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Analysis | The official poverty measure is garbage. The census has found a better way. logo 9/13/2017 Dylan Matthews
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The real poverty rate in the US in 2016 was 13.9 percent. That's a bit lower than the 14.5 percent rate registered in 2015, according to the Census Bureau.

That finding isn't particularly earth-shattering. But the way the census told us all about it was a huge deal indeed. The number above isn't the census's "official" poverty rate. Specialists have known for years that the official rate is a very bad measure, one that does little to capture the full extent of material deprivation in the US and the full reach of government social programs. Rather, 13.9 percent is the poverty rate as calculated through the Supplemental Poverty Measure (SPM), a far superior metric that the census has been developing for years.

In the past, the SPM has come out months after the official measure. But this year, for the first time, the census released the two together. Finally, the public gets to know the correctly measured poverty rate at the same time it finds out the badly measured one.

The official poverty measure is based on what people ate in 1955. Really.

The official poverty measure was developed by the Social Security Administration's Mollie Orshansky in 1963 and defined as three times the "subsistence food budget" for a family of a given size. As former acting Commerce Secretary Rebecca Blank (then a Brookings Institution fellow, now chancellor of the University of Wisconsin Madison) explained in 2008 congressional testimony:

The subsistence food budget for a family of four was based on the Economy Food Plan developed within the USDA in 1961 using data from the 1955 Household Consumption Survey. It was described as the amount needed for "temporary or emergency use when funds are low." The multiplier of 3 was used because the average family of three or more spent one-third of their after-tax income on food in the 1955 Household Food Consumption Survey. If the average family spent one-third of its income on food, then three times the subsistence food budget provided an estimated poverty threshold. This calculation was done for a family of 4, and so-called ‘equivalence scales’ were used to estimate how much was needed by smaller or larger families.

The current poverty line is this number, calculated in 1963 and based on 1955 data, updated by the Consumer Price Index in each year since.

It's worth dwelling on this for a second. The way we measure poverty is based on a 51-year-old analysis of 59-year-old data on food consumption, with no changes other than inflation adjustment. That's bananas.

The official definition of "income" for poverty purposes is ridiculous

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But it's weirder than that. To count as poor under the official measure, your income needs to fall under the threshold implied by the 1955 food consumption data, as adjusted for family size and inflation. So defining what counts as your "income" really matters. The Census Bureau currently includes all cash income, which encompasses not just wages but also:

Unemployment compensation, workers' compensation, Social Security, Supplemental Security Income, public assistance, veterans' payments, survivor benefits, pension or retirement income, interest, dividends, rents, royalties, income from estates, trusts, educational assistance, alimony, child support, assistance from outside the household, and other miscellaneous sources.

So far, so good. But the measure doesn't include a number of other sources of income (or de facto income). Capital gains and losses aren't included, for one thing, but, much more crucially for low-income workers, in-kind benefits like Medicaid or food stamps or housing assistance don't count either. And the only income that counts is pre-tax, so refundable credits like the Child Tax Credit and, most importantly, the Earned Income Tax Credit (EITC) don't figure in. So even if the EITC gave everyone in the country $100,000 a year, it wouldn't do anything to decrease poverty, under the current definition.

There's a better way; it's called the Supplemental Poverty Measure

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Out-of-pocket medical expenses don't count as income for Supplemental Poverty Measure purposes.

The Census Bureau is well aware of all these shortcomings — in particular the absurdity of using 1955 data — and to address them developed the Supplemental Poverty Measure (SPM). The SPM differs from the official numbers both in its poverty thresholds and in what it includes in income. Its thresholds are set at "the 33rd percentile of expenditures on food, clothing, shelter, and utilities (FCSU) of consumer units with exactly two children multiplied by 1.2"; the multiplier is there to account for non-FCSU spending needs. The thresholds are adjusted based on both family size and differences in regions' housing costs.

Its income measure, like the official measure's, includes all cash income from whatever source, but also non-cash benefits like food stamps, subsidized school lunches, housing assistance, and so forth. It then takes taxes (including both payroll taxes and refundable credits) into account, and subtracts out necessary expenses like work-related costs, child care, child support, and out-of-pocket medical expenses.

The inclusion of non-cash benefits has garnered the SPM some criticism relative to the official measure.

Paul Ryan's poverty plan quotes AEI's Robert Doar as claiming, "In leaving out all that government does to help the poor, the official measure focuses on what poor Americans are able to earn for themselves." The Ryan plan adjusts Doar's quote from "all that government does" to "nearly all that government does," but neither is really accurate; the official poverty measure includes Social Security, America's biggest cash assistance program by a wide margin, as well as unemployment insurance, Temporary Assistance to Needy Families (TANF), and Supplemental Security Income (SSI).

The difference isn't that the official number measures what people "earn" and the supplemental one doesn't; the supplemental one is merely more consistent in including just about every form of government assistance. And even if you're only interested in income before government taxes and transfers, the threshold determination of the official poverty line is still deeply faulty.

The better poverty metric shows the government has reduced poverty dramatically

Historical measurement of poverty can be accomplished through a tweak called "anchoring." The idea is that you take basic goods spending for a given year — say, 2012 — and determine what the SPM poverty line would be, and then adjust that dollar figure for inflation to find the poverty lines for past years.

This enables straightforward comparisons of poverty rates over time, such as this one from a group of researchers centered at Columbia — Christopher Wimer, Liana Fox, Irv Garfinkel, Neeraj Kaushal, and Jane Waldfogel. The group went back and calculated SPM numbers for every year since 1967. They found that anchored SPM (the blue line below) has fallen dramatically in recent decades. But if you take out government programs, you get the green line below, which doesn't fall at all. Poverty — measured accurately — fell, and it fell entirely because of government programs:

Poverty rates, 1967-2012, using Supplemental Poverty Measure data from Columbia© Provided by Poverty rates, 1967-2012, using Supplemental Poverty Measure data from Columbia

"After accounting for taxes and transfers, poverty falls by approximately 40 percent, from 26 percent to 16 percent," write Wimer et al. Absent those programs, poverty actually would have increased slightly.


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