National Academies Press: OpenBook

Measuring Poverty: A New Approach (1995)

Chapter: Updating the Thresholds

« Previous: The Two-Adult/Two-Child Reference Family
Suggested Citation:"Updating the Thresholds." National Research Council. 1995. Measuring Poverty: A New Approach. Washington, DC: The National Academies Press. doi: 10.17226/4759.
Page 102
Suggested Citation:"Updating the Thresholds." National Research Council. 1995. Measuring Poverty: A New Approach. Washington, DC: The National Academies Press. doi: 10.17226/4759.
Page 103
Suggested Citation:"Updating the Thresholds." National Research Council. 1995. Measuring Poverty: A New Approach. Washington, DC: The National Academies Press. doi: 10.17226/4759.
Page 104

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POVERTY THRESHOLDS 102 Nondiscretionary Expenses In addition to accounting for different needs of families by number of adults and children and geographic area of residence, we recommend that the poverty measure take account of different needs due to the fact that some families incur nondiscretionary expenses that are not available for consumption. For example, some families pay for child care in order to earn income, while other families (and individuals) make no such payments, yet the current thresholds are the same for both situations. One way to recognize these different circumstances is to develop additional thresholds, such as thresholds for nonworking families, working families with children who pay for child care, and other working families (see Renwick 1993a, 1993b, for an example of such an approach). We recommend instead that nondiscretionary expenses—which we define as taxes, child care and other work-related expenses, child support payments to other households, and out-of-pocket medical care expenditures (including health insurance premiums)—be deducted from the incomes of families with such expenses. This approach will more accurately capture the poverty status of families in different circumstances than would the approach of trying to develop a range of different thresholds (see Chapter 4). However, the proposed approach has implications for comparing poverty thresholds across concepts: a reference family threshold developed as we propose will necessarily exclude some expenses that are typically averaged in for all such families. Updating the Thresholds The major reason, in our view, to revise the threshold concept for the U.S. poverty measure is its implications for updating the thresholds over time. In this regard, it is important to understand the nature of the current poverty measure. As described below ("Expert Budgets"), the method originally used to develop the official thresholds involved taking the cost of a minimum food diet and applying a multiplier that reflected the share of food in the total expenditures of the average family, but that method has never been used to update the thresholds (although its original author, Mollie Orshansky, urged several times that this be done). The thresholds have been updated only for price changes. In other words, the poverty line of about $3,100 for a two-adult/two-child family that was originally set for 1963 has been treated as an absolute standard of need and kept fixed in real terms ever since. Thus, it no longer represents a current estimate of the cost of the food budget times a food share multiplier. In fact, neither the cost of that original food basket nor the food share underlying the multiplier of three has remained constant over time. The share of food in the typical consumer bundle has declined with economic growth, and the cost updating using the overall Consumer Price

POVERTY THRESHOLDS 103 Index (CPI) does not necessarily reflect changes in the price of food. Moreover, the composition of the minimum food diet has not been reevaluated on the basis of new information about the food-buying preferences of low-income families. If one believes that it is appropriate to have an absolute poverty line that is updated solely for price changes, there is little need to revisit the threshold concept. However, we believe that to maintain a standard in absolute terms becomes increasingly problematic as living standards change over time. The historical evidence supports the conclusion that poverty standards reflect their time and place. This is true not only when poverty standards are set in an explicitly relative fashion (e.g., as a percentage of median income or expenditures), but also when they are developed according to expert criteria for various needs. Similarly, when surveys ask people questions about minimum income levels, their answers generally reflect prevailing levels of consumption. Hence, we conclude that the relevant question is not whether poverty thresholds should be updated for changes in real consumption, but whether they should be updated on a sporadic or on a regular basis. The former choice would suggest revisiting the standards periodically, perhaps every 10-20 years, and making price adjustments in between major realignments. The latter choice would suggest an automatic mechanism for recalculating the thresholds annually to reflect real consumption changes. We believe that an automatic, regular adjustment is preferable to sporadic adjustments. An automatic adjustment will avoid major breaks in the time series of poverty statistics and also will obviate the controversy that is likely to occur with periodic readjustments.2 A decision to recommend a regular adjustment of the thresholds entails careful consideration of the updating properties of alternative concepts, particularly the implications for the magnitude of the adjustment that is made. We believe that a conservative adjustment is preferable—that is, one that updates them for real growth in consumption of basic goods and services that pertain to a concept of poverty, rather than to update them for real growth in total consumption or income. There is support for a conservative approach from ideas of poverty levels derived from surveys, specifically, those developed on the basis of responses to questions about minimum income amounts needed to "get-along." Over time, such levels have reflected growth in real income but less than proportionately with overall growth (see below). Also, a conservative updating approach will make less of a break with the historical time series. 2 Of course, even an "automatic" updating procedure should be reviewed periodically to determine if it is performing as intended or whether it needs to be modified. Such a review, which would include the data source and methodology, should be part of the regular reviews of the poverty measure that we recommend be carried out every 10 years by the U.S. Office of Management and Budget (see Chapter 1).

POVERTY THRESHOLDS 104 A way to implement a regular adjustment of the thresholds would be to return to the original concept for developing the poverty line and apply it afresh each year, namely, determine a minimum food budget and apply a multiplier that is equal to the inverse of the share of food in the total expenditures of the average family. If that procedure was correct for 1963, then it should be correct for every other year. The advantages of this method of updating mirror its initial attractiveness: it rests on a commodity, namely food, that all would agree is a necessary item of consumption; it is understandable ("food times a multiplier"); and it is easy to implement with available consumer expenditure data. However, we believe that its problems outweigh its advantages. One problem is the reliance on experts to determine the minimum food budget. As we show below, judgement inevitably enters into the determination of a poverty level for any basic need, whether food, housing, or anything else. We believe it best if these judgements are introduced explicitly and not with an apparent reliance on experts. A more important problem is the use of only one commodity with a large multiplier and, moreover, a multiplier that reflects total expenditures of the average family. This approach is not conservative with respect to adjusting the thresholds over time because the multiplier, which drives the thresholds, will reflect increased spending on luxuries as well as on basic commodities. In other words, continued application of the original threshold concept is more akin to a completely relative concept, like one-half median family income or expenditures. We sought a concept that would retain the attractive features of the original concept, namely, its understandability and grounding in familiar, basic commodities, but improve on it. Our recommendation is that the reference family poverty threshold be developed by specifying a percentage of median expenditures on the sum of food, clothing, and shelter (including utilities) by two-adult/two-child families in the Consumer Expenditure Survey (CEX), and applying a multiplier to that dollar value so as to add a small amount for other needed expenditures (e.g., personal care, household supplies, non-work-related transportation). This approach builds the budget on three categories of basic goods and services plus a little more, and it uses actual expenditure data directly in the derivation. Having specified a percentage of median expenditures and a multiplier, these values would then be used to update the poverty threshold for the reference family each year on the basis of more recent CEX data. To smooth out year-to-year fluctuations and to lag the adjustment to some extent, we propose to perform the calculations for each year by averaging the most recent 3 years' worth of CEX data, with the data for each of those years brought forward to the current period by using the change in the CPI. Once the threshold is updated for the reference family, the thresholds for other family types can be calculated (see Chapter 3).

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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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