Measuring Poverty: A New Approach (1995)

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INTRODUCTION AND OVERVIEW 94 The Poverty Measure and AFDC Benefit Standards State AFDC benefit standards vary even more widely than do state AFDC need standards, and no state provides benefits as generous as the official poverty thresholds. From time to time, there have been efforts to enact a federal minimum benefit standard for AFDC. These efforts have invariably come to naught, largely because of the cost implications of raising the benefit standard in states with low-benefits. Changes in the percentage of benefits that the federal government will reimburse the states have been enacted with the intent of providing incentives for low-benefit states to increase their benefits; however, these changes in the matching formula have had little effect on the variation in benefit levels among the states (Peterson and Rom, 1990). AFDC recipients are eligible for food stamps, and the nationalization of the Food Stamp Program has served to reduce the disparities in combined AFDC and food stamp benefits across the states.33 However, significant differences still remain that exceed what can be reasonably attributed to cost-of- living differences among the states. Thus, the maximum combined AFDC and food stamp benefit for a three-person family in January 1994 varied from $1,208 in Alaska to $415 in Mississippi; the median benefit was $658, which is 69 percent of the corresponding official 1993 poverty threshold (U.S. House of Representatives, 1994: Table 10-11). Currently, a de facto national minimum level of available benefits exists for AFDC recipients, namely, the maximum food stamp allowance combined with the maximum AFDC benefit in the lowest benefit state. (In January 1994, this amount for a three-person family was 43% of the corresponding official 1993 poverty threshold.) Hence, the issue of a national minimum benefit standard for AFDC really comes down to an issue of raising this de facto standard. Arguments for adopting such a nationwide minimum benefit standard for AFDC have been made on the basis of equity—namely, that low-income families with children should not be disadvantaged simply by reason of their state of residence. Arguments have also been offered that differences in benefits encourage low-income families to migrate from low-benefit to high-benefit states. The studies that have been done on the migration effects of AFDC suffer from serious data and methodological problems, but they suggest that the effect on migration of low-income families is quite small. The question of how or if the proposed poverty measure, for which the thresholds vary much less across states than do AFDC need and benefit standards, should be linked with program benefits (for AFDC or a combination of assistance programs) is a difficult one. There are several reasons that a benefit 33 This evening-out occurs because the food stamp benefit formula decreases food stamp benefits by 30 cents for every dollar increase in AFDC benefits and, conversely, increases food stamp benefits by 30 cents for every dollar reduction in AFDC benefits. 

INTRODUCTION AND OVERVIEW 95 standard could differ from a poverty standard and, more generally, why the design of an assistance program could deviate from the goal of helping everyone who is classified as poor. First, scarce budget resources (and competition for them from other programs) may well limit the extent to which payments can approach the poverty threshold; in state-federal programs (such as AFDC), the nature of the state-federal cost sharing provisions has an important effect on funding constraints. Second, there may be reasons to target payments on particular groups in order to maximize the effectiveness of limited funds and achieve other policy goals. For example, because of the social cost of children growing up in economic deprivation, it may be sensible to concentrate assistance dollars on poor families with children, even though other groups have measured need that is just as great. Or it may make sense to concentrate scarce assistance dollars on the poorest families, even though helping the families closest to the poverty line would achieve the fastest reduction in measured need. Third, the existence of multiple assistance programs can affect the level of the benefit standard that makes sense for any one of them. For example, AFDC interacts with food stamps and public housing, among other programs, and it makes little sense to think of an AFDC benefit standard in isolation from other programs. Finally, incentive effects drive a wedge between measured need and the amount of program dollars needed to alleviate need. For example, families who are provided benefits designed to raise them above the poverty line may reduce their work effort so that the net effect is to leave them in poverty. Behavioral effects of program benefits are, indeed, the reason that it is misleading to describe the aggregate ''poverty gap"—the difference between the poverty line and a family's resources, aggregated over all families—as the dollar amount that the government would have to spend to eliminate poverty. The question of incentives is one of the most difficult issues that policy makers face in designing assistance programs to serve multiple goals, such as alleviating need while containing costs and discouraging dependency. The task is made more difficult by the fact that research findings on incentive effects are sometimes incomplete or inconclusive. Issues of program incentives have been at the center of the policy debate about AFDC, which is directed to families that the public would like to see increasingly responsible for their own support. Consequently, there has been considerable experimentation with changes in benefit levels and formulas for calculating disposable income to try to induce AFDC families to become more stable and self-supporting. To date, results show limited effects of changes in benefit levels and the tax rate on earnings on such behaviors as work effort. The findings are not yet available on more recent state initiatives, such as not increasing benefits when another child is born or reducing benefits if parents do not stay in school or fail to have their children vaccinated. It is important also to note that other 

INTRODUCTION AND OVERVIEW 96 programs besides AFDC raise concerns about incentives; for example, Social Security and SSI have negative effects on work effort (see Chapter 8). For all of these reasons, it is not possible, on any theoretical or strictly scientific grounds, to link poverty thresholds directly to benefits. To the many people involved in evaluating and designing public assistance programs, this conclusion may seem obvious. However, we believe it is worth restating the obvious to underscore the point that measuring need, by determining how many people have resources below a reasonable poverty standard, is different from determining the proper societal response to that need. In sum, many factors properly enter into a determination of program benefit standards, including judgements about the extent to which society is prepared to allocate scarce resources to support low-income people and the mix of goals that society wants government assistance programs to serve. The critical role of such judgements is the reason that a panel such as ours, chosen for expertise in measurement issues, cannot make recommendations about appropriate benefit levels for specific assistance programs. However, the fact that we do not make a recommendation about national minimum benefit standards for AFDC (or other programs) should not be taken to mean that there is no case for reducing the wide variation in AFDC benefits across the states. Rather, as a panel on poverty measurement, our position on the issue of benefit levels for assistance programs is necessarily neutral. In conclusion, we urge policy makers at the federal and state levels to carefully consider all of the issues involved in the current debate about the nation's welfare policy. Ultimately, the determination of appropriate programs and policies to alleviate poverty involves "politics" in its best sense—namely, the consideration of competing public objectives against the constraints of scarce public resources within the framework of a nation's social and political system.