National Academies Press: OpenBook

Measuring Poverty: A New Approach (1995)


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Suggested Citation:"OVERVIEW AND RECOMMENDATION." National Research Council. 1995. Measuring Poverty: A New Approach. Washington, DC: The National Academies Press. doi: 10.17226/4759.
Page 203
Suggested Citation:"OVERVIEW AND RECOMMENDATION." National Research Council. 1995. Measuring Poverty: A New Approach. Washington, DC: The National Academies Press. doi: 10.17226/4759.
Page 204
Suggested Citation:"OVERVIEW AND RECOMMENDATION." National Research Council. 1995. Measuring Poverty: A New Approach. Washington, DC: The National Academies Press. doi: 10.17226/4759.
Page 205

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DEFINING RESOURCES 203 4 Defining Resources The determination of whether a family (or an individual) is in or out of poverty requires two pieces of information: a poverty threshold and an estimate of the family's economic resources. In the two preceding chapters, we examined thresholds and adjustments to them; in this chapter, we review definitions of family resources. We recommend a definition and analyze the elements that go into its derivation, considering for each the justification, methods and data for implementation, and needed research for improved implementation. OVERVIEW AND RECOMMENDATION The definition of family resources that has been used for determining poverty status in the United States ever since the current measure was adopted in the 1960s is annual gross money income. We believe this definition is seriously flawed and recommend a change: namely, that family resources be defined as disposable money and near-money income that is available for consumption of goods and services in the poverty budget. A key to our recommendation is the principle of consistency between the resource definition and the threshold concept. That is, a defensible measure of poverty requires that resources and needs—the thresholds—be defined consistently. Hence, we approached the task of evaluating alternative family resource definitions by constant reference to the proposed concept for the poverty thresholds—namely, a budget for food, clothing, and shelter and a small additional amount for other needed consumption. For consistency with this budget concept, the definition of resources should include the value of

DEFINING RESOURCES 204 near-money benefits, such as food stamps, that are available for consumption; it should exclude expenditures that are nondiscretionary and not available for consumption: out-of-pocket medical care expenditures (including health insurance premiums), income and payroll taxes, child care and other expenses that are necessary to earn income, and child support payments to another household. Instead of allowing for these kinds of expenses in the poverty budget, we propose, rather, to deduct them from resources for those families that incur them. Even within the constraints imposed by our choice of a concept for the poverty thresholds, there are alternative ways to define family resources. We considered these from the perspective of two other criteria: that the definition be publicly acceptable and operationally feasible. Data limitations are a particularly important consideration for the family resource definition because of the costs of estimating resources for a large enough sample of the population from which to reliably determine the poverty rate for the nation as a whole and for various population groups. Indeed, data limitations will likely hinder the extent to which complete consistency between a threshold concept and a resource definition can be achieved in practice. Nonetheless, we stress the importance of striving for consistency. In this respect, the current U.S. poverty measure has been deficient from the beginning. Most obviously, the poverty thresholds were derived from after- tax income data while resources were defined in before-tax terms. The reason for this discrepancy was that the data source for measuring poverty, the March income supplement to the Current Population Survey (CPS), did not obtain information that would readily allow families' taxes to be estimated.1 Income and payroll taxes on the working poor were low when the poverty measure was developed, but they subsequently increased and, more recently, declined again. The official poverty statistics reflected none of these shifts in tax policy, although they affected the resources available to poor and near-poor families. Other inconsistencies in the measure became apparent as society changed and new government programs were enacted. More mothers went to work outside their homes, thus incurring child care costs, yet the different needs of working and nonworking families were not reflected by modifying either the thresholds or the resource definition. In-kind benefit programs that provide such commodities as food and housing were small in scope when the current measure was developed but have increased enormously since then, yet the resource definition does not include their value. 1 The CPS surveys 60,000 households each month with a series of questions that are used to determine the official monthly unemployment rate. The income supplement every March asks about sources of income for each adult household member for the previous calendar year (see Chapter 5 and Appendix B).

DEFINING RESOURCES 205 Since the current measure was adopted, data sources and procedures for estimating income have improved substantially. In 1980, the March CPS income questions were expanded, and questions were added about major in- kind benefits. In 1983, the Survey of Income and Program Participation (SIPP) was initiated to obtain more complete information on economic resources.2 Also, methods were developed to adjust the March CPS income estimates in various ways (e.g., by subtracting taxes), and work is in progress on similar methods for SIPP. Yet, there has been no change in the data source or the definition of resources that is used to measure poverty. Not only does the current poverty measure violate the consistency principle, but so does much work to date to investigate alternative measures. For example, the Census Bureau over the past decade has published a series of "experimental" poverty rate estimates from the March CPS: they are based on changes to the family resource definition but not on changes to the thresholds (see, e.g., Bureau of the Census, 1993a, 1995).3 In some instances, this approach makes good sense: thus, the Census Bureau's estimates in which federal and state income taxes are subtracted from resources reflect a definition that is more consistent with the original threshold concept than is the current before-tax resource definition. In other instances, the changes to the resource definition are not consistent with the official thresholds. In particular, estimates by the Census Bureau (and others) in which the value of public and private health insurance benefits is added to families' resources violate the consistency principle. Since the official thresholds were first developed, medical care costs have escalated greatly, so it is inconsistent to add the value of health insurance benefits to resources without also increasing the thresholds. The effect of just adding insurance values without also raising the thresholds is to ignore the added costs of staying out of poverty. It is also to assume that health insurance benefits are fungible (i.e., that they can be spent for other goods, such as food and housing) when this is not the case, except insofar as such benefits may free up other resources. Also, medical care costs vary significantly across the population, so that for appropriate comparisons of poverty among groups (e.g., the elderly versus younger people), it is not sufficient to increase the thresholds by an average amount for medical care. 2 SIPP is a panel survey. Under the design used for the 1984–1993 panels, a new sample of 12,000–20,000 households was started each February and the members interviewed eight times at 4-month intervals, for a total of 32 months. Beginning in 1996, SIPP will be designed to have panels that last 48 months each and have larger samples of households (see Chapter 5 and Appendix B). 3 The Census Bureau has been constrained in that Congress requested publication of estimates on the basis of alternative resource definitions (specifically, definitions that added the value of in-kind benefits), but the U.S. Office of Management and Budget did not change the thresholds.

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Measuring Poverty: A New Approach Get This Book
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Each year's poverty figures are anxiously awaited by policymakers, analysts, and the media. Yet questions are increasing about the 30-year-old measure as social and economic conditions change.

In Measuring Poverty a distinguished panel provides policymakers with an up-to-date evaluation of:

  • Concepts and procedures for deriving the poverty threshold, including adjustments for different family circumstances.
  • Definitions of family resources.
  • Procedures for annual updates of poverty measures.

The volume explores specific issues underlying the poverty measure, analyzes the likely effects of any changes on poverty rates, and discusses the impact on eligibility for public benefits. In supporting its recommendations the panel provides insightful recognition of the political and social dimensions of this key economic indicator.

Measuring Poverty will be important to government officials, policy analysts, statisticians, economists, researchers, and others involved in virtually all poverty and social welfare issues.

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