National Academies Press: OpenBook

Measuring Poverty: A New Approach (1995)

Chapter: Current Poverty Measure

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Suggested Citation:"Current Poverty Measure." National Research Council. 1995. Measuring Poverty: A New Approach. Washington, DC: The National Academies Press. doi: 10.17226/4759.
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Page 226

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DEFINING RESOURCES 226 Alternative Approaches Several participants in the Census Bureau's 1985 Conference on Measurement of Noncash Benefits, including Ellwood and Summers (1985), Ward (1985) and Smolensky (1985), took positions that agree with our recommendation to exclude medical care needs and resources from the poverty measure. But other participants, including Blinder (1985) and O'Neill (1985), argued just as strongly for including medical care benefits (averaged for groups) in income and adjusting the thresholds if needed. (O'Neill thought that the thresholds would not have to be adjusted very much.) Aaron (1985) agreed that it would be difficult to include medical care in the poverty measure, but he was uncomfortable with excluding it entirely. Citing a suggestion by Burtless, Aaron proposed a two-index method of defining poverty as a possible way out of the dilemma: count people as poor if they do not have enough income to meet their nonmedical needs, or if they lack adequate health insurance (or sufficient remaining income to purchase such insurance), or both. Clearly, considerable controversy surrounds this issue. Hence, we review in some detail the pros and cons of alternative approaches to treating medical care needs and resources in the measurement of poverty—beginning with the current measure—and why we chose our recommended approach. Current Poverty Measure When they were developed in the early 1960s, the official poverty thresholds implicitly included (through the multiplier) an allowance for some out-of-pocket medical care expenses. Estimates are that such expenses accounted for 4 percent of median income in 1963 (Moon, 1993:3); 7 percent of total expenditures in the 1960-1961 CEX (Jacobs and Shipp, 1990: Table 1); and 5 percent of personal consumption expenditures in the 1960-1961 NIPA (Council of Economic Advisers, 1992: Table B-12). The official thresholds included no allowance for medical expenses that could be covered by insurance. On the income side, the current measure assigns no value to health insurance benefits and makes no adjustments for above-average or below- average out-of-pocket expenditures. Hence, families with above-average expenditures may be erroneously counted as not poor, and families with below- average expenditures may be erroneously counted as poor. The biases are not likely to be offsetting but rather to err in the direction of underestimating poverty, because above-average out-of-pocket medical care expenses can be very high indeed. In the 1987 National Medical Expenditure Survey (NMES), about 60 percent of families had annual out-of-pocket expenses (excluding premiums) that were less than 2 percent of their annual income, but 10 percent had expenses that exceeded 10 percent of their income; see Table 4-1. Over 20 percent of the elderly had expenses that exceeded 10 percent of their income, as did 19 percent of families with annual income below $20,000.

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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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