Improving the Measurement of Poverty: Implications for Children & the Elderly

Background and Purpose: Nearly fifty years after Mollie Orshansky designed the United States poverty measure, there is widespread agreement among policy-makers and researchers that our current metric does not adequately gauge the needs and resources of American families. In 1995, a National Academies of Sciences (NAS) panel offered a more contemporary methodology for measuring poverty that accounted for the changed needs and resources of American families. We review the NAS panel's recommendations, discuss their implications for poverty measurement, and provide estimates for how implementing those recommendations alters poverty rates for the US population, and for subgroups including children and the elderly.

Methods: Using the nationally representative Consumer Expenditure Survey, we estimate experimental poverty thresholds using expenditures on shelter, utilities, food, and clothing of the 30th-36th percentile of expenditure on these goods. We upwardly adjust these values for additional necessities for children and the elderly. The thresholds are then equivalized for a variety of families using an improved and validated equivalence scale. These thresholds are adjusted for geographic region and home ownership. We then crosswalk these thresholds to another nationally representative survey, the Current Population Survey, to estimate poverty rates. While the current poverty measure bases poverty status on before tax income only, we take account of a full range of family resources. Family resources include: the total of all income, tax credits received, and near-cash benefits, minus taxes paid, work related expenses, the costs of childcare, and out of pocket medical expenditures. The final three items are important to deduct from resources because they are necessary expenditures in order for family members to work.

Results: Using an improved methodology that accounts more accurately for the needs and resources of families, we find that the overall 2007 U.S. poverty rate increases from 12% to 18%. This overall increase is driven in large part by high medical expenditures. This is especially true for the elderly, a group whose poverty rate increases from 9% to 25%. Because White poverty nearly doubles and other racial and ethnic groups remain relatively stable under this new metric, racial gaps in poverty close dramatically. Adjusting for geographic differences in the cost of housing eliminate geographic disparities: in the official measure of poverty, there is a 20 percentage point gap between the Northeast and the South, while under the experimental measure, this gap is reduced to zero.

Conclusions & Implications: The results of this analysis illustrate that this new measure better captures the ability of government transfers to reduce poverty and the power of child and medical care costs to plunge people into poverty. The Census Bureau is correctly taking steps to incorporate this measure into its measure of poverty.