What is the "real" poverty rate?

A single person, living alone, with earnings from employment totaling $10,000 falls below the United States poverty threshold ($10,890 for a one person household in 2011). The Census Bureau classifies that person as “in poverty.” But what if he or she receives government benefits, such as health care, with a value of $5,000 or more per year? Should he or she still fall into the “poverty” category?

And what about those families just above the poverty line who, because of out-of-pocket health care costs or child care spending, actually have fewer resources left than those formally classified as “in poverty”?

These are more than just academic questions. Calculating poverty in an accurate, and meaningful, way enables us, first of all, to accurately describe the well-being of our communities. It enables us to understand levels of need and to identify groups with higher than average risks of poor health, poor nutrition, poor academic achievement, and lower life expectancy. Beyond that, however, an accurate calculation of poverty enables us to analyze the effectiveness of programs we have put into place to promote economic development and to protect the vulnerable.

The poverty rate has served, since 1965, as the official yardstick for measuring how many people live in the worst economic straits in the United States. No major changes have occurred in its formula, despite some issues regarding its validity, such as:

• The original formula does not include non-monetary resources in calculating whether a household falls below the poverty line (the example above). This occurred, in part, because many of the benefits programs we now have in this country had not evolved to their current level in the 1960s.
• The original formula made reasonable assumptions for the 1960s regarding the proportions of a “minimum needs” household budget required for food, housing and other expenses. (The amount of income necessary to be “above poverty” was calculated by taking the average cost for a minimum diet and multiplying that number by 3.) However, with changes over five decades in the relative costs of food, housing, health care, transportation, etc., should the Census Bureau revise those proportions?
• What about taxes? If a household has a gross income above the poverty threshold, but after taxes, it slips below the federal poverty threshold, should the people in that household fall into the “in poverty” category?

To address the poverty measure issues, Congress appropriated money, in the 1990s, to study the accuracy of the poverty measure, and the National Academy of Sciences formed a task force for that purpose. The task force confirmed the alleged weaknesses of the measure, and it proposed a new, supplemental measure based on a formula which, among other things:

• Improved the definition of who is included and excluded in a household when determining whether or not that household is “in poverty.”
• Added the value of government-provided benefits to a household’s income (including in the calculation of total household resources both monetary income and also the value of “near-money benefits” such as nutritional assistance, subsidized housing, and home energy assistance).
• Subtracted from a household’s total resources the taxes (income, Social Security, etc.) which it pays.
• Uses numbers and ratios that better reflect contemporary costs, to calculate poverty thresholds for households of different types and sizes.

So, what does this all mean? How does it change anything? Why is this formula just supplemental to and not replacing the original formula?

Compared to the current official measure, the new measure reduces the number of children in poverty; but increases the number of elderly in poverty. It shows fewer blacks, but more Asians, in poverty. The new measure puts more city dwellers and suburbanites, but fewer rural residents, into poverty. It shows less poverty in the Midwest and the South, but more in the West and the Northeast. (About half a million fewer people in the Midwest region of the United States fall below the poverty line, according to the new measure.)

With respect to the national total, The New York Times reported that an “alternate census data set quietly published last week said the number of poor people has grown by 4.6 million since 2006, not by 9.7 million as the bureau reported in September.” The Times also offered the example of the State of North Carolina, in which poverty grew by 250,000+ by the official measure, but stayed flat with the new measure.

Whether, and if so when, the new measure should replace the current official measure is a question with many facets. Changing the measure is not solely an enterprise for economists and statisticians. The official measure has connections to many policies and programs. That means money – the amounts that communities might receive, the amounts that individuals receive through benefits-eligibility. When financial implications enter the picture, nothing ever remains simple! In addition, the implementation of a new measure would require some “education” among all potential users of information who want to track trends: Agreement would have to be reached about how to describe changes from the past to the present and the future, when the rules for measurement have changed.

At Minnesota Compass, we will continue, for the foreseeable future, to report trends based on the current official measure, but when feasible (if Minnesota numbers are available), we will provide some data from the supplemental measure, to round out everyone’s understanding of the true nature of economic conditions within our population.

If interested, take a look at the U.S. Census Bureau report, and/or take a look at what the Minnesota Legislative Commission to End Poverty by 2020 had to say about some of these issues in their report.

Questions or thoughts? Feel free to call!

What do you think – Should the new formula replace the old? What’s best for our communities as we move forward?

Paul Mattessich

Paul Mattessich became executive director of Wilder Research in 1982and has served as a member of the Wilder Foundation's senior leadership team since then.