1
Introduction and Overview

The Social Security Administration (SSA) began publishing poverty statistics in the early 1960s, using a poverty measure developed by staff economist Mollie Orshansky (1963, 1965a). This measure had a set of poverty thresholds for different types of families that consisted of the cost of a minimum adequate diet multiplied by three to allow for other expenses. The threshold value for the base year 1963 for a family of two adults and two children was about $3,100. To determine a family's poverty status, its resources, defined as before-tax money income, were compared with the appropriate threshold.

In 1965 the Office of Economic Opportunity (OEO) adopted the SSA thresholds for statistical and program planning purposes; in 1969 the U.S. Bureau of the Budget (now the U.S. Office of Management and Budget) issued a statistical policy directive that gave the thresholds official status throughout the federal government. The Census Bureau took over the job of publishing the official annual statistics on the number and proportion poor (the poverty rate) by comparing the SSA thresholds to estimates of families' before-tax money income from the March Current Population Survey (it first issued poverty statistics in August 1967).1 For these comparisons, the SSA thresholds are updated annually for price inflation and so are not changed in real dollar terms: in other words, the 1992 threshold value of $14,228 for a family of four (two adults and two children) represents the same purchasing power as the 1963 threshold value of about $3,100 for this type family.2

1  

See Fisher (1992b, summarized in 1992a) for a detailed history of the origins and development of the official U.S. poverty measure.

2  

We cite the 1992 threshold here and elsewhere because the latest data available to us were for that year.



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Measuring Poverty: A New Approach 1 Introduction and Overview The Social Security Administration (SSA) began publishing poverty statistics in the early 1960s, using a poverty measure developed by staff economist Mollie Orshansky (1963, 1965a). This measure had a set of poverty thresholds for different types of families that consisted of the cost of a minimum adequate diet multiplied by three to allow for other expenses. The threshold value for the base year 1963 for a family of two adults and two children was about $3,100. To determine a family's poverty status, its resources, defined as before-tax money income, were compared with the appropriate threshold. In 1965 the Office of Economic Opportunity (OEO) adopted the SSA thresholds for statistical and program planning purposes; in 1969 the U.S. Bureau of the Budget (now the U.S. Office of Management and Budget) issued a statistical policy directive that gave the thresholds official status throughout the federal government. The Census Bureau took over the job of publishing the official annual statistics on the number and proportion poor (the poverty rate) by comparing the SSA thresholds to estimates of families' before-tax money income from the March Current Population Survey (it first issued poverty statistics in August 1967).1 For these comparisons, the SSA thresholds are updated annually for price inflation and so are not changed in real dollar terms: in other words, the 1992 threshold value of $14,228 for a family of four (two adults and two children) represents the same purchasing power as the 1963 threshold value of about $3,100 for this type family.2 1   See Fisher (1992b, summarized in 1992a) for a detailed history of the origins and development of the official U.S. poverty measure. 2   We cite the 1992 threshold here and elsewhere because the latest data available to us were for that year.

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Measuring Poverty: A New Approach The official poverty measure has important effects—direct and indirect—on government policies and programs. Some government assistance programs for low-income people determine eligibility for benefits or services by comparing families' resources to the poverty thresholds or a multiple of them.3 Also, some formulas for allocating federal funds include state or local poverty rates as a factor. The poverty measure influences policy making more broadly as an indicator of economic well-being to which policy makers, advocates, analysts, and the general public are sensitive. Trends in poverty rates over time and differences in poverty rates across population groups are often cited as reasons that a particular policy (or set of policies) is, or is not, needed. For example, the recent expansion of the Earned Income Tax Credit (EITC) was prompted by statistics on poverty among working families. The poverty measure also plays a role in evaluating government programs for low-income people and, more generally, the effects of government policies and economic growth on the distribution of income. In academia, there is a large literature on the characteristics of the poor, factors leading to poverty and other kinds of deprivation, and the effects of poverty on other behaviors and outcomes. Consequently, each year's poverty figures are sought by policy makers, researchers, and the media, who look to see if the rate has changed for the nation as a whole and for specific population groups and to understand the causes and consequences of changes in the rate and their implications for public policy. For all of these users, it is critical that the measure provide an accurate picture of trends over time and of differences among groups, such as children, the elderly, minorities, working people, people receiving government assistance, people in cities, and people in rural areas. Poverty statistics regularly make the headlines, but, increasingly over the past decade, so do stories that question the soundness of the concepts and methodology from which the official numbers derive. In response to a request of the U.S. Congress, the Committee on National Statistics of the National Research Council established a study panel to address the concerns about the poverty measure and also to consider related conceptual and methodological issues in establishing standards for welfare payments to needy families. Our panel—the Panel on Poverty and Family Assistance: Concepts, Information Needs, and Measurement Methods—has concluded that revisions to the current poverty measure are long overdue. We have developed a new measure, embracing both the concept of the poverty standard or threshold 3   Most of the programs that relate eligibility to the poverty measure actually use the poverty guidelines, which were originally developed by OEO and are issued annually by the U.S. Department of Health and Human Services. The poverty guidelines are constructed by smoothing the official thresholds for different size families (see Fisher, 1992c). For historical reasons, the guidelines are higher than the thresholds for Alaska (by 25%) and Hawaii (by 15%).

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Measuring Poverty: A New Approach itself (i.e., the standard of need), how it is updated over time, and the definition of families' resources that are available to meet this poverty standard. We considered the relevance of our proposed poverty measure—and other factors—for setting standards for government assistance programs. Although we offer few recommendations in this latter area, we try to illuminate and clarify the issues. This overview presents the panel's findings, conclusions, and recommendations in a nontechnical way, for the general reader. The other chapters of this report discuss the issues involved in poverty measurement in detail: alternative concepts for developing and updating poverty thresholds (Chapter 2); alternative adjustments of the thresholds for different family circumstances, such as family size and geographic location (Chapter 3); alternative definitions of family resources (Chapter 4); data requirements for implementing the panel's proposed poverty measure and the effects on the distribution of poverty (Chapter 5); other issues in poverty measurement, such as the time period and unit of economic analysis covered (Chapter 6); and the potential relationship of the poverty measure to government assistance programs, both generally (Chapter 7) and, specifically, to the program for Aid to Families with Dependent Children (Chapter 8). Appendices provide additional information on specific topics. In this overview we first explain what we mean by economic poverty, in contrast to other types of deprivation. We then describe the current official U.S. poverty measure and assess its adequacy. We also review alternative poverty measures, summarizing their merits and limitations. We base our choice of a measure on scientific evidence to the extent possible; however, we stress that the decision to recommend a particular measure (and the specific features of a measure) ultimately cannot rest on science alone, but also involves judgement. We describe the criteria that we used to guide our judgements. We then present our recommendations for the poverty measure. Finally, we present our findings and views regarding the applicability of our revised poverty measure for eligibility standards and payment levels in assistance programs for low-income families. WHAT IS POVERTY? We define poverty as economic deprivation. A way of expressing this concept is that it pertains to people's lack of economic resources (e.g., money or near-money income) for consumption of economic goods and services (e.g., food, housing, clothing, transportation). Thus, a poverty standard is based on a level of family resources (or, alternatively, of families' actual consumption) deemed necessary to obtain a minimally adequate standard of living, defined appropriately for the United States today.4 4   We refer to ''family resources" throughout this report, as distinguished from the country's economic resources, more broadly defined. Properly, the term should be "family or unrelated individual resources" (or needs) to accord with the units for which poverty is currently measured.

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Measuring Poverty: A New Approach There are many other forms of deprivation. One can be deprived of psychological or social well-being (e.g., one can have impaired self-esteem or heightened anxiety and stress or be socially isolated), and one can lack physical well-being (e.g., one can have a chronic disease or disabling condition or be subjected to a high risk of violence in one's neighborhood). There are also many conditions that can lead to deprivation on one or more of these dimensions. For example, people who live with a family member who abuses drugs or alcohol likely suffer deprivation in terms of their psychological health, and perhaps their physical health and economic standard of living as well. People who live in a crime-ridden neighborhood may be deprived in a number of ways—through the psychological fear they are likely to harbor, the actual physical harm or property loss that they may experience, and the adverse social and economic effects (e.g., declining property values) that may result because the broader society shuns their neighborhood. People who are illiterate may experience many deprivations to full participation in society: they may have great difficulty in finding and keeping a good job; they may have problems in traveling around their area or in negotiating a good price for the products they buy; they may avoid voting for public office; and they may experience social shame. People who are without health insurance may be at risk of psychological and economic, as well as physical, deprivation. People who lose their job or who have never been successful in finding one may suffer a deprivation of both income and psychic esteem. Finally, people who, for one or another reason, lack sufficient resources to provide for an adequate standard of living may suffer not only economic hardship, but psychological stress and physical problems as well. We encourage the development of indicators for monitoring trends over time and among population groups on all of these different dimensions of deprivation. Also, we encourage work on the relationships among them. For example, one element of economic or material deprivation may be inadequate housing, which, in turn, can imply exposure to risks that go well beyond income inadequacy (e.g., fire hazard, lead poisoning). For fuller understanding and to inform policy, a breadth of information and analysis is needed on the well-being of the population, including and going beyond the economic dimension. But the focus of our work is on economic deprivation, narrowly defined. We are concerned with the concept, definition, and measurement of economic poverty, or what many call material poverty. We contend that this relatively narrow conceptualization of poverty is appropriate for an official poverty measure for several reasons. First, it is a familiar concept that, in a broad sense, has formed the basis of official poverty measurement in the United States for the past several decades. It is a notion of poverty that accords with political rhetoric as least as far back as Franklin D. Roosevelt's concern for Americans who were ill-housed, ill-clad, and ill-nourished.

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Measuring Poverty: A New Approach Second, while it is surely not easy to arrive at a specific concept or measurement of economic deprivation (see below), the same problem applies to other kinds of deprivation, and the notion of economic deprivation has the advantage that policy makers and the public have experience with its measurement and intuition about its interpretation and movement over time. Third, since many public programs and debates pertain to the economic sphere of life, it is important to have a time-series measure of economic deprivation. If a broader concept for the official "poverty" measure were adopted, there would still be a need for a measure to track the effects of programs and policies on the economic domain. The nation's understanding about and commitment to the alleviation of poverty has been informed for many years by the official measure of economic deprivation. We think the function of that measure should be retained much as it is now. If the current measure were internally consistent and not flawed, in ways we describe below, we would be inclined to recommend its continuation. But we do find it unacceptably flawed for its important uses with respect to government policies and programs, academic research, and public understanding; thus, we recommend a new measure, but one that retains the concept of economic deprivation as the core notion of poverty. This concept of poverty must be distinguished from "welfare" and "well-being." Poverty is a circumstance, defined by a set of specific conditions that are considered to reflect economic deprivation. One is said to be ''in poverty" if those conditions are met (i.e., if one's resources are below a threshold level for needed economic consumption) and "not in poverty" if those conditions are not met. Welfare is a term for certain government assistance programs or the resources that are transferred by those programs, such as Aid to Families with Dependent Children. More generally, the term welfare is sometimes used to mean well-being, which is a much broader term capturing the overall condition of a person. In contrast, "economic poverty" refers to a circumstance defined by a low level of material goods and services or a low level of resources to obtain those goods and services. This distinction is maintained by the concept of poverty that we use here. While we use economic deprivation as the underlying concept of poverty and devote most of this report to its definition and measurement, we acknowledge that it is not easy to specify in a precise manner what it means to be economically deprived, even in a narrow sense. The general idea certainly seems intuitive and transparent. For instance, Adam Smith as far back as 1776 linked economic poverty to the want of "necessaries," which he defined as "not only the commodities which are indispensably necessary for the support of life, but whatever the custom of the country renders it indecent for creditable people, even of the lowest order, to be without." Commonly, such a concept is translated into a dollar level that is deemed adequate to obtain necessary goods and services. The official U.S. poverty measure

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Measuring Poverty: A New Approach was developed along these lines, although only one "necessity"—a minimum diet—was specified; other necessary consumption was subsumed in the multiplier of three applied to the costs of the minimum diet. More recently, Townsend (1979, 1992:5, 10) has given a social dimension to economic deprivation. Townsend observes that people are "social beings expected to perform socially demanding roles as workers, citizens, parents, partners, neighbors, and friends." He argues that economic poverty should be defined as the lack of sufficient income for people to "play the roles, participate in the relationships, and follow the customary behavior which is expected of them by virtue of their membership of society." As an example, one could argue that having a telephone is essential in a developed country for everything from job seeking to having relationships with family and friends. Given a concept such as Smith's or Townsend's or, indeed, virtually any concept of economic deprivation, the issue is how to define the key terms—"necessaries," "indecent…to be without," "customary behavior.'' Although there may be a general sense in a society of what are "necessities" or what is "customary behavior," the attempt to be specific inevitably raises questions and leads to debate about the very meaning of economic poverty. Throughout this report, our approach is pragmatic. We first assess how well the official U.S. poverty measure is serving as a barometer and benchmark for policy, research, and general public understanding about an important aspect of deprivation. We conclude that, given socioeconomic and public policy changes since the measure was developed, it is no longer satisfactory for those purposes. We then review the properties of some common alternative measures to determine which of them could represent an improvement. Our goal is not to develop the ideal poverty measure on which everyone would agree (which surely does not exist), but to propose a measure that is a marked improvement over the current one—just as the official measure, when first developed by Mollie Orshansky, was regarded as a marked improvement over competing measures at that time. Our measure includes a specific concept of economic poverty by which to develop a new poverty threshold for a reference family type: inadequate resources to obtain basic living needs. We define those basic needs as food, clothing, and shelter. There are other needs as well (e.g., personal care, transportation), but there is less agreement about them, and so our approach provides a small amount for other needed spending by means of a multiplier that is applied to the amounts for food, clothing, and shelter. This concept of poverty as insufficient resources for basic living needs accords with traditional public concerns for the needy, whether expressed in provisions for homeless shelters, soup kitchens, and clothing drives, or the provision of cash or in-kind benefits for basic consumption. It is also not inconsistent with and, in our view, improves on, the concept that was originally used to derive the current thresholds, namely, the application of a multiplier for other needed spending to a minimum allowance for food.

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Measuring Poverty: A New Approach Yet general agreement about basic needs does not mean that everyone agrees about the level of consumption that distinguishes a state of poverty from a state of adequacy. Thus, there is a question about how much food, shelter, and clothing distinguish a person in poverty from one who is not in poverty. This question cannot be answered in the abstract. No concept of economic poverty, whether ours or another, will of itself determine a level for a poverty threshold. That determination necessarily involves judgement. Moreover, as we show below and in Chapter 2, no matter what the particular concept, the determination of a poverty threshold invariably considers people's actual spending patterns and hence, inevitably, has a relative aspect. Under our threshold concept, we propose that the values for food, shelter, and clothing—the basic bundle—and for a small amount of other needed spending—the multiplier—be developed by direct reference to spending patterns of American families below the median expenditure level. More important, we propose that real changes in spending on food, clothing, and shelter be used to update the poverty thresholds each year. By so doing, the thresholds will maintain a relationship to real changes in living standards, but only to the extent that these changes affect consumption of basic goods and services that pertain to a concept of poverty, not all goods and services. In this sense, our concept is quasi-relative in nature. Because the most judgemental aspects of any poverty measure concern the reference family threshold, there is a danger that the need to improve the official measure may founder on debates about the "right" concept and level of that threshold. (We do not recommend a particular value for that threshold; rather, we suggest a range within which we believe it could reasonably fall.) It is important that a threshold concept satisfy the criteria we outline below and that the level chosen for the threshold is credible, but other characteristics of a poverty measure are equally or more important. Significant improvements will result in the accuracy of official U.S. poverty statistics by implementing our recommendations for adjusting the threshold along the three dimensions of family composition, geographic location, and time period and by implementing our recommended definition of family resources. It is in these recommendations that we are confident that the new measure of poverty is a considerable improvement over the current official measure. Finally, by focusing on and recommending a specific measure of economic poverty, as we do, we do not advocate the idea that there is but a single measure of economic deprivation that should be featured as sacrosanct in policy evaluations. Rather, we urge the Census Bureau to develop reports on a range of poverty statistics, just as the Bureau of Labor Statistics (BLS) publishes a range of unemployment statistics in addition to the official unemployment rate. Examples of such useful poverty indicators, in addition to the poverty rate itself, would include measures of the intensity of poverty in terms of the average income and distribution of income of the poor.

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Measuring Poverty: A New Approach THE OFFICIAL U.S. POVERTY MEASURE Development of the Measure The poverty thresholds that are used in estimating the official U.S. poverty statistics were originally developed by SSA staff economist Mollie Orshansky as the cost of a minimum diet times a "multiplier" (or factor) of three to allow for other needed expenses, such as housing and clothing. The diet was constructed by the U.S. Department of Agriculture (USDA), by examining data on the food-buying patterns of lower income households from a 1955 Household Food Consumption Survey, modifying the patterns to develop a nutritionally balanced food plan, and costing out the items included in the plan. The USDA developed several food plans at varying cost levels; the one used as the basis of the poverty thresholds was the "Economy Food Plan," the lowest cost plan designed for "temporary or emergency use when funds are low."5 The plan allowed for no eating at restaurants, called for careful management of food storage and food preparation, and was acknowledged by its developers to provide a nutritious but monotonous diet. The multiplier of three was derived from the same 1955 survey, which showed that the average family of three or more persons—the average of all such families, not the average of low-income families—spent about one-third of its after-tax money income on food. The poverty thresholds were varied to account for the differing food needs of children under age 18 and of adults under and over age 65 and to account for economies of scale for larger households. Originally, the thresholds also varied by the gender of the family head and whether or not the family resided on a farm and could be expected to grow some of its own food. The thresholds are the same across the nation; there are no allowances for differences in cost of living in different geographic areas. Each year the thresholds are updated for price inflation by the Census Bureau. In 1969 the Bureau of the Budget gave official status to the following two changes in the poverty thresholds, which were adopted by an interagency committee: to use the overall Consumer Price Index (CPI) to update the thresholds for price changes instead of the Economy Food Plan cost index and to raise the farm thresholds from 70 to 85 percent of the nonfarm thresholds. (Turned down was an SSA proposal to revise the thresholds to reflect newer data from the 1965-1966 Nationwide Food Consumption Survey; see Fisher, 1992b:38-49.) In 1979 Carol Fendler of the Census Bureau wrote a paper with Orshansky describing various possible changes that could be made in the poverty thresholds, including a revision of the thresholds using a multiplier of 5   Orshansky also developed a set of poverty thresholds on the basis of the Low-Cost Food Plan, the second lowest cost of four USDA plans, but these thresholds were never adopted for official use.

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Measuring Poverty: A New Approach 3.4 derived from the 1965-1966 survey. In 1979-1980, an interagency committee was asked to consider possible small changes in the thresholds (not including the use of a higher multiplier) and recommended the following minor changes discussed by Fendler and Orshansky, which were adopted in 1981: the nonfarm thresholds were applied to all families; the thresholds for families headed by women and men were averaged; and the largest family size category for the thresholds was raised from families of seven or more to families of nine or more persons (Fisher, 1992b:64-68). Overall, except for the minor changes in the number of different thresholds and the change in the price index for updating them, the poverty line has not been altered since it was first adopted in 1965. In the language of poverty measurement, the United States has an "absolute" poverty threshold that is updated for price changes but not for real growth in consumption. Thus, the poverty line no longer represents the concept on which it was originally based—namely, food times a food share multiplier—because that share will change (and has changed) with rising living standards. Rather, the poverty threshold reflects in today's dollars the line that was set some 30 years ago. Each year, the official thresholds are compared with an estimate of resources for each family (or individual) in the March Current Population Survey (CPS), which includes about 60,000 households, to determine the number and proportion poor (the poverty rate). Resources are defined as before-tax money income from all sources—for example, earnings, pensions, interest, rental income, other income from assets, cash welfare. Although the multiplier of three used in constructing the poverty thresholds was based on after-tax income, there was no methodology for calculating taxes from the March CPS, so income is defined on a before-tax basis. No valuations for in-kind benefits, such as food stamps, are included in income, nor are asset holdings accounted for in any way. Since 1982 the Census Bureau has published poverty estimates that do exclude most taxes from income and do include the value of major in-kind benefits, but these estimates are labeled "experimental" and do not represent the official statistics (see, e.g., Bureau of the Census, 1993a, 1995). The official poverty statistics for the United States, based on the March CPS, are currently published each fall as a Current Population Report in the P-60 Series (for the latest such report, see Bureau of the Census, 1995). Adequacy of the Current Measure There are several different approaches to developing a measure of poverty, both for the thresholds and for the definition of family resources, each of which has some merit and none of which is without difficulties. So one might ask why the United States should consider replacing a measure that has served for many years. Moreover, it will undoubtedly be disruptive to an important statistical time series if a different measure is adopted.

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Measuring Poverty: A New Approach Yet, historically, poverty measures have tended to reflect their time and place. When it was adopted by OEO for official use, the SSA measure was viewed as a distinct improvement over a widely cited measure developed by the Council of Economic Advisers (CEA) for 1962. The SSA thresholds were based on an explicit concept of need and were adjusted for family size and other characteristics; the CEA measure had just one threshold for families of all sizes with a second, lower threshold for single individuals. The SSA measure also had the advantage that its central threshold for a family of four in 1963 was about the same as the CEA family threshold of $3,000. In turn, the CEA family threshold had been based on considering such factors as the minimum wage and public assistance levels; see Fisher (1992b:30). Gallup Poll data from the early 1960s, as analyzed by Vaughan (1993), suggest that public opinion would also have agreed with a four-person family poverty threshold of about $3,000. Also, such a level represented about one-half median after-tax four-person family income, which is a standard often used in comparative analyses of poverty across nations. In other words, the SSA thresholds accorded well with other views about what it meant to be poor in America in the mid-1960s. Yet if the SSA approach of developing the thresholds as food costs times a food share multiplier were to be used today, it would produce a different result from the current thresholds—which represent the original 1963 thresholds adjusted for inflation—because changes in consumption patterns have increased the multiplier. Similarly, the use of the SSA approach for a period earlier than 1960 would have given a different result from the official thresholds extended back in time in real dollars because the multiplier would have been lower. Two questions in evaluating the current poverty measure are whether it makes sense to continue to use the real value of the original 1963 thresholds and, if not, whether the original SSA approach or some other procedure should be used to update them. From the perspective of providing accurate comparisons of poverty status across population groups and across time, there is also the important question of whether other aspects of the current measure—namely, the adjustments to the thresholds for family size and type and the definition of family resources—remain relevant at the end of the twentieth century. Given the important role that the poverty measure and poverty statistics play in contemporary U.S. society, it seems imperative to make the most careful assessment possible of the current measure to determine its adequacy. We find that the current official poverty measure has a number of weaknesses, involving both the thresholds and the definition of family resources. (Some of these problems were pointed out in the 1960s by Orshansky herself.) Although they were not necessarily important or obvious at the time the measure was adopted, these problems have become more evident and more consequential because of far-reaching social and economic changes, as well as

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Measuring Poverty: A New Approach changes in public policy, that have occurred since the 1950s and 1960s. These changes involve labor force participation, family composition, geographic price differences, growth in medical care costs and benefits, government taxation, the provision of in-kind benefits to families and individuals, and the overall increase in the standard of living. Work Patterns of Families with Children Over the period from 1955 (the date of the survey underlying the original poverty thresholds) to 1993, the percentage of women with a child under age 6 who were in the labor force more than tripled, increasing from 18 to 58 percent. During that same time, the labor force participation rate of women whose youngest child was age 6 or older almost doubled, increasing from 38 to 75 percent (U.S. House of Representatives, 1994: Table 12-1). As a consequence of these changes, there are many more families who must make arrangements for child care in order to earn at least some of their income. Child care expenditures were a negligible component of consumer expenditures in the 1950s; at that time, one could readily assume that in most U.S. families a parent was available at home. Today, one can no longer make that assumption, and many families face high out-of-pocket child care expenses. Estimates from the 1991 National Child Care Survey are that 57 percent of families with working mothers of pre-school-aged children paid cash for child care and that child care expenses for the average family with such expenses amounted to 10 percent of total family income (U.S. House of Representatives, 1994: Table 12-8). The current poverty measure does not distinguish between families with and without these expenses, either by having separate thresholds for working and nonworking families or by deducting child care costs from earnings; hence, the current measure does not accurately portray the relative poverty status of these two groups. Composition of Families and Households Among families with children, one of the most dramatic changes over the past few decades has been the rise in the number that are headed by a single parent, most often a woman: such families increased from 11 to 26 percent of all families with children over the period 1970-1992. As a proportion of all households, single-parent families increased from 5 to 8 percent over the same period (see Bureau of the Census, 1993d: Tables 65, 75). In order to work, such single parents face the problem noted above of finding—and, in many instances, paying for—child care. Concurrent with the rise in the number of single-parent families is the growth in the number of people who live apart from their children. Many noncustodial parents pay child support, which means that they have fewer

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Measuring Poverty: A New Approach annual poverty measure for evaluating these programs may be misleading: an annual measure may suggest that the programs are providing benefits to people above the poverty line when, in fact, those people were poor for part of a year and hence eligible for support. An appropriate poverty measure for evaluating such programs also needs to take account of assets because of the requirement that families use up most of their accumulated assets before they can obtain program benefits. SIPP provides data to construct subannual poverty measures that would be suitable for evaluating the effects of such programs as AFDC and food stamps. Given some of the features of the SIPP design, we suggest that a feasible measure might use a 4-month accounting period and add to income any financial assets that the family reports, such as savings accounts (after first subtracting the income from such assets). These 4-month measures might also serve as an indicator of short-term increases or decreases in economic distress, although it may be that other readily available data, such as monthly food stamp caseloads, could serve this purpose. There are also important uses for measures that assess poverty over multi-year periods. There is strong evidence that people who experience long spells of poverty are worse off—not only economically, but also in other respects such as health status and educational attainment—than those who experience short spells. Also, long-term poverty appears concentrated in particular groups of the population, particularly minorities and the disabled. Policies and programs for ameliorating long-term poverty are likely to differ from those aimed at helping people through a temporary economic crisis. There is no agreement on the basis of research on the best form of a long-term poverty measure. It is also not clear how often a long-term poverty measure needs to be updated. The design of SIPP makes it possible to develop estimates of the number of poor in a given year who are still poor 1, 2, and 3 years later. The Panel Study of Income Dynamics permits developing poverty measures for much longer periods, but with small sample sizes. Clearly, further research and the development of some experimental series would be useful. RECOMMENDATION 6.1. The official poverty measure should continue to be derived on an annual basis. Appropriate agencies should develop poverty measures for periods that are shorter and longer than a year, with data from SIPP and the Panel Study of Income Dynamics, for such purposes as program evaluation. Such measures may require the inclusion of asset values in the family resource definition. Unit of Analysis The current poverty measure defines thresholds and aggregates resources for families of various sizes and for adults who live alone or with other people not

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Measuring Poverty: A New Approach related to them.29 In other words, the assumption is made that family members pool their resources to support consumption and thereby achieve economies of scale. Unrelated individuals, in contrast, are assumed not to share resources with others, even if they live with one or more roommates. Although some researchers have criticized the assumption that all family members have access to their "fair share" of the family's resources, data limitations make it infeasible at this time to consider defining the unit of analysis for poverty measurement as an individual, so we recommend continuing to use the family as the unit of analysis. We also recommend that the definition of "family" be broadened to include cohabiting couples, as they maintain longer lasting relationships than other roommates and are likely to pool resources. In the case of roommates as such, there are no data on the extent of resource sharing among them. We encourage research on this topic, and more generally on resource sharing among household and family members. RECOMMENDATION 6.2. The official measure of poverty should continue to use families and unrelated individuals as the units of analysis for which thresholds are defined and resources aggregated. The definition of "family" should be broadened for purposes of poverty measurement to include cohabiting couples. RECOMMENDATION 6.3. Appropriate agencies should conduct research on the extent of resource sharing among roommates and other household and family members to determine if the definition of the unit of analysis for the poverty measure should be modified in the future. Other Measures Considerable thought has been given in the research literature to the development of poverty statistics that provide more information than the simple head-count ratio (the poverty rate or proportion of people who are poor). Thus, it would be useful to have a statistic that reflects the depth of poverty, by measuring, for example, the average income of the poor. It would also be useful to have a poverty statistic that increases when resources are less equally distributed among the poor. The simple head-count ratio—although readily understandable—has some drawbacks. For example, if income were taken from some very poor people to move a few less-poor persons out of poverty, the effect would be to reduce the head count, even though the depth of poverty had become worse. Yet statistics that attempt to capture several dimensions of poverty in a single index 29   Poverty is not defined for unrelated individuals under age 15, as no information is obtained about their income in surveys.

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Measuring Poverty: A New Approach very quickly become impenetrable, with the result that it is hard to interpret what changes in them mean to policy makers and the public (and even to researchers). We see the need for additional information besides the head-count ratio, but we believe it is best to provide such information in simpler, more disaggregated form, as is already done to a large extent in Census Bureau reports. These reports show the poverty gap, or the aggregate amount of income by which poor people fall below the poverty line, and it would be easy to provide the obverse, namely, the average income of the poor compared with an average weighted poverty threshold. (Because there are different thresholds for different types of families, statistics on the average income of the poor need to be calculated for each type separately or by comparing the average income for all poor people to an average weighted threshold that reflects the composition of the poor by family type.) Census Bureau reports also provide information on the proportions of people with income below varying ratios of the poverty line (e.g., below 50%, 75%, 100%, 125%), thereby indicating the distribution of poverty among the poor and, in the case of ratios of income that exceed the poverty line, the extent of near poverty. These indicators must be interpreted carefully: for example, the poverty gap is not an actual measure of the amount of money that the government would have to spend to eliminate poverty (see below). Also, the number of people who are very far below the poverty line may be overestimated because of underreporting of income or the reporting of business losses by self-employed people. Nonetheless, such indicators can enrich understanding of the nature and scope of economic poverty in the United States and how it changes over time. We also believe it would be useful to publish poverty statistics on the basis of measures in which family resources are defined net of government taxes and transfers. Several such measures could be useful: one in which resources are defined in before-tax terms, one in which resources are net of taxes but exclude benefits from means-tested government programs (whether cash or in-kind), and one in which resources exclude benefits from all government programs, whether means tested or not. Again, the statistics from such measures must be interpreted with care: the poverty rate in a world without government taxes or government assistance programs would likely differ from the rate under these measures. Nonetheless, when compared with the new official measure, such before-tax and transfer measures would be helpful for evaluating the effects of government policies and programs on poverty. RECOMMENDATION 6.4. In addition to the basic poverty counts and ratios for the total population and groups—the number and proportion of poor people—the official poverty series should provide statistics on the average income and distribution of income for the poor. The count and other statistics should also be published for poverty

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Measuring Poverty: A New Approach measures in which family resources are defined net of government taxes and transfers, such as a measure that defines income in before-tax terms, a measure that excludes means-tested government benefits from income, and a measure that excludes all government benefits from income. Such measures can help assess the effects of government taxes and transfers on poverty. Finally, we note the importance of having indicators of deprivation other than economic—physical, psychological, and social deprivation. A measure of economic poverty is undoubtedly a key social indicator. It is important in its own right as a barometer of the extent to which there is a segment of U.S. society that lacks the means to obtain basic economic necessities; it is also important because it correlates highly with other aspects of deprivation, such as poor health and low educational levels. But an economic poverty measure cannot feasibly encompass other types of deprivation. Instead, other measures need to be developed to directly assess the well-being of the population on a number of dimensions and to help focus publicand private-sector policies to ameliorate deprivation. We encourage research and development on a range of deprivation indicators. USE OF THE POVERTY MEASURE IN GOVERNMENT PROGRAMS The current official poverty measure plays a role in determining eligibility for a number of government assistance programs, and it is important to consider how or if the proposed measure is appropriate for program use.30 We first examine the implications of linking the proposed measure to program eligibility. We then look at the relationship of the proposed measure to benefit standards for the AFDC program, for which we were asked to consider issues involved in establishing a national minimum benefit standard.31 The Poverty Measure and Program Eligibility Need Standards for Programs That Use the Official Measure Of 70 federal and federal-state programs that provide cash or in-kind benefits to people on the basis of an explicit test of low-income, 27 programs link their need standard for eligibility to the U.S. Department of Health and Human 30   The descriptions of programs and program eligibility standards are as of the time when this report was prepared; they do not reflect any changes after 1994. 31   Another program use of the poverty measure is for allocation of federal funds to states and localities through formulas: for example, the allocation of funds for educationally deprived children to school districts on the basis of their share of children age 5 to 17 who live in poor families. This use of the poverty measure raises important issues, including that of data availability, but is beyond the scope of this report.

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Measuring Poverty: A New Approach Services (HHS) poverty guidelines, which are derived from the official poverty thresholds. Examples include food stamps, Head Start, Legal Services, Maternal and Child Health Services, Medicaid, and the School Lunch and Breakfast Programs (Burke, 1993). Some programs (e.g., food stamps, Medicaid) have several criteria for eligibility: applicants who are already participating in another program, such as AFDC, may be automatically eligible, while other applicants can qualify on the basis of comparing their income to the poverty guidelines (or a multiple of them). The use of the proposed poverty measure in these programs would be an improvement in several respects over the current measure for the purpose of targeting benefits to needy families. The proposed measure has an internally consistent equivalence scale by which to adjust the poverty thresholds for different types of families, it reflects geographic differences in the cost of housing in the thresholds, and its definition of family resources as disposable money and near-money income is consistent with the basic needs concept underlying the thresholds. This consistency means that two families with the same gross income would not be mistakenly treated as having the same income for consumption when one of them had nondiscretionary expenses (such as taxes or child support payments) and the other did not. However, program agencies should carefully consider whether the proposed measure may need to be modified to better serve program objectives. For example, the proposed family resource definition is considerably more data intensive than the current definition. Full implementation would require asking about in-kind benefits and several types of expenses, as well as money income. For such programs as food stamps that require a very detailed determination of both gross and net or "countable" income in order to determine financial eligibility and benefit amounts, implementing the proposed definition of family resources would not complicate program administration—indeed, that definition, in concept, if not in precise details, is quite similar to the definition already in use. In contrast, other programs have a simple application procedure that obtains a crude measure of gross money income for purposes of eligibility determination. Many of these programs provide an all-or-nothing service—an example is Head Start, which offers an enrichment program to preschool children in families with income below the poverty threshold. Other programs with relatively simple application procedures charge recipients for services on a sliding scale, depending on the broad income-to-poverty ratio category into which the family falls. In these cases, to fully implement the proposed family resource definition could pose a burden on applicants and program administrators. However, we believe there are ways to simplify the proposed definition for programs for which a simple application process is valued and where there is a willingness to trade off the loss of some precision in classifying an applicant's eligibility status.

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Measuring Poverty: A New Approach With respect to the threshold or need standard component of the proposed measure, program agencies must consider whether to use 100 percent of the thresholds as the cutoff for eligibility or a multiple of them, as is now specified in many programs. Obviously, there are budgetary implications of this choice, particularly for entitlement programs that must provide benefits for all applicants who meet the eligibility criteria (in contrast to programs with a legislatively set budget that requires program administrators to put eligible applicants on a waiting list once the budget is exhausted). In this regard, it is critical to consider the implications for programs of the recommendation to update the thresholds each year for real changes in consumption of basic goods and services. The thresholds developed under this procedure will not likely increase as fast as would a purely relative set of thresholds (because the procedure considers only the categories of food, clothing, and shelter, not all goods and services). However, the thresholds developed under the proposed procedure will likely increase faster than thresholds that are simply adjusted by the CPI, like the official ones, if real growth occurs. There are ways to address the budgetary consequences of poverty thresholds that are updated in real terms. For example, program eligibility could be limited to families with resources below a fraction of the thresholds. This type of strategy is not a contradiction in terms. Although updating the poverty thresholds for real growth in basic consumption makes a great deal of sense for a statistical measure, the design of government assistance programs must take into account many factors, only one of which is a statistical standard of need. Other considerations, such as funding constraints and competing uses for scarce tax dollars, may dictate assistance program eligibility levels that are lower than the statistical poverty thresholds. Finally, there are some other features of the proposed poverty measure that may not be suitable for program use. For example, we propose that need be measured on an annual basis and that asset values not be included in family resources. However, many programs (e.g., food stamps) use a subannual accounting period together with an asset test because they are intended to provide immediate assistance to people who are in a crisis situation. Also, we propose that the unit of analysis be the family, as defined by the Census Bureau, but programs differ in their target populations and hence often in their definition of an eligible unit. Such differences from the proposed statistical poverty measure are quite appropriate in light of program objectives. RECOMMENDATION 7.1. Agencies responsible for federal assistance programs that use the poverty guidelines derived from the official poverty thresholds (or a multiple) to determine eligibility for benefits and services should consider the use of the panel's proposed measure. In their assessment, agencies should determine whether it may be necessary to modify the measure—for example, through a

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Measuring Poverty: A New Approach simpler definition of family resources or by linking eligibility less closely to the poverty thresholds because of possible budgetary constraints—to better serve program objectives. Need Standards for AFDC In most government assistance programs, the benefit standard—that is, the maximum amount of benefits provided to people with no other income—and the eligibility or need standard are the same. People who are eligible because their countable income falls below the benefit standard are entitled to receive benefits up to the amount of the standard.32 AFDC is unique in that federal legislation requires each state to establish a standard of need for families with no other means of support. In a separate process, each state determines the maximum benefit that it will actually pay to such families, which does not have to equal the state's need standard. As prescribed by federal statute, the need standard restricts eligibility for AFDC: currently, families must have gross income below 185 percent of the state need standard to be eligible to receive benefits. In addition, they must have net countable income (as defined by federal law) below 100 percent of either the state need standard or the state payment standard, whichever is lower. As of January 1994, 40 states had a maximum benefit that was below their need standard (in some states the maximum benefit was below both their need and payment standards; U.S. House of Representatives, 1994: Table 10-11; see also Solomon and Neisner, 1993: Table 1). Historically, there has been great variation among the states in how they derive their need standard, in how often and by what method they update it, in how benefits relate to the need standard, and in the level of the need standard. The differences in state AFDC need standards are much wider than can be explained by differences in the cost of living across states, even allowing for the problems with subnational cost-of-living indicators (see, e.g., Peterson and Rom, 1990). One could argue that the level of the need standard is irrelevant to families' welfare because states are not required to pay benefits at that level—and three-quarters do not. It is also true that welfare policy is currently in a state of flux: the AFDC program as it has operated historically may change in significant ways, possibly rendering moot the question of the soundness or adequacy of the need standard for the current program. Nonetheless, until the program is changed, there is a requirement that the states develop a need standard, which is important for several reasons: it sets limits for eligibility; it is linked to benefits, directly in those states that pay 100 percent of need and 32   Strictly speaking, this statement applies to cash benefit programs (e.g., SSI, veterans' pensions). Near-cash programs (e.g., food stamps and assisted housing) have a benefit standard that falls below the eligibility standard because the benefit pertains to a single commodity.

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Measuring Poverty: A New Approach indirectly in other states; and it offers a goal or target against which to assess the adequacy of benefits. The question is whether it makes sense for states to adopt the proposed poverty measure in place of their own need standard. A related recent development in standard setting practices is that 14 states have explicitly geared their need standard to the current poverty guidelines. In many of these states, the link is more theoretical than actual in that the need standard, either by law or regulation or because of failure to adjust for inflation, is a small fraction of the poverty guidelines. In other states, the definition of the poverty guidelines has been altered to exclude some types of consumption. Still, a growing number of states have found it convenient to link their AFDC need standard in some fashion to the poverty guidelines. We believe the proposed measure represents an improvement over the current measure for this purpose, and we encourage states to consider its use. The proposed budget concept correlates well with the objectives of the AFDC program to provide the means for low-income families to obtain basic necessities. The exclusion of medical care needs from the proposed budget concept is consistent with the separate provision of medical care to AFDC families through the Medicaid program. In many respects, the proposed definition of family resources is similar to the AFDC definition of countable income, such as the treatment of work-related expenses, including child care, as deductions from family resources rather than as part of the poverty budget. In addition, the proposed measure includes an improved equivalence scale and reflects area differences in housing costs. The 1988 Family Support Act requires states to review their need standard every 3 years and report to HHS. In the next review, states could consider the possible use of the proposed poverty measure as a need standard for AFDC. In their review, the states would need to look at the implications of the proposed measure—both the thresholds and the definition of family resources—in relation to their current need standards (whether the current poverty guidelines or the states' own standards). They would also need to consider whether the proposed measure may need to be modified in one or more respects to be more suitable for program purposes. It may be that, for budgetary or other reasons, states will decide to set the need standard at different fractions of the poverty threshold. Nonetheless, having a link between state need standards and the proposed poverty measure would be a major step toward providing a common framework for determining AFDC eligibility and evaluating eligibility levels across states. RECOMMENDATION 8.1. The states should consider linking their need standard for the Aid to Families with Dependent Children program to the panel's proposed poverty measure and whether it may be necessary to modify this measure to better serve program objectives.

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Measuring Poverty: A New Approach The Poverty Measure and AFDC Benefit Standards State AFDC benefit standards vary even more widely than do state AFDC need standards, and no state provides benefits as generous as the official poverty thresholds. From time to time, there have been efforts to enact a federal minimum benefit standard for AFDC. These efforts have invariably come to naught, largely because of the cost implications of raising the benefit standard in states with low-benefits. Changes in the percentage of benefits that the federal government will reimburse the states have been enacted with the intent of providing incentives for low-benefit states to increase their benefits; however, these changes in the matching formula have had little effect on the variation in benefit levels among the states (Peterson and Rom, 1990). AFDC recipients are eligible for food stamps, and the nationalization of the Food Stamp Program has served to reduce the disparities in combined AFDC and food stamp benefits across the states.33 However, significant differences still remain that exceed what can be reasonably attributed to cost-of-living differences among the states. Thus, the maximum combined AFDC and food stamp benefit for a three-person family in January 1994 varied from $1,208 in Alaska to $415 in Mississippi; the median benefit was $658, which is 69 percent of the corresponding official 1993 poverty threshold (U.S. House of Representatives, 1994: Table 10-11). Currently, a de facto national minimum level of available benefits exists for AFDC recipients, namely, the maximum food stamp allowance combined with the maximum AFDC benefit in the lowest benefit state. (In January 1994, this amount for a three-person family was 43% of the corresponding official 1993 poverty threshold.) Hence, the issue of a national minimum benefit standard for AFDC really comes down to an issue of raising this de facto standard. Arguments for adopting such a nationwide minimum benefit standard for AFDC have been made on the basis of equity—namely, that low-income families with children should not be disadvantaged simply by reason of their state of residence. Arguments have also been offered that differences in benefits encourage low-income families to migrate from low-benefit to high-benefit states. The studies that have been done on the migration effects of AFDC suffer from serious data and methodological problems, but they suggest that the effect on migration of low-income families is quite small. The question of how or if the proposed poverty measure, for which the thresholds vary much less across states than do AFDC need and benefit standards, should be linked with program benefits (for AFDC or a combination of assistance programs) is a difficult one. There are several reasons that a benefit 33   This evening-out occurs because the food stamp benefit formula decreases food stamp benefits by 30 cents for every dollar increase in AFDC benefits and, conversely, increases food stamp benefits by 30 cents for every dollar reduction in AFDC benefits.

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Measuring Poverty: A New Approach standard could differ from a poverty standard and, more generally, why the design of an assistance program could deviate from the goal of helping everyone who is classified as poor. First, scarce budget resources (and competition for them from other programs) may well limit the extent to which payments can approach the poverty threshold; in state-federal programs (such as AFDC), the nature of the state-federal cost sharing provisions has an important effect on funding constraints. Second, there may be reasons to target payments on particular groups in order to maximize the effectiveness of limited funds and achieve other policy goals. For example, because of the social cost of children growing up in economic deprivation, it may be sensible to concentrate assistance dollars on poor families with children, even though other groups have measured need that is just as great. Or it may make sense to concentrate scarce assistance dollars on the poorest families, even though helping the families closest to the poverty line would achieve the fastest reduction in measured need. Third, the existence of multiple assistance programs can affect the level of the benefit standard that makes sense for any one of them. For example, AFDC interacts with food stamps and public housing, among other programs, and it makes little sense to think of an AFDC benefit standard in isolation from other programs. Finally, incentive effects drive a wedge between measured need and the amount of program dollars needed to alleviate need. For example, families who are provided benefits designed to raise them above the poverty line may reduce their work effort so that the net effect is to leave them in poverty. Behavioral effects of program benefits are, indeed, the reason that it is misleading to describe the aggregate ''poverty gap"—the difference between the poverty line and a family's resources, aggregated over all families—as the dollar amount that the government would have to spend to eliminate poverty. The question of incentives is one of the most difficult issues that policy makers face in designing assistance programs to serve multiple goals, such as alleviating need while containing costs and discouraging dependency. The task is made more difficult by the fact that research findings on incentive effects are sometimes incomplete or inconclusive. Issues of program incentives have been at the center of the policy debate about AFDC, which is directed to families that the public would like to see increasingly responsible for their own support. Consequently, there has been considerable experimentation with changes in benefit levels and formulas for calculating disposable income to try to induce AFDC families to become more stable and self-supporting. To date, results show limited effects of changes in benefit levels and the tax rate on earnings on such behaviors as work effort. The findings are not yet available on more recent state initiatives, such as not increasing benefits when another child is born or reducing benefits if parents do not stay in school or fail to have their children vaccinated. It is important also to note that other

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Measuring Poverty: A New Approach programs besides AFDC raise concerns about incentives; for example, Social Security and SSI have negative effects on work effort (see Chapter 8). For all of these reasons, it is not possible, on any theoretical or strictly scientific grounds, to link poverty thresholds directly to benefits. To the many people involved in evaluating and designing public assistance programs, this conclusion may seem obvious. However, we believe it is worth restating the obvious to underscore the point that measuring need, by determining how many people have resources below a reasonable poverty standard, is different from determining the proper societal response to that need. In sum, many factors properly enter into a determination of program benefit standards, including judgements about the extent to which society is prepared to allocate scarce resources to support low-income people and the mix of goals that society wants government assistance programs to serve. The critical role of such judgements is the reason that a panel such as ours, chosen for expertise in measurement issues, cannot make recommendations about appropriate benefit levels for specific assistance programs. However, the fact that we do not make a recommendation about national minimum benefit standards for AFDC (or other programs) should not be taken to mean that there is no case for reducing the wide variation in AFDC benefits across the states. Rather, as a panel on poverty measurement, our position on the issue of benefit levels for assistance programs is necessarily neutral. In conclusion, we urge policy makers at the federal and state levels to carefully consider all of the issues involved in the current debate about the nation's welfare policy. Ultimately, the determination of appropriate programs and policies to alleviate poverty involves "politics" in its best sense—namely, the consideration of competing public objectives against the constraints of scarce public resources within the framework of a nation's social and political system.