8
The Poverty Measure and AFDC

In addition to reviewing the statistical measure of poverty, the panel was asked to consider issues of benefit levels for government family assistance programs—in particular, a national minimum benefit standard for the Aid to Families with Dependent Children (AFDC) program. Currently, there are large differences in AFDC benefit standards across states, and no state provides benefits as generous as the official poverty thresholds.

Federal policy makers have several times considered enacting a uniform minimum benefit standard that would provide a nationwide floor for AFDC benefits. The congressional debate over the Family Support Act (FSA) of 1988 included proposals for a national minimum benefit, but they were not accepted, largely because of the sizable estimated budgetary costs to the government. The FSA did request a study of minimum benefit standards, however, and this chapter responds to that request. We considered conceptual and statistical issues involved in setting a national minimum benefit standard for AFDC, just as we considered such issues for the poverty line.

In our review, we focused on the nature of the relationship between program benefit levels (whether in AFDC or other cash and near-cash assistance programs) and a measure of poverty (whether ours or another), and we show why that relationship is indirect at best. We also considered the relationship of the proposed poverty measure to AFDC standards of need. AFDC is unique among cash and near-cash assistance programs in that the states are required to establish a standard of need but are not required to—and often do not—use this standard to determine actual benefits. (See Appendix D for details of the AFDC program.)



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Measuring Poverty: A New Approach 8 The Poverty Measure and AFDC In addition to reviewing the statistical measure of poverty, the panel was asked to consider issues of benefit levels for government family assistance programs—in particular, a national minimum benefit standard for the Aid to Families with Dependent Children (AFDC) program. Currently, there are large differences in AFDC benefit standards across states, and no state provides benefits as generous as the official poverty thresholds. Federal policy makers have several times considered enacting a uniform minimum benefit standard that would provide a nationwide floor for AFDC benefits. The congressional debate over the Family Support Act (FSA) of 1988 included proposals for a national minimum benefit, but they were not accepted, largely because of the sizable estimated budgetary costs to the government. The FSA did request a study of minimum benefit standards, however, and this chapter responds to that request. We considered conceptual and statistical issues involved in setting a national minimum benefit standard for AFDC, just as we considered such issues for the poverty line. In our review, we focused on the nature of the relationship between program benefit levels (whether in AFDC or other cash and near-cash assistance programs) and a measure of poverty (whether ours or another), and we show why that relationship is indirect at best. We also considered the relationship of the proposed poverty measure to AFDC standards of need. AFDC is unique among cash and near-cash assistance programs in that the states are required to establish a standard of need but are not required to—and often do not—use this standard to determine actual benefits. (See Appendix D for details of the AFDC program.)

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Measuring Poverty: A New Approach DETERMINING PROGRAM BENEFIT LEVELS We recommend (in Chapter 7) that serious consideration be given to the use of the proposed poverty measure as an eligibility standard for programs that tie eligibility for benefits and services to the current poverty measure. It might seem a logical next step to suggest a direct relationship of the proposed poverty measure to program benefits. Certainly, the existence of a poverty threshold that makes reasonable adjustments for differences in family circumstances, including differences in the cost of living across regions of the country, creates an impetus for program benefits to be related to that threshold. However, there are many factors that properly enter into a determination of benefit levels, only one of which is a poverty threshold. At present, there is wide variation in AFDC benefits across the 50 states and the District of Columbia, and, in most states, benefits are considerably below the official poverty threshold. As of January 1994, the states' median standard of need for a three-person family was 60 percent of the corresponding official poverty threshold, and the median maximum benefit was 38 percent of the poverty threshold. 1 The median of the maximum combined AFDC and food stamp benefit for the states was 69 percent of the poverty threshold. Looking across states, the maximum AFDC benefit for a three-person family in January 1994 varied from $923 per month in Alaska to $120 in Mississippi, with a median of $366, a mean of $396, and a coefficient of variation of 40 percent; see Table 8-1.2 The maximum AFDC benefit ranged from $240 to $552 (25-58% of the poverty threshold) in about two-thirds of the states; eight states exceeded this range, and eight states fell below it. The maximum combined AFDC and food stamp benefit for a three-person family exhibited somewhat less dispersion, varying from $1,208 in Alaska to $415 in Mississippi, with a median of $658, a mean of $675, and a coefficient of variation of 22 percent. Food stamps have this effect because of the program's benefit formula, which assumes that families will devote 30 percent of their countable income to food expenditures (see Chapter 7). Hence, an increase of $1 in AFDC benefits (or other countable income) decreases food stamp benefits by 30 cents, and a decrease of $1 in AFDC benefits (or other countable income) increases food stamp benefits by 30 cents. The maximum combined AFDC and food stamp benefit ranged from $528 to $822 (55-86% of the poverty threshold) in 39 states. Adjusting AFDC and food stamp benefit levels to take account of differences in the cost of living by state further reduces the variation, although only to a limited extent (see below). 1   The three-person family (parent or caretaker and two children) is the usual reference family for AFDC. 2   The coefficient of variation is the standard deviation of a distribution as a percentage of the mean value; the standard deviation is the value that when added to or subtracted from the mean includes about two-thirds of the observations (states in this case).

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Measuring Poverty: A New Approach TABLE 8-1 AFDC Need Standards, Maximum AFDC Benefits, and Maximum Combined AFDC and Food Stamp Benefits for a Family of Three, January 1994     Maximum AFDC Benefit Maximum Combined AFDC/Food Stamp Benefit State AFDC Need Standard Dollar Value Percent of Need Dollar Value Percent of Need Alabama 673 164 24 459 68 Alaska 975 923 95 1,208 124 Arizona 964 347 36 639 66 Arkansas 705 204 29 499 71 California 715 607 85 821 115 Colorado 421 356 85 645 153 Connecticut 680 680 100 872 128 Delaware 338 338 100 633 187 District of Columbia 712 420 59 690 97 Florida 991 303 31 598 60 Georgia 424 280 66 575 136 Hawaii 1,140 712 62 1,134 99 Idaho 991 317 32 612 62 Illinois 890 367 41 658 74 Indiana 320 288 90 583 182 Iowa 849 426 50 694 82 Kansas 429 429 100 713 166 Kentucky 526 228 43 523 99 Louisiana 658 190 29 485 74 Maine 553 418 76 689 125 Maryland 507 366 72 661 130 Massachusetts 579 579 100 801 138 Michigana 551 459 83 717 130 Minnesota 532 532 100 768 144 Mississippi 368 120 33 415 113 Missouri 846 292 35 587 69 Montana 511 401 78 677 132 Nebraska 364 364 100 651 179 Nevada 699 348 50 640 92 New Hampshire 1,648 550 33 781 47 New Jersey 985 424 43 700 71 New Mexico 357 357 100 646 181 New Yorkb 577 577 100 816 141 North Carolina 544 272 50 567 104 North Dakota 409 409 100 682 167 Ohio 879 341 39 636 72 Oklahoma 471 324 69 619 131 Oregon 460 460 100 753 164 Pennsylvania 614 421 69 691 113

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Measuring Poverty: A New Approach     Maximum AFDC Benefit Maximum Combined AFDC/Food Stamp Benefit State AFDC Need Standard Dollar Value Percent of Need Dollar Value Percent of Need Rhode Island 554 554 100 822 148 South Carolina 440 200 45 495 113 South Dakota 491 417 85 688 140 Tennessee 426 185 43 480 113 Texas 574 184 32 479 83 Utah 552 414 75 686 124 Vermont 1,124 638 57 843 75 Virginia 393 354 90 644 164 Washington 1,158 546 47 804 69 West Virginia 497 249 50 544 109 Wisconsin 647 517 80 758 117 Wyoming 674 360 53 648 96 Mean 655 396 66 675 115 Median 574 366 66 658 113 Range 320–1,648 120–923 24–100 415–1,208 47–187 Coefficient of variationc 40.7% 39.5% 39.6% 21.8% 32.5% SOURCE: U.S. House of Representatives (1994:366-367). a The values apply to Wayne County. b The values apply to New York City. c The standard deviation of the distribution as a percentage of the mean value. Proposals for AFDC Minimum Benefits: A Brief History The original Aid to Dependent Children program, the predecessor to AFDC, was enacted in 1935 as part of the legislation that instituted a national Social Security system.3 It was designed to put on a sounder footing the states' programs to provide ''mothers' pensions," but there was no intent to mandate a prominent role for the federal government. 4 The legislation provided that the federal government would pay 33 percent of the program's costs, with a 3   Peterson and Rom (1990:Chap. 4) is the main source for this historical review; see also U.S. Senate (1986). 4   In contrast, it was argued in the case of Social Security that national standards were needed to protect working people, given the mobility of labor across state boundaries. Similarly, for unemployment insurance, it was argued that a nationally uniform payroll tax was needed to ensure that states could not gain an unfair business advantage by choosing not to provide unemployment compensation.

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Measuring Poverty: A New Approach maximum federal payment of $6 a month for the first child and $4 for other children. In 1950 the program was amended to provide benefits to the mother herself (or another caretaker of a dependent child or children), and in 1962 the program was amended to provide benefits (at state discretion) to two-parent families in which both were unemployed. The original legislation required that the states pay one-third of the costs (i.e., it prohibited states from the common practice of laying off all their costs on local jurisdictions), and it made federal payments "conditional on passage and enforcement of mandatory State laws and on the submission of approved plans assuring minimum standards in investigation, amounts of grants, and administration" (Congressional Record, January 17, 1935:548). Since one-half of the counties in the United States did not provide mothers' pensions at the time and there was wide variation in payments across counties within states, the legislation had the effect of reducing within-state variation in benefits. However, it had little effect on across state variation, leaving broad discretion to the states to set need standards, payments, and eligibility rules. For example, states were allowed to keep their residency requirements, and most did so until the Supreme Court in 1969 ruled them to be unconstitutional. Historically, reformers have followed three strategies to try to establish more uniform state policies with regard to AFDC benefits (see Peterson and Rom, 1990:99-100), focusing on the matching formula, a supplementary national program, and national minimum benefit standards. The Matching Formula The federal matching percentage was raised from 33 to 50 percent in 1939, to be consistent with the percentage for programs to assist the needy elderly, blind, and disabled. The formula was changed several times more between 1944 and 1958. Finally, in 1965, states were given the option of switching to the matching formula adopted for the Medicaid program. This formula committed the federal government to paying at least 50 percent of the welfare benefit in every state and to paying a higher matching rate (up to 83%) in those states with lower per capita income. Currently, all states use the Medicaid matching formula for AFDC benefits. The matching percentages in fiscal 1994 varied from 50-55 percent in 19 states and the District of Columbia to 70-79 percent in 13 states (U.S. House of Representatives, 1994: Table 10-17). The rationale for the changes in the matching formula included the desire to provide incentives for low-benefit states to raise their benefits. However, Peterson and Rom (1990) found that the differences in benefit levels across states remained essentially unchanged, with a coefficient of variation that ranged from 34 to 37 percent in each decade from the 1940s to the 1980s. A Supplementary Program with a National Benefit Standard—Food Stamps Food assistance programs in the United States were initially very

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Measuring Poverty: A New Approach localized. Many communities did not participate in the food stamp (or commodity distribution) program, and eligibility standards varied widely among those that did. In 1970 the Food Stamp Program was effectively nationalized: a single national standard was adopted, which was higher than any then in use in the states; the Secretary of Agriculture was empowered to set national eligibility requirements; and stiff penalties could be imposed on states that did not operate a program in every county. In 1977 Congress eliminated all purchase requirements for food stamps, making them a simple supplement to cash assistance in inverse proportion to family income (as well as a benefit to working families not receiving cash assistance). The effect of these changes was to reduce the variation across states in the combined value of AFDC and food stamp benefits. However, there was no incentive for low-benefit states to raise AFDC benefits per se; rather the provision that food stamp benefits increase (decrease) by 30 cents for every dollar decrease (increase) in cash benefits in effect rewarded states that kept cash benefits low and penalized states that increased them. A National Minimum Benefit Standard for AFDC The strategy of legislating a uniform minimum benefit standard for AFDC has never achieved legislative success. In an early discussion of needed reforms in public assistance programs, Leon Keyserling's Conference on Economic Progress (1959:58) urged that "minimum uniform standards among the States should be set by the Federal Government." In 1965, the Office of Economic Opportunity (OEO) proposed a negative income tax program with a single nationwide payment schedule as part of its first "national anti-poverty plan." As part of its second plan in 1966, OEO again proposed a negative income tax program with a single nationwide payment schedule; besides being available to all poor persons without regard to demographic category, this proposed program would have gradually replaced existing public assistance programs (including AFDC) by 1972. In that same year the Advisory Council on Public Welfare (1966:15,22,117) recommended a "minimum standard for public assistance payments below which no State may fall." It proposed (p. xii) that the ''Federal Government … set nationwide standards, adjusted by objective criteria to varying costs and conditions among the States, and assume the total cost of their implementation above a stipulated State share." In 1967 President Johnson proposed that states be required to pay 100 percent of their standard of need, but he did not propose any specific minimum benefit standard. The proposal was rejected in the House Ways and Means Committee. The President's Commission on Income Maintenance (1969:7) recommended a "universal income supplement program financed and administered by the Federal Government." Concerning benefit levels for this income supplement program, the Commission stated (p. 59) that "attempts to reflect different costs of living in different areas would involve many difficulties and so a uniform National supplement is recommended."

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Measuring Poverty: A New Approach The Family Assistance Plan (FAP) put forward by the Nixon Administration in the late 1960s provided for two kinds of programs, each with national minimum benefit standards: a program for low-income elderly, blind, and disabled (which subsequently became the Supplemental Security Income [SSI] program), and a program for all families with dependent children, regardless of work status. The proposed FAP AFDC minimum benefit was $1,600 a year for a family of four (about 40% of the official poverty line at that time)—a level that would have raised benefits in 16 states. FAP passed the House in 1970 but died in the Senate: conservatives questioned the adequacy of the work incentives; liberals criticized the national minimum benefit as inadequate. The Carter Administration's Better Jobs and Income Program, proposed as legislation in 1977, also included a national minimum benefit for a program that would have combined AFDC, SSI, and food stamps; the minimum was set at $4,200 for a family of four whose head could not be expected to work (about 70% of the poverty line). This proposal died in Congress. In 1979 a scaled-back plan was introduced that proposed a national minimum benefit for AFDC at about 75 percent of the poverty line. The House passed this plan with the minimum benefit lowered to 65 percent of the poverty line (which would have raised benefits in 13 states). This bill died in the Senate. As noted above, proposals for a national minimum benefit were originally considered for the 1988 FSA. In 1987 the House Ways and Means Committee approved a minimum benefit standard, but opposition from southern Democrats on the grounds of increased costs to their states resulted in stripping this provision from the legislation. The FSA instead mandated a study of minimum benefit standards. Issues in Program Benefit Design Today, the de facto national minimum level of available benefits for AFDC recipients is the maximum food stamp allowance combined with the maximum AFDC benefit in the lowest benefit state. In January 1994, this amount was $415 per month for a three-person family, or 43 percent of the corresponding 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: that low-income families with children should not be disadvantaged simply by reason of their state of residence. In addition, others have argued that differences in benefits encourage low-income families to migrate from low-benefit to high-benefit states. There have been studies of the migration effects of AFDC, but they suffer from serious data and methodological problems. The results suggest that there is an effect on the migration behavior of low-income families but that the effect, for a number of reasons, is quite weak (see below).

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Measuring Poverty: A New Approach We considered the issue of a national minimum benefit standard in somewhat broader terms, asking the question of how or if the proposed poverty measure could or should be linked with benefit levels for a program such as AFDC or a combination of AFDC and other cash and near-cash assistance programs. We first broached this issue in Chapter 7 , in which we discussed the possible use of the proposed poverty measure for programs that already relate eligibility to the current measure. We pointed out some of the reasons that program agencies might want to make the link less direct, for example, by setting eligibility cutoffs at a fraction of the poverty thresholds. Here we explore more fully the reasons that a program benefit 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. A note on terminology: When we speak of a "benefit standard" in the context of AFDC, we mean what is referred to in that program as the "maximum benefit" in contrast to either the ''need standard" or the "payment standard." A family must have gross income below 185 percent of the need standard to be eligible for AFDC; it must also have net or countable income below 100 percent of the payment standard. A number of states have a payment standard below their need standard, and some states cap the maximum benefit at a lower level than the payment standard (see below). The measurement of poverty or need does not necessarily imply anything about the extent to which need can or should be alleviated through government assistance programs. There are five key issues that separate measurement of need and alleviation of need: budget constraints, both overall and from competing demands on funding resources; strategies and preferences for targeting program benefits; interactions among programs; behavioral responses to program incentives; and, finally, cost-sharing provisions for federal-state programs. Budget Constraints Scarce budget resources may well limit the extent to which benefit standards can approach the poverty threshold, particularly in entitlement programs, such as AFDC, that must provide benefits to all eligible applicants. Both globally and in the United States, the areas with the greatest poverty are typically the areas that can least afford high benefits. For example, in some African countries, such a high proportion of the population is poor (by any standard) that very few resources are available internally to alleviate poverty. For AFDC, the states with low-benefit standards tend to be the states with higher poverty rates and with lower per capita incomes and, hence, with less ability to provide assistance to their needy families. Thus, maximum benefits in January 1990 were negatively correlated with the 1989 state poverty rate

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Measuring Poverty: A New Approach (correlation coefficient, –.55) and positively correlated with the 1989 state per capita income (correlation coefficient, .67).5 However, there is considerable variation in benefit levels among the states that is not explained by differences in income. Peterson and Rom (1989) and Plotnick and Winters (1985) show that differences in AFDC benefits across states relate to a variety of political, ethnic, and economic differences. For the nation as a whole, it would be hard to argue that the United States lacks sufficient revenue-generating ability to provide assistance to families below the poverty level. But the country's funding resources are not unlimited, and there are many demands on them. Assistance programs must compete with all other uses of taxpayers' funds. Targeting Strategies and Preferences In order to maximize the effectiveness of limited funds and achieve other policy goals, there may be reasons to target assistance payments to particular groups, even though simple measurement of need would not necessarily identify them as unique. For example, because of the long-term 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 need that is just as great. There are many examples of targeting in current programs. The Earned Income Tax Credit (EITC) was originally targeted to working poor families with children and was recently expanded to cover childless workers as well (see Appendix D). Food stamps offers another example of targeting, in that the program is designed to provide a more secure safety net for the elderly and disabled than for other people. This feature operates through the definition of countable income, which permits more generous deductions for households with elderly and disabled members in determining eligibility and benefits. Also, there is a higher asset limit for households with an elderly member (see Appendix D). Another approach would be to concentrate scarce assistance dollars on the poorest families (the "worst off" among the poor), even though helping the families closest to the poverty line (the "best off" among the poor) would achieve the fastest reduction in measured need. In other words, although the strategy of helping the poorest poor will not produce as large a reduction in measured need per dollar spent as helping other poor people, it may be the best strategy to reduce poverty. 5   The correlations were carried out by using data on AFDC benefits from U.S. House of Representatives (1990:553-555) and data on state poverty rates and per capita incomes from the 1990 census (Bureau of the Census, 1993d: Tables 733, 741).

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Measuring Poverty: A New Approach Program Interactions 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, and it makes little sense to think of an AFDC benefit standard in isolation from these programs (or in isolation from such programs as the EITC and enforcement of child support). However, given the different ways in which eligibility and benefits are calculated, it is not easy to determine an appropriate adjustment to AFDC benefit levels to take account of program interactions. In the case of AFDC and food stamps, for example, one could certainly argue for excluding food costs from the AFDC benefit standard because of the almost universal provision of food stamps (and school meals) to AFDC families. As noted above, it would also be to a state's financial benefit to reduce its AFDC benefit standard by as much as the value of the Thrifty Food Plan because the Food Stamp Program will provide higher benefits than otherwise would have been the case. However, only in the case of states with very low AFDC benefit standards will the Food Stamp Program in fact make up the entire difference for recipients. This occurs because the program assumes that, after deductions, 30 percent of countable income including AFDC benefits is available for food consumption and, hence, reduces food stamp benefits accordingly. As a hypothetical example, consider a state that wants to provide combined AFDC and food stamp benefits at the level of the official poverty threshold. The deductions in the Food Stamp Program make it difficult to calculate by how much the state should reduce its AFDC benefit standard, but it can be demonstrated that not to reduce the AFDC standard at all may overcompensate recipients by as much as 10 percent relative to the poverty threshold, while to reduce the AFDC standard by the full amount of the Thrifty Food Plan may undercompensate recipients by as much as 17 percent.6 Program interactions virtually dictate that designers of assistance programs use complicated models to evaluate likely program effects. Some models are designed to point out odd interactions of such program features as maximum benefit levels and tax rates on other income by estimating the benefit package 6   The first bound is obtained as follows: assume the AFDC benefit standard is $991 per month, or 100 percent of the poverty guideline for a family of three in 1993 (no state actually paid this amount). Then a family with the maximum $991 benefit from AFDC and the standard and excess shelter deductions for food stamps would have $653 of countable food stamp income and would receive $99 in food stamps (the Thrifty Food Plan value of $295 minus 30% of $653), for a total combined benefit of $991 plus $99, or $1,090 (110% of the poverty guideline). To obtain the other result, assume that the same state reduced its benefit standard to $696 by subtracting the entire value of the Thrifty Food Plan. Then a family with the maximum $696 AFDC benefit but only the standard food stamp deduction would have $565 in countable food stamp income and would receive $125 in food stamps ($295 minus 30% of $565), for a total combined benefit of $696 plus $125, or $821 (83% of the poverty guideline).

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Measuring Poverty: A New Approach that would accrue to a specific type of family at a particular income level. Other models use microsimulation techniques operating on large-scale household databases to project the effects on program costs and caseloads of specified program features, given the distribution of the population and estimates of the likelihood of participation and other behavioral effects (see Citro and Hanushek, 1991; Lewis and Michel, 1990). Program Incentives Human beings participate in programs, and programs undeniably affect their behavior. Some effects are intended, others are unintended; some effects are positive, others are negative. Some programs have an explicit goal of providing a positive incentive: for example, the federal government subsidizes student loans to encourage more young people to obtain the economic and other benefits of a college education. As another example, the Special Supplemental Nutrition Program for Women, Infants, and Children (WIC) seeks out poor pregnant women, mothers, and children to provide food supplements with the goal of healthier pregnancies, healthier babies, and, ultimately, healthier children and adults. Other programs have a primary goal of providing income support to needy people. Such cash and near-cash assistance programs as AFDC and food stamps must contend with the fact that economic support has negative incentive effects to the extent that recipients are encouraged to rely on the program and not take steps to become self-supporting. Research on AFDC has examined incentive effects in the areas of work effort, family structure, and migration. Work Effects Both economic theory and empirical research indicate that such programs as AFDC adversely affect the work choices of the eligible population. These programs provide a "guaranteed" base income to those who do not work; the resulting "income effect" allows individuals to work less. These programs also impose taxes on earned income. Since workers' net wages are now lower, the "substitution effect" encourages them to decrease the number of hours worked as it is relatively less expensive for them to do so. The combination of these provisions results in an unambiguous decrease in the aggregate number of hours of market work by the eligible low-income population.7 Extensive research has been undertaken to estimate the magnitude of the 7   In theory, there is an alternative explanation: it is possible that the primary effect of extra program dollars for low-income families is to induce them to underreport their earned (or other) income. That is, rather than decreasing work hours, they may decrease reporting of work hours (or switch to work where it is easier to evade official notice). However, there is no empirical evidence on this point.

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Measuring Poverty: A New Approach TABLE 8-8 AFDC Maximum Benefits for a Family of Three, July 1970, July 1980, and January 1991, in Constant (January 1991) Dollars July 1970 July 1980 January 1991 Percentage Change State Max. AFDC Ben. Percent of Need Std. Max. AFDC Ben. Percent of Need Std. Max. AFDC Ben. Percent of Need Std. 1970–1980 1980–1991 1970–1991 Alabama 224 35 192 61 124 21 -14 -35 -45 Alaska 1,132 94 745 100 891 100 -34 -20 -21 Arizona 476 65 329 87 293 47 -31 -11 -38 Arkansas 307 60 262 69 204 29 -15 -22 -34 California 642 53 771 99 694 100 20 -10 8 Colorado 666 100 473 100 356 85 -29 -25 -47 Connecticut 976 100 774 100 680 100 -21 -12 -30 Delaware 552 65 434 100 338 100 -21 -22 -39 District of Columbia 673 85 466 73 428 60 -31 -8 -36 Florida 393 60 318 100 294 33 -19 -8 -25 Georgia 369 60 267 85 280 66 -28 5 -24 Hawaii 780 100 763 100 632 62 -2 -17 -19 Idaho 728 89 526 87 317 57 -28 -40 -56 Illinois 800 100 469 100 367 45 -41 -22 -54 Indiana 414 44 416 83 288 90 0 -31 -30 Iowa 693 81 587 100 426 86 -15 -27 -39 Kansas 766 91 562 100 409 100 -27 -27 -47 Kentucky 507 71 306 100 228 43 -40 -25 -55 Louisiana 304 51 248 38 190 29 -18 -23 -37 Maine 466 49 456 68 453 69 -2 -1 -3 Maryland 559 65 440 100 406 72 -21 -8 -27 Massachusetts 925 100 618 100 539 100 -33 -13 -42 Michigana 756 100 693 100 525 90 -8 -24 -31 Minnesota 883 100 680 100 532 100 -23 -22 -40 Mississippi 193 28 156 43 120 33 -19 -23 -38 Missouri 359 37 404 80 292 94 13 -28 -19 Montana 697 91 422 100 370 82 -39 -12 -47

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Measuring Poverty: A New Approach Nebraska 590 61 505 100 364 100 -14 -28 -38 Nevada 417 45 427 92 330 60 2 -23 -21 New Hampshire 904 100 564 100 516 100 -38 -9 -43 New Jersey 1,042 100 587 100 424 100 -44 -28 -59 New Mexico 514 89 359 100 310 100 -30 -14 -40 New Yorkb 963 100 642 100 577 100 -33 -10 -40 North Carolina 500 86 313 100 272 50 -37 -13 -46 North Dakota 735 92 544 100 401 100 -26 -26 -45 Ohio 555 78 429 76 334 43 -22 -22 -40 Oklahoma 524 85 460 100 341 72 -12 -26 -35 Oregon 635 80 460 100 444 100 -28 -3 -30 Pennsylvania 914 100 541 100 421 69 -41 -22 -54 Rhode Island 790 100 554 100 554 100 -30 0 -30 South Carolina 293 52 210 69 210 48 -28 0 -28 South Dakota 911 100 523 100 385 100 -43 -26 -58 Tennessee 386 62 199 68 195 47 -48 -2 -49 Texas 511 75 189 75 184 32 -63 -3 -64 Utah 604 79 587 75 402 75 -3 -32 -33 Vermont 921 93 802 73 679 66 -13 -15 -26 Virginia 776 94 505 90 354 90 -35 -30 -54 Washington 890 100 747 100 531 54 -16 -29 -40 West Virginia 393 52 336 75 249 50 -15 -26 -37 Wisconsin 635 86 724 85 517 80 14 -29 -19 Wyoming 735 87 513 100 360 53 -30 -30 -51 Mean 635 78 480 89 393 72 -23 -18 -37 Median 635 85 469 100 367 72 -26 -22 -38 Range 193–1,132 28–100 157–807 38–100 120–891 21–100 (-63)–20 (-40)–20 (-64)–8 Coefficiant of variationc 35.5% 27.0% 35.6% 17.3% 39.5% 34.7% 71.4% 65.2% 37.1% NOTES: Data calculated from U.S. House of Representatives (1991:602-605). The adjustment to constant January 1991 dollars was made using the CPI-U. a The values apply to Wayne County. b The values apply to New York City. c The standard deviation of a distribution as a percentage of the mean value.

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Measuring Poverty: A New Approach USR&E based this argument on the behavior of the subset of states that either made a conscientious effort during the 1970s to set normative standards or, although not having recently established a systematically derived need standard, had committed themselves to maintaining the value of their need standard in real terms. These states as a group increased both their need standard and their benefit level more than other states in the 1969-1979 period. However, it seems to us as likely or more likely that a common set of factors (e.g., a more supportive attitude toward welfare programs) explains the propensity to raise both need and benefit standards in some states rather than that higher need standards in and of themselves cause states to raise their benefits. We do not offer a recommendation about the merits of having a separate need standard in the AFDC program, although we are among those who find the concept of questionable utility. Welfare policy is currently the subject of intense debate, and the AFDC program as it has operated historically may likely change in significant ways, perhaps rendering moot the issue of the soundness or adequacy of the need standard for the existing program. However, given that current law requires states to set need standards (and allows them to have lower benefit standards), our concern is whether it makes sense for states to adopt the proposed poverty measure in place of their own standard. A recent development in standard setting practices with relevance to this issue is that, in the past decade, 14 states have explicitly geared their need standard to the current poverty guidelines, which derive from the official thresholds. 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. Overall, however, a growing number of states are finding it convenient to link their AFDC need standard to the poverty guidelines in some fashion. We recommend that states that tie their AFDC need standard to the current poverty measure consider the use of the proposed measure instead, and we encourage all of the states to make a similar assessment. The Family Support Act requires states to review their need standard every 3 years and report to HHS. We note that HHS could request the states to complete an assessment that considers the possible use of the proposed poverty measure for inclusion in their next regular reports. An important element of such a review is an assessment of the implications of the proposed measure—both the thresholds and the definition of family resources—in relation to a state's current need standard (whether the poverty guidelines or its own standard) and the rules for determining gross and net income. Also important to consider is whether the proposed measure may need to be modified in one or more respects to be more suitable for program

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Measuring Poverty: A New Approach purposes. Finally, it is important to keep in mind the need for consistency between the thresholds and the resource definition in whatever measure a state uses. Comparative Advantage of the Proposed Poverty Measure The use of the proposed threshold concept to set state need standards of AFDC would represent an improvement over the current measure in several respects. One improvement relates to the equivalence scale by which the reference family poverty threshold is adjusted to take account of different needs for different types of families: the proposed scale is more reasonable than that embedded in the official thresholds. Another improvement is that the proposed threshold concept incorporates geographic variation in housing costs. For the statistical measure of poverty, we recommended that the thresholds vary by nine regions and several categories of size of metropolitan area within region (see Chapter 3). States may want to use thresholds that are specific to their state as a whole, and it is certainly feasible to develop such thresholds from decennial census data (see Table 8-4). Alternatively, states may want to have thresholds that vary by size of metropolitan area (or other geographic unit) within the state, and it is also feasible to develop such thresholds from census data. We caution against making further distinctions, particularly for small metropolitan or other areas, as the sample sizes underlying the estimates can become uncomfortably small. Thus, for many metropolitan areas under about 125,000 population, there are only 200-300 cases of housing units in the 1990 decennial census data with the specified characteristics that are used to estimate geographic differences in housing costs. The Census Bureau and Bureau of Labor Statistics could assist the states by constructing thresholds by state and by substate area and by providing estimates of the sampling error underlying the geographic indexes. The states could then determine whether there is enough intrastate variation and whether the estimates of that variation are sufficiently reliable to warrant using several different thresholds. Finally, an important improvement is that we propose a consistent budget concept and definition of family resources. Moreover, the proposed resource definition is more congruent with the income definition in the AFDC program than is the current gross money income definition, so it would be more consistent to use the proposed threshold concept in place of the current concept. For example, the AFDC definition of countable income deducts child care and other work expenses. It does not deduct out-of-pocket medical care expenditures, but AFDC recipients are automatically eligible for Medicaid, which limits their out-of-pocket expenditures (although the generosity of the program varies among states). There are also some inconsistencies. For example, the EITC and a few other sources of income may not be counted as

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Measuring Poverty: A New Approach income in the AFDC program. Also, in-kind benefits are not counted as income (see further discussion below). Overall, however, the income definition in concept (if not necessarily in the specific details, such as the amount allowed for child care or work expenses) is quite consistent with the budget concept that underlies the proposed poverty thresholds and definition of family resources. Problematic Aspects of the Proposed Poverty Measure Program Interactions One issue that arises with the use of the proposed threshold concept (or the current concept, for that matter) is that AFDC is not the only program of basic consumption support for low-income families. Specifically, such programs as food stamps, school meals, public housing, and home energy assistance provide important components of consumption for many AFDC families—kinds of consumption that are included in the need concepts that underlie both the current poverty measure and the proposed alternative. Currently, a few of the states that tie their need standard to the HHS poverty guidelines attempt to take account of interaction effects with other assistance programs by subtracting food or food and medical care costs from the guidelines in order to form their AFDC need standard. However, such adjustments are not necessarily appropriate, even when the need standard would otherwise equal the poverty thresholds.23 With regard to medical care, the official poverty thresholds arguably do not include medical expenses that would be covered by Medicaid or other health insurance; the proposed thresholds do not include such expenses either (see Chapter 4). Hence, to subtract Medicaid from the poverty guidelines—or from thresholds developed under the proposed measure—is to assume that such benefits are fungible and can be used for other needed goods, when this is not generally the case. There is a clearer case for subtracting food stamps from the poverty thresholds to form AFDC need standards, particularly since food stamps are not counted as income for computing AFDC benefits. However, as we noted earlier, the way in which food stamp benefits are computed—specifically, the assumption that 30 percent of countable income (including AFDC benefits) will be available for food consumption—means that it is not straightforward to determine an appropriate adjustment. To subtract the entire value of the Thrifty Food Plan from the poverty thresholds would likely result in too great 23   Logically, such adjustments should not even be considered when the need standard is set at a fraction of the poverty thresholds, as is the case in a number of states. See Larin and Porter (1992) for a discussion of the problems in adjusting the current poverty guidelines to try to account for program interactions.

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Measuring Poverty: A New Approach a reduction in the AFDC need standard; how much less than that amount might be appropriate is open to question. Clearly, the issue of program interactions is a very difficult one. It may make most sense for the states to think of the AFDC need standard as a global standard, and then address program interaction questions in determining AFDC benefit levels. Implications of Updating for Costs and Caseloads Another important issue with the possible use of the proposed poverty measure to determine AFDC need standards concerns the proposed procedure for updating the thresholds. As we have stressed, thresholds developed under that procedure will reflect real increases in basic consumption, not just price changes. The use of thresholds updated in this manner offers the advantage that states would not have to periodically evaluate their need standard for real changes in living standards. Although few states have historically sought to revise their standard on any regular basis, there are some exceptions, and the Family Support Act now requires states to evaluate their need standard at least once every 3 years and to report the results to HHS. However, with the proposed procedure, the states would face concerns about possibly larger caseloads and higher costs compared with the use of the current poverty guidelines (see Chapter 7). One way in which the need standard is linked to eligibility for AFDC—and, hence, potentially to caseloads and the costs associated with changes in caseloads—is through federal law. The effects of this link may be relatively minor because the tie, strictly speaking, is only to gross income. Families with gross incomes that do not exceed 185 percent of the need standard may be eligible, but only if their net income does not exceed the payment standard. Hence, in states that do not raise their payment standard, increases in the need standard that result from the use of the proposed procedure will not necessarily add to caseloads or costs.24 More important effects on costs and caseloads may stem from the links that state laws provide between the need standards and the determination of net income eligibility and benefits. These links are more or less direct, depending on which of several methods a state uses to calculate eligibility and benefits; for some examples of how changes in need standards can affect families' eligibility status and benefits depending on the method used by the state, see Figure 8-1. 24   The adoption of higher need standards could cause some families with very high deductions from gross income to become eligible, but the number is likely to be small. There is evidence that states do not necessarily worry about increased costs from raising their need standard, from their reactions to federal legislation in the early 1980s that limited eligibility to families with gross income below 150 percent of the need standard (subsequently increased to 185%). Many states, including those with low-benefits, raised their need standards but not their benefit levels. This response allowed previously eligible families with high deductions to continue to be eligible but limited any increase in their benefits.

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Measuring Poverty: A New Approach EXAMPLE A: STATEPAYS 100 PERCENT OF DIFFERENCE BETWEEN NEED STANDARD AND COUNTABLE INCOME An increase in the need standard affects the number of eligible families and translates dollar for dollar into an increase in benefits. FAMILY 1: Countable income of $450 per month If need standard is $400 per month, family will be ineligible. If need standard is increased by $100 per month, family will be eligible for $50 benefit ($500 - $450). FAMILY 2: Countable income of $350 per month If need standard is $400 per month, family will be eligible for $50 benefit ($400 - $350). If need standard is increased by $100 per month, family will be eligible for a benefit increase of $100 per month ($500 - $350 = $150). EXAMPLE B: STATE PAYS FRACTION (50%) OF DIFFERENCE BETWEEN NEED STANDARD AND COUNTABLE INCOME An increase in the need standard affects the number of eligible families but increases benefits only fractionally. FAMILY 1: Countable income of $450 per month If need standard is $400 per month, family will be ineligible. If need standard is increased by $100 per month, family will be eligible for $25 benefit (($500 - $450) × 0.50). FAMILY 2: Countable income of $350 per month If need standard is $400 per month, family will be eligible for $25 benefit (($400 - $350) × 0.50). If need standard is increased by $100 per month, family will be eligible for a benefit increase of $50 per month (($500 - $350) × 0.50 = $75). FIGURE 8-1 AFDC eligibility and benefits of hypothetical families in states with different eligibility and benefit determination methods. Example A: A state pays the full difference between the need standard and countable income. In this case, the need standard (which determines gross income eligibility) is the same as the payment standard (which determines net or countable income eligibility), and both are the same as the maximum benefit paid to families with no other income. The link of the need standard to eligibility and benefit levels and hence to caseloads and costs is most obvious in these cases: an increase in the need standard allows families with higher net (as well as gross) incomes to become eligible and, for a given level of countable income, provides a higher level of benefits. Example B: A state pays a fraction of the difference between the need standard and countable income. In this case, the need standard and the payment standard are the same, but the maximum benefit is lower. Here, there is a direct link of the need standard to eligibility, which means a link to caseloads and the costs associated with changes in caseloads. However, the

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Measuring Poverty: A New Approach EXAMPLE C: STATE PAYS DIFFERENCE BETWEEN FRACTION (50%) OF NEED STANDARD AND COUNTABLE INCOME An increase in the need standard only fractionally increases the number of eligible families as well as the amount of benefits. FAMILY 1: Countable income of $450 per month If need standard is $800 per month, family will be ineligible ($800 × 0.50 = $400, which is &$450). If need standard is increased by $100 per month, family will still be ineligible ($900 × 0.50 = $450, which equals $450). FAMILY 2: Countable income of $350 per month If need standard is $800 per month, family will be eligible for $50 benefit (($800 × 0.50) - $350 = $50). If need standard is increased by $100 per month, family will be eligible for a benefit increase of $50 per month (($900 × 0.50) - $350 = $100). EXAMPLE D: STATE PAYS 100 PERCENT OF DIFFERENCE BETWEEN NEED STANDARD AND COUNTABLE INCOME SUBJECT TO A MAXIMUM BENEFIT An increase in the need standard affects neither the number of eligible families nor benefits unless the maximum benefit is also increased. FAMILY 1: Countable income of $450 per month. If need standard is $400 per month and maximum benefit is $375 per month, family will be ineligible. If need standard is increased by $100 per month but maximum benefit is unchanged, family will still be ineligible. FAMILY 2: Countable income of $350 per month If need standard is $400 per month and maximum benefit is $375 per month, family will be eligible for $25 benefit ($375 - $350). If need standard is increased by $100 per month but maximum benefit is unchanged, family will still be eligible for $25 benefit. link to benefits per case is attenuated because eligible families with a given level of countable income will receive only a fraction of an increase in the need standard. Example C: A state pays a fraction of the need standard itself. In this case, the need standard exceeds both the payment standard and the maximum benefit. Here, the link of the need standard to both eligibility and benefits is attenuated. Example D: A state uses one of the three methods listed above to make an initial determination of eligibility and benefits, but then imposes a maximum benefit that is lower than both its need and its payment standards. In this state, increases in the need standard have no effect, practically speaking, on either eligibility or benefit amounts unless the maximum benefit is also increased.

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Measuring Poverty: A New Approach Clearly, each state will need to analyze the possible implications for program costs and caseloads of basing its need standard on poverty thresholds that are developed under the proposed updating procedure. Given the differences among states in methods for determining eligibility and benefits, the states may well come to different conclusions. Effects of Updating on Program Incentives Some states that have a maximum benefit below their need standard provide higher benefits to families with other income, such as earnings or child support, through a ''fill-the-gap" method of calculating benefits. The details of this method vary across states, but the essence is that families are allowed to retain other income without having their AFDC benefit reduced, so long as the total of their benefit and other income does not exceed the need standard (see Larin and Porter, 1992: App). To illustrate, consider a state with a need (and payment) standard and maximum payment of $400 per month (i.e., the state pays 100% of need). In this state, a newly eligible family that has $200 of earnings will receive only $200 in AFDC, as the family's earnings will be subtracted in full from the need standard. But in another state, one that has a maximum benefit of $400 per month but a need (and payment) standard of $600 per month and that allows families to fill the gap, the same family will receive an AFDC benefit of $400 because the family's $200 in earnings will be subtracted from the (higher) need standard. The fill-the-gap approach to benefit calculation is a way to provide incentives to working families. Hence, states that want to provide such incentives may find it attractive to base their need standard on poverty thresholds that are developed under the proposed updating procedure. Summary We have offered a number of reasons that the use of the proposed poverty measure by the states for their AFDC need standard could be advantageous and some areas of concern, principally involving possible effects on program costs and caseloads. We do not want our discussion of budgetary implications to be misinterpreted. We do not intend to argue against the adoption of need standards for the AFDC program that are updated in real terms; indeed, from the perspective of the low-income population, there is much to recommend such a step by the states. However, assistance programs must balance a number of objectives and contend with a number of constraints. We urge that program designers fully evaluate all of the ramifications before deciding to adopt for program purposes a measure that is proposed for statistical purposes. For the AFDC need standard, it is important to note that the states, under current law, have considerable latitude with which to attenuate the link of the

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Measuring Poverty: A New Approach need standard to eligibility and benefits, by such strategies as setting the payment standard at a fraction of the need standard. Hence, considerations of possible adverse consequences for program costs and caseloads should perhaps weigh less heavily than the advantages of using the proposed poverty measure to set AFDC standards of need. In conclusion, we believe that, on balance, the use of the proposed poverty concept for the purpose of determining AFDC need standards would be beneficial, even if individual states set their need (or benefit) standard at different fractions of the poverty threshold. Use of the poverty thresholds that are developed under the proposed procedure would be generally consistent with the AFDC definition of income and would recognize important interstate differences in living costs within a common framework that would provide a benchmark for evaluating the adequacy of eligibility levels across states.

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