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Measuring Poverty in the United States

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					                                                                                                         FA C T S H E E T



                                 Measuring Poverty in the United States
                                 Nancy K. Cauthen | Sarah Fass                              June 2008




                                    This fact sheet discusses how the U.S. government measures poverty,
                                    why the current measure is inadequate, and what alternative ways exist
                                    to measure economic hardship.


                                 How does the U.S. measure poverty?

                                    The U.S. government measures             eligibility for public programs.
                                    poverty by a narrow income               A similar but more complex
                                    standard that does not include           measure is used for calculating
                                    other aspects of economic status,        poverty rates.
                                    such as material hardship (for
                                    example, living in substandard           The current poverty measure was
                                    housing) or debt, nor does it con-       established in the 1960s and is
                                    sider financial assets (including        now widely acknowledged to be
                                    savings or property). The official       flawed.2 It was based on research
                                    poverty measure is a specific dol-       indicating that families spent
                                    lar amount that varies by family         about one-third of their incomes
                                    size but is the same across the          on food – the official poverty level
                                    continental U.S. According to the        was set by multiplying food costs
                                    guidelines, the poverty level in         by three. Since then, the figures
                                    2008 is $21,200 a year for a family      have been updated annually for
                                    of four and $17,600 for a family         inflation but have otherwise re-
                                    of three (see table). The poverty        mained unchanged.
                                    guidelines are used to determine


                                      Federal poverty guidelines, 20081

                                      Persons in family or household       48 contiguous        Alaska        Hawaii
                                                                          states and D.C.
                                                     1                       $10,400           $13,000        $11,960
                                                     2                       $14,000           $17,500        $16,100
                                                     3                       $17,600           $22,000        $20,240
                                                     4                       $21,200           $26,500        $24,380
                                                     5                       $24,800           $31,000        $28,520
                                                     6                       $28,400           $35,500        $32,660

215 W. 125th Street, 3rd Floor                       7                       $32,000           $40,000        $36,800
New York, NY 10027-4426                              8                       $35,600           $44,500        $40,940
Ph. 646-284-9600
                                      For each additional person add:         $3,600            $4,500         $4,140
www.nccp.org
2




    Why is the current poverty measure inadequate?

       The current poverty measure is          More accurate estimates of typi-      in-kind government benefits that
       flawed in two ways.                     cal family expenses, and adjust-      assist low-income families – food
                                               ments for local costs, would pro-     stamps, Medicaid, and housing
       1) The current poverty level            duce substantially higher dollar      and child care assistance – are not
       – that is, the specific dollar          amounts.                              taken into account. This means
       amount – is based on outdated                                                 that official poverty statistics can-
       assumptions about family                2) The method used to deter-          not be used to analyze the effec-
       expenditures.                           mine whether a family is poor         tiveness of these programs.
       Food now comprises only one-            does not accurately count
       seventh of an average family’s          family resources.
       expenses, while the costs of            When determining if a family is
       housing, child care, health care,       poor, income sources counted
       and transportation have grown           include earnings, interest, divi-
       disproportionately. Thus, the           dends, Social Security, and cash
       poverty level does not reflect the      assistance. But income is counted
       true cost of supporting a family.       before subtracting payroll,
       In addition, the current poverty        income, and other taxes, overstat-
       measure is a national standard          ing income for some families.
       that does not adjust for the            On the other hand, the federal
       substantial variation in the cost       Earned Income Tax Credit isn’t
       of living from state to state and       counted either, underestimating
       between urban and rural areas.          income for other families. Also,


    Are there alternative ways to measure poverty?
       Considerable research has been          ▶ Adjust thresholds by region to      If the NAS recommendations
       conducted on better methods to            account for variation in the cost   were adopted, millions more
       measure income poverty, but to            of living.                          people would be considered
       date, the political will necessary to   ▶ When counting families’             officially poor. But even these rec-
       implement change has been lack-           resources to determine whether      ommendations underestimate the
       ing. In the early 1990s, Congress         they fall below the poverty line:   cost of family expenses and thus
       asked the National Academy of                                                 produce poverty thresholds well
       Sciences (NAS) to investigate             – use families’ post-tax income;    below what it takes to make ends
       alternative measures. The NAS             – include earned income tax         meet, for example, increasing the
       panel of experts issued a report in         credits and the value of          poverty level for a family of four
       1995 that recommended revising              near-cash benefits (such as       by only about $3,000 annually.4
       the poverty level and the method            food stamps and housing
       of determining which families are           assistance); and
       poor.3 The panel’s recommenda-            – subtract the cost of work-
       tions included the following:               related expenses (such as
       ▶ Create new poverty thresholds             child care and transportation)
         that more accurately reflect              and medical care.
         the cost of food, clothing, and
         shelter.
        National Center for Children in Poverty                                                                           Measuring Poverty in the United States 3




How much does it really take to make ends meet?

  Given that the federal poverty
  level grossly understates how                     Basic needs budgets for a family of four, in selected urban,
  much it takes to support a fam-                   suburban, and rural localities*
  ily, researchers have developed
                                                                                             UrbAn             UrbAn            SUbUrbAn           rUrAL
  budgets that realistically quantify                                                       new York,          Houston,          Aurora,           Decatur
  basic living costs in specific locali-                                                      nY                 TX                 IL            County, IA
  ties.5 Building on earlier efforts,               Rent and utilities                      $15,816            $10,224          $11,328              $6,324
  NCCP has developed Basic Needs                    Food                                      $7,878             $7,878           $7,878             $7,878
  Budgets that include only the
                                                    Child care                              $20,684            $15,422          $18,793            $11,682
  most basic daily living expenses
                                                    Health insurance premiums                 $2,609             $2,834           $2,265             $2,436
  and are based on modest assump-
                                                    Out-of-pocket medical                        $732              $732              $732              $732
  tions about costs. For example,
                                                    Transportation                            $1,824             $4,808           $4,808             $6,288
  the budgets in the table at right
  assume that family members                        Other necessities                         $6,397             $4,887           $5,185             $3,834

  have employer-sponsored health                    Payroll taxes                             $5,113             $3,873           $4,437             $3,270

  coverage, even though the major-                  Income taxes (includes credits)           $5,787                 -$34         $2,572               $304
  ity of low-wage workers do not                    TOTAL                                    $66,840            $50,624          $57,998            $42,748
  have employer coverage.6 NCCP’s                   % of 2008 Federal Poverty Level            315%              239%              274%              202%
  Basic Needs Budgets do not                        *Assumes two-parent family with one preschool-aged and one school-aged child.
  include money to purchase life or                 Source: NCCP’s Basic Needs Budget Calculator (available online at www.nccp.org/tools/budget).
  disability insurance or to create                 Results are based on the following assumptions: children are in center-based care settings while their
                                                    parents work (the older child is in after-school care); family members have access to employer-based
  a rainy-day fund that would help                  health insurance; in New York family relies on public transportation, in all other locations, costs reflect
  a family withstand a job loss or                  private transportation.

  other financial crisis. Nor do they
  allow for investments in a fam-
  ily’s future financial success, such
                                                  In short, even if the official
  as savings to buy a home or for a
                                                  poverty measure is revised along
  child’s education. In short, these
                                                  the lines suggested by the NAS,
  budgets indicate what it takes for
                                                  it would remain a measure of
  a family to cover their most basic
                                                  deprivation and severe hardship.
  living expenses – enough to get
                                                  In contrast, Basic Needs Budgets
  by but not enough to get ahead.
                                                  provide a way to think about
                                                  what families need to maintain
  Across the country, families typi-
                                                  a minimally decent standard of
  cally need an income of at least
                                                  living.
  twice the official poverty level
  ($42,400 for a family of four) to
  meet basic needs. In high-cost
  cities such as New York, it may
  take an income of over three
  times the poverty level to make
  ends meet, whereas in some rural
  areas, the figure may be under
  double the poverty level.
4




    Endnotes
      1. The federal poverty guidelines are           4. Bernstein, Jared. 2007. More Poverty
      used for administrative purposes, such as       than Meets the Eye (Economic Snapshots,
      determining financial eligibility for ben-      April 11, 2007). Washington, DC: Eco-
      efit programs. For statistical purposes,        nomic Policy Institute. Accessed April
      researchers use a different – but quite         23, 2007 at <www.epi.org/content.cfm/
      similar – version of the federal poverty        webfeatures_snapshots_20070411>.
      measure, the federal poverty thresholds,        5. These efforts include Self-Sufficiency
      issued by the U.S. Census Bureau. Both          Standards developed by Diana Pearce for
      the guidelines and the thresholds are           Wider Opportunities for Women and the
      commonly referred to as the federal             Economic Policy Institute’s Basic Family
      poverty level (FPL).                            Budgets.
      2. Cauthen, Nancy K. 2007. Testimony            6. Only 59 percent of all workers have ac-
      on Measuring Poverty in America. Tes-           cess to employer-sponsored health cover-
      timony before the House Subcommittee            age; the proportion is much lower among
      on Income Security and Family Support,          low-wage workers. Krugman, Paul. 2007.
      Committee on Ways and Means. Aug. 1,            The Conscience of a Liberal. New York,
      2007. Available at www.nccp.org/publi-          NY: W.W. Norton & Co.
      cations/pub_752.html.
      3. Betson, David M.; Citro, Constance
      F.; Michael, Robert T. 2000. Recent De-
      velopments for Poverty Measurement in
      U.S. Official Statistics. Journal of Official
      Statistics 16(2): 87-111.

				
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