Exclusive Commentary

July 20, 2009: Poor Measurement: Changing How We Measure Poverty, By Diana Pearce, founder and director of the Center for Women’s Welfare and Senior Lecturer at the University of Washington School of Social Work

- The Self-Sufficiency Alternative


Just as we no longer rely on a single communication mode, but use cell phones, email, Facebook, and Twitter – sometimes all at once – I believe we can no longer rely on one measure of poverty. Although Mollie Orshansky designed the current federal poverty measure (the FPL) in the mid-1960s to count the poor, its expanded uses since then – eligibility determination, program evaluation, policy analysis, and more – have revealed its shortcomings.

Two very different alternatives have emerged, both of which are included in pending legislation before Congress:

§ In 1995, a panel at the National Academy of Sciences (NAS) proposed an FPL replacement, detailed in other commentaries in the “Poor Measurement” series, with a primary goal of better tracking poverty trends over time.

§ Also in the mid-1990s, this author developed the Self-Sufficiency Standard as a realistic, specific, and transparent tool that measures what people require to meet their basic needs. Similar to the federal government’s early family budgets, other modern versions of this approach include Renwick and Bergman’s Basic Needs Budgets and the Economic Policy Institute’s basic family budgets. The Self-Sufficiency Standard (SSS) is now found in 37 states and the District of Columbia.

This commentary addresses the question: how do the NAS and SSS alternative poverty measures meet the four most common critiques of the FPL?

#1. The FPL is too low

The FPL has become so low that it requires multiples to measure need: eligibility for food stamps (now called SNAP) is set at 130% of the FPL, the WIC program at 185%, and the CHIP program varies by state—anywhere from 150% to 350% of the FPL. The Working Poor Families Project often uses 200% of the FPL. Many U.S. residents believe that the minimum amount a family of four needs to “get along” is around $45,000 (about 60% of the median income or around 200% of the FPL). Even the Census Bureau states that the FPL “should be interpreted as a statistical yardstick rather than as a complete description of what people and families need to live.”

Work-related and health care costs may have been minimal in the 1960s, but by the 1990s these costs were substantial, creating a new set of essential needs for working families. Rather than setting a measure that averages costs across families with and without work-related costs, the Standard measures the costs of families in which the adult(s) are presumed to be working (i.e. neither elderly nor disabled). This reflects public policy embodied in welfare reform, that all who are able-bodied are expected to work, as well as the reality that most (about 80-85%) of non-elderly, non-disabled low-income households contain at least one worker. In short, work-related needs are now basic needs.

The SSS is higher than the FPL because it includes these “new” work-related and health care costs. SSS costs are generally pegged to the level that federal, state, or local government has determined is sufficient to secure a particular need at a minimally adequate level for those receiving subsidies. Thus, housing costs are set at the level of HUD-calculated Fair Market Rents, which are used to determine housing subsidies. The resulting budgets are “bare bones,” allowing just enough income to meet each need at a minimally adequate level. Nevertheless, depending on place and family composition, the Standard ranges from 150% to over 300% of the FPL.

Various versions of thresholds proposed by the NAS are only marginally higher than the FPL, about 15%-30%. This is primarily because the NAS thresholds are partial thresholds, intended to measure deprivation, and include only food, utilities, shelter, and clothing (plus “a little bit more” for miscellaneous other needs). Indeed, for four-person families in New York City, the amount in the Standard for the NAS items of housing, food, utilities, and miscellaneous (including clothing) totals $23,773 to $40,550 (depending on age of child and borough) compared to the NAS four-person threshold of $26,138.

Although work-related and health care costs are not included in the NAS thresholds, these costs are accounted for in the NAS measure by deducting them from income. Although this seems equivalent, it is not, with several consequences:

§ In the NAS measure, only actual work-related and health care expenditures are deducted. If low-income people spend less than they “should” on health care, child care, etc. (and they clearly do, hence the need for programs like CHIP), then less – or nothing – is deducted. In effect, limiting these deductions in this way incorporates some of the very poverty one is trying to measure. It also lowers the “count” of the poor and “blinds” us to poverty that comes from having too little income to secure needed health care or child care.

§ The NAS thresholds also change who is counted as poor. As Mark Levitan has shown, it increases the poverty count among the elderly, attributed to their higher actual medical expenditures, but leaves out many whose lack of income results in inadequate child care, health care, or transportation expenditures.

§ Although partial, the NAS thresholds are misinterpreted as equivalent to the (full) FPL. Thus, the July 2008 New York Times editorial entitled “Poverty’s Real Measure” notes that the FPL for a family of four was only $20,444, and then states that “the mayor raised New York’s poverty ceiling to a more believable $26,138.” The New York City SSS for a four-person household with two adults, a preschooler, and a school age child ranges from $61,930 to $89,330 annually, considerably more than the NAS measure, while still only a minimum “bare bones” budget.

#2. The FPL’s “frozen” methodology does not incorporate changes in living standards, and/or changes in basic needs

In a sense, the FPL is a hybrid measure, as it combines the “absolute” cost of one item, food, with all other items’ “relative” costs, or costs pegged to overall consumer expenditures. Americans in the 1950s spent one-third of their income on food. Because the FPL was fixed at that ratio and only updated for price changes using the Consumer Price Index (CPI), it ignores rapid increases in other costs and new needs. The FPL is essentially “frozen” at the living standards of the 1950s.

The SSS is an “absolute” measure – it is based on a set of goods and services, valued at the price of fixed items – such as a two-bedroom rental unit, or a nutritionally balanced diet – but with a twist. Its methodology reflects not just price increases but living standard increases as well, so that the SSS rises about 1.5-3.0% more annually than the CPI, and thus is not “frozen”. There are several reasons for this:

§ First, the data sources used in the Standard reflect rising living standards as well as increasing prices. For example, for housing and utility costs, the SSS uses HUD’s Fair Market Rents, which are set at the 40th percentile of rental housing expenditures in a given housing market. This number will rise to reflect increasing prices but also increased standards in rental housing overall. However, this method does exclude the more volatile rising consumption as well as prices in the homeowner market.

§ Second, the Standard includes what are considered “basic” needs at specific points in time. Needs that once were “off market” – health care for the poor or unpaid home-based child care – increasingly must now be purchased in the market. This reflects the trend described by Fischer that absolute budgets achieve considerable “income elasticity” in that successive budgets add in “new” necessities as they become required for daily living. In the case of the SSS, new items have already been added (such as the Child Tax Credit and the Making Work Pay Tax Credit), and others will be added/subtracted as needs arise—or are met in other ways (such as health care reform), thus avoiding this pitfall of absolute measures.

§ Third, while it is speculative, there is the intriguing possibility that the “poor pay more,” as prices at the “bare bones” level for basics such as housing, health care, and child care may be rising faster than more competitively priced “luxury” goods such as airplane tickets or computers.

In contrast, the NAS measure is fully “relative,” with the thresholds rising (and falling) as living standards for the general population rise (and fall). While this means that the NAS measure will increase over time as living standards rise overall, it also means that during a severe recession, household expenditures – and thus the NAS thresholds – will fall, tending to reduce somewhat the count of the “poor” even as other indicators of economic distress rise. On the other hand, if income falls substantially during an economic downturn but prices of basic goods do not fall proportionately at the lower end of the market, then absolute measures such as the SSS will reflect increased levels of poverty and income inadequacy.

#3. The FPL does not vary by place or family composition

The SSS varies by place, usually by county, and, data permitting, by sub-county levels. In terms of family composition, the SSS varies by number of adults and children and by ages of children, reflecting age-differentiated costs of child care, health care, and food.

To calculate costs, the SSS does not presume any regular or formulaic relationship across places or family types, but takes a “bottom-up” approach. Each SSS budget is built up independently from the specific costs of housing, food, health care, child care, and transportation. This allows for irregularities such as rural areas that are expensive resort areas (e.g. Aspen, Colorado or Martha’s Vineyard), small cities that are more expensive than large ones (San Francisco compared to Los Angeles), or that not all costs are equally expensive in a given area. The resulting Standards do not vary in any regular fashion that is reducible to a formula, either across geography or family composition.

In contrast, the NAS takes a “top-down” approach: beginning with a single threshold for a modal family (two adults and two children), its thresholds are derived by using formulas and ratios to reflect cost differentials by family composition and place (region and size of place).

#4. The FPL does not allow us to show the impact of subsidies, or tax and tax credit policies

Because the FPL only specifies the amount for food, it does not show how much should be allotted for other basic needs, and therefore cannot show the impact of cash or noncash assistance on poverty levels. Because the SSS includes each need, any assistance meant to offset a specific need can be “credited,” and the impact can be shown. In the table below, we have taken a Standard for a specific family type and place and have shown how the SSS is reduced with a specific package of work supports. A child care subsidy reduces the full monthly cost of child care of $1,006 to the co-payment of $50; along with food stamps (SNAP), WIC, and CHIP, the amount this adult needs to earn to meet basic needs is reduced from $3,450 to $1,990 per month.

Impact of the Addition of Child Support and Work Supports on Monthly Costs and Self-Sufficiency Wage
One Adult with One Preschooler and One Schoolage Child
Kitsap County (Excluding
Bainbridge Island) 2009

Self-Sufficiency Standard

Child Care Assistance, SNAP*, WIC*, & CHIP*

Housing

$694

$694

Child Care

$1,006

$50

Food

$539

$386

Transportation

$279

$279

Health Care

$355

$116

Miscellaneous

$287

$287

Taxes

$489

$249

Earned Income Tax Credit

(5)

--

Child Care Tax Credit (-)

(110)

(15)

Child Tax Credit (-)

(167)

(23)

Making Work Pay Credit (-)

(33)

(33)

Self-Sufficiency Wage:

Hourly

$18.94

$11.30

Monthly

$3,334

$1,990

Annual

$40,011

$23,876

Total Federal EITC
(annual refundable)

$3,458

Total Federal CTC
(annual refundable)

$1,722

* WIC is the Special Supplemental Nutrition Program for Women, Infants and Children (WIC). Assumes average monthly value of WIC benefit $45.59 (FY 2008). SNAP is the Supplemental Nutrition Assistance Program, formerly known as the Food Stamp Program. CHIP is the Children's Health Insurance Program.

The NAS measure can also be used to show the impact of assistance, but only for items included in the threshold: housing, utilities, food, and clothing. Because work-related costs and health care are not included in the threshold, the impact of subsidies such as child care assistance or CHIP on well-being cannot be shown. In addition, the NAS measure does not distinguish between a family receiving subsidies and one that is not, even though the former is clearly better off.

Conclusion

The Self-Sufficiency Standard’s strength is that it is both a tool and a measure, providing a detailed, transparent, and specific measure of all of the costs of meeting the basic needs of working families. In contrast, the NAS alternative is a deprivation measure including only housing, utilities, food, clothing, and miscellaneous items. On the other hand, the NAS measure covers the entire population, while the SSS only applies to households in which the adult is expected to be working, excluding the elderly and disabled. As a relative measure, the NAS reflects overall trends in living standards, both up and down, while as a (mostly) absolute measure, the Self-Sufficiency Standard tracks the costs facing low-income families. Both measures are varied by geography and family composition, although the SSS uses a more detailed “bottom-up” approach, adding child age and more geographic variation, while the NAS uses formulas and ratios in a “top-down” method. Both measures can be used to show the impact of subsidies and tax and tax credit policies, although the NAS is limited to subsidies included in its threshold. In short, we need both alternative measures, and not surprisingly, both are found in the legislation recently introduced by Rep. Jim McDermott (WA) and Sen. Chris Dodd (CT), the Measuring American Poverty Act of 2009, as the Modern Poverty Measure (NAS) and the Decent Living Standard (SSS).

Diana Pearce is founder and Director of the Center for Women’s Welfare and Senior Lecturer at the University of Washington School of Social Work