 1980) • Underreporting of income varies by source so implementing improvements sequentially rather than all at once could affect perceptions of who is poor • Other • Instead of basing definition on families, NAS recommends including cohabiting couples as families (because of assumed resource sharing); what about foster children, other household members? • Treat owner-occupants as quasi-landlords and account for (implicit) rent as income from an asset (would affect the elderly disproportionately)

24. What’s Next? • NAS asked to hold a follow-up workshop to assess status of research • OMB will need to decide on next steps • Some interest in expenditure-based measures, but substantial additional work needed and CE sample size relatively small • Supplemental Measures of Well-Being: Expenditures, Consumption, and Poverty, 1998 and 2001 issued September 2003 Poverty measurement web site: http://www.census.gov/hhes/www/povmeas.html