Have you ever wondered where the poverty figures you read in the paper or see on the news come from? What qualifies a person as “poor”?
The poverty statistics discussed in the media are almost always the “official” poverty estimates compiled by the Census Bureau based on surveys of American households.
The official poverty measure was developed in the 1960s by an entrepreneurial young economist named Mollie Orshansky working for the Social Security Administration. The Johnson administration was launching its “War on Poverty” and wanted a measuring stick to gauge the success of its social programs.
Orshansky was charged with the daunting task of converting endless stacks of obscure economic figures into a simple, digestible statistic about the fiscal health of American households. So instead of trying to calculate the costs of all the major goods and services a family would need to live, Orshansky based her thresholds on the “Economy Food Plan,” which had been developed by the Department of Agriculture to represent the minimum amount of money that a family would need to spend on food to sustain a nutritious (if spartan) diet.
Based on recommended dietary allowances for men and women of different ages, Orshansky calculated how much different families would need to spend on food to meet the “Economy Food Plan” depending on family size, number of children, and whether the family head was older than 65.
The final step was simple. To derive total income poverty thresholds, Orshansky used the 1955 Household Food Consumption Survey to find out what percentage of the average family’s income was devoted to buying food. The answer was one-third, so multiplying the family food costs by three provided figures for total family income.
Thus was born the official poverty measure. Crucially, Orshansky only counted families’ pre-tax cash income, thus ignoring the effects of tax credits or government benefits.
As a first pass, Orshansky’s approach was ingenious. Despite sparse data, her methods provided a quantitative sense of how American households were faring — and allowed social scientists to track changes over time. The official poverty measure began to be used to allocate billions of dollars through myriad social assistance programs.
But over the ensuing decades, it became clear that the official measure was a crude and often misleading measure of economic privation.
For one, food, which comprised about a third of the average family’s budget when the official measure was first adopted, makes up less than one-sixth of the average family’s budget today. Meanwhile, the official measure is insensitive to spending on housing, health care, and child care that today make up a much larger percentage of a typical family’s budget than it did before.
A second serious flaw in the official measure is that it does not account for the effects of government assistance programs that provide in-kind or after-tax benefits — such as Medicaid and SNAP (formerly, Food Stamps).
In the 1990s, the National Academy of Sciences summoned economists, statisticians, and other experts to address these deficiencies and develop a more accurate way to estimate poverty. The panel recommended numerous updates to Orshansky’s original work. For example, the supplemental poverty measure (SPM) they developed defines poverty as the lack of economic resources for consumption of basic needs such as food, housing, clothing, and utilities.
In addition, to determine family resources, benefits such as food vouchers, housing subsidies, and tax credits are counted to reflect a family’s real living standards. Medical out-of-pocket expenses including health insurance premiums, income and Social Security payroll taxes, child support payments, work-related expenses, and childcare costs are deducted from family income.
Instead of using a food plan as its basic unit of analysis, the SPM bases its poverty thresholds on expenditure levels for necessities, plus a small amount to allow for additional expenses. These thresholds are further adjusted for different family sizes and compositions, housing status, and geographic differences in housing costs.
The difference between the official poverty figures and the SPM can be substantial. For example, while the official poverty rate in Maine from 2015 to 2017 was 12.4 percent, the SPM rate was only 10.4 percent — a difference of some 26,000 people.
Though economists and statisticians quibble with some of the details, no one argues that the SPM is not a better yardstick for poverty than the official numbers.
But efforts to replace the official measure with the supplemental measure have repeatedly stalled, owed in part to the enormous amount of federal and state funding dependent on the Census Bureau’s poverty statistics. Adopting a new method would change — sometimes significantly — the number of poor people in a state or another.
Overnight, a state might gain hundreds of thousands of poor residents or see its poverty rate plunge to record lows. Congress has shown little appetite to provoke such discombobulations. So, despite its flaws, Orshansky’s approach is still at the center of official poverty statistics in the United States.
Currently, a precarious compromise persists: the Census Bureau computes the SPM and makes it available to anyone interested in digging into the details, but the official poverty estimates still govern how federal dollars are allocated. For the last seven years, the Census Bureau has published SPM figures alongside the official statistics, mainly for the benefit of academic researchers and the curious public.