National Academies Press: OpenBook

Measuring Poverty: A New Approach (1995)

Chapter: Simplified Determination of Disposable Income

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Suggested Citation:"Simplified Determination of Disposable Income." National Research Council. 1995. Measuring Poverty: A New Approach. Washington, DC: The National Academies Press. doi: 10.17226/4759.
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Page 330
Suggested Citation:"Simplified Determination of Disposable Income." National Research Council. 1995. Measuring Poverty: A New Approach. Washington, DC: The National Academies Press. doi: 10.17226/4759.
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Page 331

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USE OF THE POVERTY MEASURE IN GOVERNMENT ASSISTANCE PROGRAMS 330 The Family Resource Definition Proper implementation of the proposed poverty measure requires not only using the revised thresholds, but also changing the definition of income to compare with those thresholds. As we have stressed throughout, a poverty measure is a package in which the two components—the budget or threshold concept and the definition of family resources—must be consistent. Although the initial poverty threshold for the proposed measure might well be set at a level close to the current threshold, it represents a different concept, namely, a basic budget for food, clothing, shelter, and a little more for other necessities. This budget explicitly excludes some kinds of expenses—such as taxes, work- related expenses, child support, and out-of-pocket medical care expenses— which are instead treated as deductions from income. The proposed definition of disposable income also includes the value of in-kind benefits. This change in definition has somewhat different implications for programs that currently have a fairly simple process for determining gross regular money income and programs that already collect extensive information with which to determine gross and net income. Simplified Determination of Disposable Income For programs that currently obtain a crude measure of gross money income, full implementation of the proposed disposable income definition would require collecting additional information from applicants about income and expenses. Hence, there could be increased administrative costs and an increased burden on applicants. We are certainly not in a position to provide detailed guidance to federal and state program agencies to determine how best they might implement the proposed disposable income definition. However, we have some ideas for ways to do so that could reduce the added burden on program agencies and applicants. It is important to note that the approaches we suggest, while minimizing burden, may increase the chance of an error in classifying an applicant's eligibility status in comparison with an approach that asks very detailed questions about applicants' income and expenses. (The assumption, based on survey research results, is that asking more detailed questions will elicit more complete responses; see Appendix B.) However, programs that at present obtain a fairly crude and hence less burdensome measure of gross money income probably already experience some classification errors. A simplified determination of disposable income might work as follows, by taking the School Lunch and School Breakfast Programs as examples. These programs currently provide automatic eligibility to AFDC and food stamp families and presumably would continue doing so. For other families, the program asks about monthly income by several broad categories, including

USE OF THE POVERTY MEASURE IN GOVERNMENT ASSISTANCE PROGRAMS 331 earnings for up to two jobs. A possibility for obtaining after-tax income would be to ask for net pay after deductions for Social Security and payroll taxes. A drawback is that such monthly pay information probably would not reflect the EITC. Another alternative would be for the Food and Nutrition Service, with guidance from the Census Bureau, to provide schools with a simple formula for calculating payroll and net income taxes from information on gross earnings and family composition. The specifications could indicate an income level above which it would not be necessary to estimate taxes; in other words, there should be no need to go through the calculation for families clearly above the thresholds. For child care costs and child support payments, it seems fairly straightforward to ask families if they pay for child care or child support and their typical monthly costs. The flat deduction for commuting and other work- related expenses would not require asking families for any added information. With regard to in-kind benefits, it would not be necessary to ask about food stamp income, because food stamp families are automatically eligible.12 Families could be asked if they receive housing assistance, although the value of such assistance is difficult to determine, and it might be wise, for administrative ease, to ignore this source of income.13 Finally, rather than asking families about last month's out-of-pocket medical costs, which might not be representative of their annual costs, it might be easier simply to ask whether they have public or private health insurance. The Food and Nutrition Service, with guidance from the Census Bureau, could provide schools with a formula for assigning average out-of-pocket expenses to applicants on the basis of their family composition (including ages of family members) and insurance coverage. The process just described for determining disposable income would be more involved than the current process for determining gross money income. However, we think that a "cookbook" (which might be computerized) could be developed for state and local agencies that would provide a reasonably straightforward way to calculate disposable income with acceptable accuracy with only a few added questions being asked of applicants. An alternative approach would be to develop a "menu" of poverty thresholds for different types of families—such as working families with and without child care expenses and with and without health insurance coverage— that are appropriate to compare with a gross money income definition of family resources. For example, the threshold for a working family of two adults and 12 However, programs that rely solely on comparing income with the poverty guidelines to determine eligibility and do not accord automatic eligibility to welfare families would need to ask about food stamps and, perhaps, other sources of in-kind income. 13 In fact, many public housing recipients are also receiving food stamps or AFDC and hence would not need to be queried about income. Data from the 1991 American Housing Survey showed that 54 percent of renters receiving housing assistance also received food stamps (Nelson and Redburn, 1994: Table 1).

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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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