Defining Poverty
 
Official Poverty Statistics May Be Misleading
 
By Roger Doyle

SOURCES:  U.S. Census Bureau, Thesia J. Garner, et al;  Gallup Organization, Asena Caner and Edward N. Wolff

The Poverty Threshold -- the level of income that separates the poor from the not poor -- was the brainchild of economist Mollie Orshanksy of the Social Security Administration, who developed it in the early 1960s. Orshanksy did not have the extensive data on the income and consumption habits of Americans needed to fashion a completely satisfactory formula; as a result, it had certain built-in inequities, such as an underestimation of the cost of nonfood items.
 
After a time other problems became apparent. The formula did not allow for changing demographics, including the substantial rise in the number of working mothers, whose costs for child care were not factored into the formula. Nor did it take into account higher Social Security payroll and other taxes levied on the working poor. Nor did it adjust for geographic variations in the cost of living, such as the two-to-one differential between San Francisco and Houston. The only significant adjustment made was for cost-of-living increases.
 
To remedy these and other shortcomings, economists tried to devise a better formula. One, constructed by Thesia I. Garner of the Bureau of Labor Statistics and her colleagues, builds on the more extensive statistics now available. The results, depicted by the green line on the chart, yields the "Improved" Threshold, 55% higher than the official level.
 
Another approach is to base the threshold on purely subjective perceptions. In 1992, the Gallup Organization asked Americans, "What is the smallest amount of money a family....  needs each week to get along in this community?" The average of their answers is the basis of the Subjective Threshold calculation, indicated by the blue line on the graph. On average, the respondents named a figure 76% higher than the "Official" Poverty level.
 
Still another method focuses on assets rather than income. Economists Asena Caner of the Jerome Levy Economics Institute at Bard College, and Edward N. Wolff of New York University, have calculated several measures of Asset Poverty. In one, indicated by the yellow line, they define a measure of "insufficient net worth" to cover minimal living expenses for three months. In a similar measure, indicated by the red line, they define the term "insufficient liquid wealth" to cover these same expenses. (Liquid wealth is cash and other easily monetized assets.) Under the latter definition, a significant proportion of middle-class people would be considered at risk for poverty. Both of the Asset Poverty lines show a different trend than the Income Poverty lines, possibly because of changes in savings rates over time.
 
The "Official" Threshold data were highly useful in the 1960s, but now they are outdated, and, according to some, greatly understate the problem. Since at least 1995, when a panel of experts under the aegis of the National Research Council recommended new guidelines, a growing consensus has emerged that the "Official" measure is inadequate. Most economists argue that it should be discontinued and replaced by a revised measure, or perhaps even several measures, including at least one indicator of Asset Poverty.

More to Explore:
 
    Measuring Poverty: A New Approach.
    Edited by Constance F. Citro and Robert T. Michael.  National Academy Press, 1995.
 
    Experimental Poverty Measurement for the 1990s.
    Thesia I. Garner et al. in Monthly Labor Review, Vol. 121, No. 3, March, 1998.
 
    Asset Poverty in the United States, 1984-1999: Evidence From The Panel Study Of Income Dynamics.
    Asena Caner and Edward N. Wolff.  Levy Economics Institute, Working Paper No. 356, 2002.
 
    United States Poverty Studies And Poverty Measurement: The Past Twenty-Five Years.
    Howard Glennerster in Social Services Review, Vol. 76, No. 1, March, 2002.