Measuring Poverty: A New Approach (1995)

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INTRODUCTION AND OVERVIEW 39 with 10 years ago; about its incidence in the Northeast or Southwest; about its prevalence among minority groups, among female-headed families, among children, or among employed householders. The concept and measurement of poverty must apply as well to these various groups and over time and space as it does to the population as a whole for a given year. Operational Feasibility Operational feasibility implies that data can be collected that will in fact measure the prevalence of the conditions underlying the concept of poverty. Income and expenditures are concepts that are generally understood and can be measured and so these should be the core of the concept and measure of poverty. As the capacity to measure and to survey improves, the measures of poverty that are used may well also improve. One rationale for a new measure now is that, indeed, knowledge of and capacity to collect accurate data on income and expenditures is far superior to that which informed the construction of the poverty thresholds in the early 1960s. Another 30 (or fewer) years, one hopes, will again provide far superior data, theory, and technical capacity to gather and analyze relevant information. A NEW APPROACH TO POVERTY MEASUREMENT: RECOMMENDATIONS A New Poverty Measure We conclude that it is time to revise the official U.S. measure of poverty, even though a revision will affect the time series of poverty statistics. This section presents our recommendations for a new poverty measure and its implementation. We describe and explain the type of measure that we propose with regard to the threshold for a reference family, the updating procedure, adjustments to the threshold for differing family circumstances, and the family resource definition. We then summarize the results of an empirical analysis of the likely effects of the proposed poverty measure on the distribution of poverty and the overall rate. Finally, we summarize our recommendations for the kinds of data that are needed to fully implement the recommended new measure and other issues in poverty measurement (e.g., the time period and economic unit). RECOMMENDATION 1.1. The official U.S. measure of poverty should be revised to reflect more nearly the circumstances of the nation's families and changes in them over time. The revised measure should comprise a set of poverty thresholds and a definition of 

INTRODUCTION AND OVERVIEW 40 family resources—for comparison with the thresholds to determine who is in or out of poverty—that are consistent with each other and otherwise statistically defensible. The concepts underlying both the thresholds and the definition of family resources should be broadly acceptable and understandable and operationally feasible. RECOMMENDATION 1.2. On the basis of the criteria in Recommendation 1.1, the poverty measure should have the following characteristics: • The poverty thresholds should represent a budget for food, clothing, shelter (including utilities), and a small additional amount to allow for other needs (e.g., household supplies, personal care, non-work-related transportation). • A threshold for a reference family type should be developed using actual consumer expenditure data and updated annually to reflect changes in expenditures on food, clothing, and shelter over the previous 3 years. • The reference family threshold should be adjusted to reflect the needs of different family types and to reflect geographic differences in housing costs. • Family resources should be defined—consistent with the threshold concept—as the sum of money income from all sources together with the value of near-money benefits (e.g., food stamps) that are available to buy goods and services in the budget, minus expenses that cannot be used to buy these goods and services. Such expenses include income and payroll taxes, child care and other work-related expenses, child support payments to another household, and out-of-pocket medical care costs, including health insurance premiums. Table 1-1 contrasts the elements of the proposed measure and the current measure. Not only do we propose a different concept for the reference family threshold (and suggest a realignment of the level of that threshold), but we also propose different ways of adjusting the threshold by family type, by geographic area, and over time, as well as a different definition of family resources. The current definition is gross money income; the proposed definition is disposable money and near-money income, which recognizes the value of near-money in- kind benefits and the unavailability for consumption of taxes and other nondiscretionary expenses. We also recommend using a different data source with which to measure disposable money and near-money income, namely, the Survey of Income and Program Participation (SIPP). These other elements of a poverty measure—that is, the elements besides the concept and level of the threshold on which attention so often focuses— have important implications for differences in poverty rates for groups and areas and over time. In contrast to poverty statistics that are produced with the 

INTRODUCTION AND OVERVIEW 41 TABLE 1-1 Elements of the Current and Proposed Poverty Measures Element Current Measure Proposed Measure Threshold Concept Food times a large Food, clothing, and shelter, multiplier for all other plus a little more expenses 1992 level (two-adult/two- $14,228 Suggest within range of child family) $13,700-$15,900 Updating method Update 1963 level each Update each year by change year for price changes in spending on food, clothing, and shelter over previous 3 years by two-adult/ two-child families Threshold Adjustments By family type Separately developed Reference family threshold thresholds by family adjusted by use of type; lower thresholds equivalence scale, which for elderly singles and assumes children need less couples than adults and economies of scale for larger families By geographic area No adjustments Adjust for housing cost differences by region and size of metropolitan area Family Resource Gross (before-tax) Gross money income, plus Definition (to compare money income from all value of near-money in-kind with threshold to sources benefits (e.g., food stamps), determine poverty status) minus income and payroll taxes and other nondiscretionary expenses (e.g., child care and other work-related expenses; child support payments to another household; out-of-pocket medical care expenses, including health insurance premiums) Data Source (for March Current Survey of Income and estimating income) Population Survey Program Participation Time Period of Annual Annual, supplemented by Measurement shorter term and longer term measures Economic Unit of Analysis Families and unrelated Families (including individuals cohabiting couples) and unrelated individuals