National Academies Press: OpenBook

Measuring Poverty: A New Approach (1995)

Chapter: Setting the Initial Threshold

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Suggested Citation:"Setting the Initial Threshold." National Research Council. 1995. Measuring Poverty: A New Approach. Washington, DC: The National Academies Press. doi: 10.17226/4759.
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Suggested Citation:"Setting the Initial Threshold." National Research Council. 1995. Measuring Poverty: A New Approach. Washington, DC: The National Academies Press. doi: 10.17226/4759.
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Page 54
Suggested Citation:"Setting the Initial Threshold." National Research Council. 1995. Measuring Poverty: A New Approach. Washington, DC: The National Academies Press. doi: 10.17226/4759.
×
Page 55
Suggested Citation:"Setting the Initial Threshold." National Research Council. 1995. Measuring Poverty: A New Approach. Washington, DC: The National Academies Press. doi: 10.17226/4759.
×
Page 56
Suggested Citation:"Setting the Initial Threshold." National Research Council. 1995. Measuring Poverty: A New Approach. Washington, DC: The National Academies Press. doi: 10.17226/4759.
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Page 57

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INTRODUCTION AND OVERVIEW 53 purposes by using the new thresholds updated only for price changes (rather than for changes in consumption of the basic goods and services in the poverty budget). In summary, we see the following advantages to our proposed concept for the poverty threshold. First, the concept is readily described as ''food, clothing, and shelter, plus a little more." Although it is an oversimplification, as is a description of the original official concept as "food times a multiplier," it represents a clear and understandable level of need. Second, by relying on observed expenditure data, the concept avoids the difficulties of trying to develop and justify expert-based standards for a number of budget categories. Our approach explicitly links the measure of poverty to actual expenditures on basic goods and services. Finally, our proposed updating procedure has properties that we believe are desirable for the official U.S. poverty measure— namely, that the thresholds be updated on an automatic, regular basis, and that the updating be linked to spending on basic goods and services instead of total consumption. Setting the Initial Threshold In our empirical analysis (see below), we determined a two-adult/two-child reference family poverty threshold that, together with all of the other changes we recommend to the thresholds and family resource definition, produced the same overall poverty rate as the official rate for 1992. The purpose of this exercise was to illustrate the effects of the proposed measure, compared with the current measure, on the distribution of poverty among population groups and areas of the country. The threshold for this exercise, however, is simply an artifact of the analysis. Thus, there remains the question of where to set the reference family threshold to serve as the starting point for a new series of poverty statistics with a new measure. Since we propose a new concept for the threshold, in which work and certain other expenses are subtracted from income rather than included in the poverty budget, one must allow for that concept in considering values for the reference family threshold. Data limitations make it difficult to convert threshold values developed on the basis of other concepts to the proposed concept with any exactitude, but it is possible to make rough estimates. Thus, a rough estimate is that the official 1992 threshold of $14,228 for a two-adult/two-child family is about $12,000 in terms of the proposed concept; see Table 1-4.13 This adjustment only transforms the one budget concept 13 The value of $12,000 is lower than the value of $13,175 that, together with the proposed changes to the poverty measure, produces the same overall poverty rate as the official rate for 1992 (see section below on "Effects"). The reason is that the threshold value for this exercise has to exactly offset the effects of all the other changes, not just the new threshold concept.

INTRODUCTION AND OVERVIEW 54

INTRODUCTION AND OVERVIEW 55 into the other; we believe that the adoption of a new measure should also occasion a reevaluation of the appropriate level of the threshold. We have recommended that, once adopted, the new reference family threshold be updated on an annual basis for real growth in the consumption of three categories of basic goods and services—food, clothing, and shelter. Consistent with this recommendation, we conclude that it is appropriate in setting the initial threshold to consider the real growth in the standard of living since 1963 when the current threshold was fixed in real terms. RECOMMENDATION 2.4. As part of implementing a new official U.S. poverty measure, the current threshold level for the reference family of two adults and two children ($14,228 in 1992 dollars) should be reevaluated and a new threshold level established with which to initiate a new series of poverty statistics. That reevaluation should take account of both the new threshold concept and the real growth in consumption that has occurred since the official threshold was first set 30 years ago. Over the period 1963-1992, median before-tax money income of four- person families increased by 36 percent in real terms (the real increase in median after-tax income was 28%; the real increase in average expenditures was 45%; see Chapter 2), but the poverty threshold did not change. There is, of course, a judgement to be made about how much to adjust the current poverty threshold. An adjustment that is somewhat less than the real increase in total consumption would be consistent with the proposed updating procedure, given our earlier observation that real growth in spending on food, clothing, and shelter has been less than real growth in total spending. Because of the limitations of historical data on family expenditure patterns, one cannot readily apply the proposed updating procedure over time to determine a value for the threshold today (see Chapter 2). Even if the data were adequate for this purpose, however, the decision about the appropriate level for the reference family threshold for a particular time and place would remain inherently a matter of judgement. For this reason, we concluded that we would not make a formal recommendation about the initial threshold for the two-adult/two-child reference family. However, we do offer our conclusion about what we believe is a reasonable range for that initial threshold. This conclusion is informed by our analysis of thresholds that result from a variety of approaches and concepts in the published literature, as well as our judgement. We conclude that reasonable values for the starting threshold for a two- adult/two-child family lie in the range of about $13,700 to $15,900 (in 1992 dollars). Compared with the range of threshold values of $17,200 to $21,800 shown in Table 1-3, the values we suggest appear to represent little or no updating in real terms of the official 1992 threshold of $14,228 for a two-

INTRODUCTION AND OVERVIEW 56 adult/two-child family. However, when other threshold values are converted (as best as can be done) to our budget concept, their range is $13,100 to $18,300, or 9 to 53 percent above the comparable value of $12,000 for the official level; see Table 1-4. Our suggested range of $13,700 to $15,900 is 14 to 33 percent higher than the comparable current level. This range falls within but toward the lower end of the estimated range of other thresholds. Thus, it represents a conservative updating in real terms of the current threshold, consistent with our recommendation. In terms of our proposed budget concept, the lower end of our suggested range, $13,700, equals 1.15 times (or 15% more than) the spending on food, clothing, and shelter by two-adult/two-child families at the 30th percentile of the distribution estimated from the 1989-1991 CEX (expressed in 1992 dollars). That is, if one sets aside 15 percent for all other spending items, then that threshold level permits a family to spend as much on food, clothing, and shelter as families that ranked at the 30th percentile of all two-adult/two-child families, which was $11,950. Similarly, one can characterize the upper end of our suggested range, $15,900, as equal to 1.25 times (or 25% more than) the spending on food, clothing, and shelter by two-adult/two-child families at the 35th percentile of the distribution, which was $12,720.14 What could these amounts buy? Illustratively, a family at the 30th percentile might spend $355 per month or $4,260 annually for food (the value of the Thrifty Food Plan for a four-person family); $545 per month or about $6,550 per year for rent and utilities (including telephone) for a two-bedroom apartment (the fair market rent in 1992 for such units that is the basis for federal housing assistance); and $95 per month ($24 per family member) or $1,140 per year for clothing. A family at the 35th percentile could spend another $64 per month, or $770 per year, on food, clothing, and shelter. The multiplier adds another $1,750-$3,180, or about $145-$265 per month, for all other needed expenditures. Values of the multiplier of 1.15 to 1.25 are below the values of the multiplier in other approaches (see Table 1-4). However, the multiplier in the proposed concept applies to a larger bundle of basic goods and services (food, clothing, and shelter) than is true for other approaches; also, it excludes such expenses as child care and out-of-pocket medical care costs, which are treated as deductions from income. Analysis that we conducted with CEX data supports the range for the multiplier of 1.15 to 1.25. (In this analysis, we examined the amounts spent on such items as personal care and non-work-related transportation relative to the amounts spent on food, clothing, and shelter by two-adult/two-child 14 Both the lower and the upper ends of our suggested range for the initial reference family threshold could be expressed in terms of some other combination of values for food, clothing, and shelter and a multiplier for other expenditures.

INTRODUCTION AND OVERVIEW 57 families spending below the median level on these three categories—see Chapter 2.) Multipliers in recently published expert budgets (Renwick, 1993a; Schwarz and Volgy, 1992), after adjustment to the proposed concept, fall in the range of 1.14 to 1.30 for the reference family type. The ranges that we suggest for food, clothing, and shelter and the multiplier produce a reasonable threshold, even though the range for food, clothing, and shelter is 78-83 percent of the median level of spending on these categories by two-adult/two-child families; in 1992 that median was $15,344. The reason that the threshold is reasonable is because the average family (not the average low-income family) spends only about 45 percent of its budget on food, clothing, and shelter (Bureau of the Census, 1993d: Table 708). Hence, taking a relatively large proportion of median expenditures on food, clothing, and shelter, which represent less than half the typical budget, and applying a multiplier in the range of 1.15 to 1.25 will produce a threshold that is lower than a relative threshold of one-half median total expenditures (or after-tax income). Whatever level is selected for the initial threshold, the key point of our procedure is how that level is updated over time. Each year, the updating procedure will use the same percentage of median expenditures on food, clothing, and shelter and the multiplier that were determined for the initial threshold and use them to update the threshold with newer expenditure data.15 Consequently, the updating over time will be pegged to the level of spending on food, clothing, and shelter, not to the spending on all goods or to the growth in income overall. This difference is quite important because food, clothing, and shelter expenditures are likely to increase proportionately less than total expenditures (or income). Hence, a threshold that is updated as we recommend is likely to increase less than would a purely relative threshold. Finally, we want to make clear that building a poverty threshold on food, clothing, and shelter plus a little more—and linking changes in the thresholds to changes in consumption of these items—do not imply that families must spend their income accordingly. For example, families that spend less on food, clothing, and shelter than implied in the poverty threshold are not necessarily poor—perhaps they grow some of their own food or make some of their own clothing in order to increase their income for other spending (e.g., on books, haircuts, or a vacation). Such families are poor if their total income (net of nondiscretionary expenses) is below the poverty line, but not otherwise. Conversely, families that spend more on food, clothing, and shelter than 15 It is convenient in setting the initial threshold to look at percentiles of the expenditure distribution on food, clothing, and shelter (i.e., the dollar values that include the lowest 20%, 25%, 30%, 35%, 40%, and so on of two-adult/two-child families). However, for updating purposes, the dollar level for food, clothing, and shelter must be expressed as a percentage of median expenditures on these categories; see Chapter 2.

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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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