National Academies Press: OpenBook

Measuring Poverty: A New Approach (1995)

Chapter: Categorical Approaches

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Suggested Citation:"Categorical Approaches." National Research Council. 1995. Measuring Poverty: A New Approach. Washington, DC: The National Academies Press. doi: 10.17226/4759.
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Page 116
Suggested Citation:"Categorical Approaches." National Research Council. 1995. Measuring Poverty: A New Approach. Washington, DC: The National Academies Press. doi: 10.17226/4759.
×
Page 117
Suggested Citation:"Categorical Approaches." National Research Council. 1995. Measuring Poverty: A New Approach. Washington, DC: The National Academies Press. doi: 10.17226/4759.
×
Page 118

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POVERTY THRESHOLDS 116 AHS, and multiplied the result by two. The basis for their multiplier was the HUD limit of 30 percent on the amount of income families who receive rent subsidies are expected to contribute to the rent plus an estimate from CEX data that food accounts for about 20 percent of total expenditures. (This method follows Orshansky's approach of using the spending of average families to determine the food component of the multiplier but then determines the housing component of the multiplier on the basis of program standards for lower income families.) They computed another set of thresholds in the same manner but using the 35th percentile value of the rental distribution (see Table 2-2). Their thresholds are, respectively, 42 and 53 percent higher than the official threshold for 1989. Several points emerge from the work by Ruggles (1990) and Weinberg and Lamas (1993). First, the level of the poverty threshold is obviously affected by the choice of the standard.11 In the case of the food component, several analysts have argued that the Thrifty Food Plan is unrealistically restrictive and that the Low-Cost Food Plan should be used instead.12 Second, over time, if the developers of poverty thresholds rely on program standards that are set by legislation, the standards may change for many reasons other than an evaluation of need (such as the desire to cut program costs). This problem is evident in Ruggles' HUD-based thresholds, for which changes were legislated in the early 1980s for both the housing standard (from the 50th to the 45th percentile) and the basis for the multiplier (from a 25% to a 30% share of income).13 Had these changes not been made, it is likely that the HUD-based thresholds in Table 2-2 would have increased as a percent of the official threshold in the late 1980s rather than remaining flat. Categorical Approaches Renwick and Bergmann (1993) took a categorical approach to defining a poverty budget, which they refer to as a basic needs budget (BNB). Their approach is based on adequacy standards, not only for food, but also for housing and household operations, transportation, health care, clothing, child 11 Why there is not more of a difference between the Weinberg and Lamas (1993) thresholds and the Ruggles (1990) thresholds, which are based on different percentiles of the rent distribution (see Table 2-2), is not clear. Weinberg and Lamas calculated the 25th and 35th percentiles of the rent distribution of all nonsubsidized rental units, while the HUD fair market rents used by Ruggles represent the 45th or 50th percentile of two-bedroom units occupied by recent movers and having other specified characteristics. In addition, the data sources were somewhat different. 12 Indeed, Orshansky herself developed two sets of poverty thresholds, one based on the Economy Food Plan and the other on the Low-Cost Food Plan. 13 Indeed, CEX data for 1991 indicate that the housing share of total after-tax expenditures was about 24 percent (for all consumer units and four-person units), not 30 percent (Bureau of the Census, 1993d: Table 708).

POVERTY THRESHOLDS 117 care, and personal care. To date, they have developed BNBs for single-parent and two-parent families with varying numbers of children (see Renwick and Bergmann, 1993; Renwick, 1993a, 1993b). Their budgets vary by whether the parent(s) work and by whether they receive such in-kind benefits as food stamps, school meals, free or subsidized child care, and medical care benefits. Their budgets also vary by region and type of place (central city, suburb, rural). The final step in their procedure is to determine the before-tax income required to be out of poverty on the basis of the BNB dollar level together with an estimate of payroll and income tax liabilities. In constructing the basic needs budget, Renwick and Bergmann used previously defined standards whenever they considered them appropriate. Their food standard is based on the USDA Low-Cost Food Plan, the second least expensive of the four food plans, which incorporates some economies of scale for families of larger sizes. For housing, they assumed that parents have a separate bedroom from children and that no more than two children share a bedroom. For two-bedroom units they analyzed AHS data to determine the 25th percentile of the distribution of all such units, separately by the four regions and by central city, suburban, and rural locations. They allowed for a telephone and household supplies in the budget (updating the latter from the Bureau of Labor Statistics (BLS) lower level family budget—see below), but they did not allow for household furnishings or equipment, assuming that families would make do with what they had during a poverty spell. They assumed the use of public transportation by central city and suburban families and developed a weekly allowance for work trips for each adult earner plus an allowance for shopping and errands. In the budget for rural families, they allocated the cost of operating a second-hand car, using data from a 1977 survey on distance to work and the mileage allowances of the Internal Revenue Service (IRS) to estimate the cost of work trips for these families. They based their allowance for health insurance on the average total premium cost of group health insurance covering lower income families as reported in the National Health Care Expenditure Survey, and their allowance for out-of-pocket medical care expenditures was based on typical expenditures of moderate-income families with health insurance from the same source.14 They developed a child care budget (for the case of no parent at home) by using the IRS dependent care tax credit limits on eligible expenses in full or in part, depending on the assumed age of the children and an assumption about use of free or subsidized care. For the clothing portion of the budget, they updated the lower level family budget allowance from the BLS. Finally, for personal care, they updated the BLS lower level family budget allowance, omitting the services component (principally, haircuts) and adding an allowance for disposable 14 It is not clear, but presumably the survey they used is the 1987 National Medical Expenditure Survey.

POVERTY THRESHOLDS 118 diapers for children under age 2. They made no provision for other or miscellaneous expenses, thus excluding such BLS categories as reading materials, recreation, educational expenses, alcohol, and miscellaneous. In the case of two-parent families with at least one wage earner, Renwick (1993a: Table 2, Appendix) made a further adjustment to the basic needs budget by deducting an estimated employer contribution to the health insurance premium. For a two-adult/two-child family in 1992, the resulting BNB (assuming the use of public transportation and weighted average housing costs) was $16,044, which was 113 percent of the official poverty threshold. For the same family with two adult earners (and hence higher work expenses and a need for child care), the resulting BNB was $21,132, or 149 percent of the official threshold. Watts (1993) also proposed a categorical approach to the definition of poverty thresholds based largely on the work of Renwick and Bergmann. He concluded that the categorical approach is more feasible, understandable, and acceptable than either budgets with a large multiplier applied to only one or two categories or very detailed budgets.15 Watts' proposal differs from the Renwick and Bergmann approach in a number of ways. First, he recommended that actual work-related transportation expenses be deducted from family resources rather than accounted for in the budget. Second, he argued that adequate medical insurance should be assumed for people with coverage. For households that lack such coverage, the cost of a standard insurance package should be deducted from resources. Employee contributions to medical insurance should also be deducted from resources. That is, the budget itself should only allow for estimated out-of-pocket medical costs (other than premiums). Third, since child care is an expense of work, he recommended that it too be deducted from resources. Fourth, he proposed that a new look be taken at the BLS family budget standards for clothing and personal care. To develop what he termed a ''modest proposal budget," Watts simply deducted the work and child care expense and medical insurance components from budget thresholds presented by Renwick (1993a). Implementing these calculations for 1992 produces a two-adult/two-child poverty threshold of $14,580, or 102 percent of the official threshold. Watts' adaptation of the Renwick and Bergmann categorical budget approach has the advantage, in our judgement, of treating such expenses as child care that pertain to specific situations (namely, working) as deductions from family resources rather than as components of the budget. At the time Orshansky originally developed her thresholds, the treatment of such a category as child care expenses was largely not an issue because most families with 15 Watts also found attractive the feature of the BNB approach that a budget is developed explicitly for each family type (in terms of the number of adults and children) rather than by applying a formal equivalence scale. We believe, however, that this feature is problematic, just as it is problematic for the official thresholds (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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