Measuring Poverty A New Approach (1995) / Chapter Skim
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4 DEFINING RESOURCES
4 DEFINING RESOURCES
Pages 203-246
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From page 203... ...
OVERVIEW AND RECOMMENDATION The definition of family resources that has been used for determining poverty status in the United States ever since the current measure was adopted in the 1960s is annual gross money income. We believe this definition is seriously flawed and recommend a change: namely, that family resources be defined as disposable money and near-money income that is available for consumption of goods and services in the poverty budget.
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From page 204... ...
More mothers went to work outside their homes, thus incurring child care costs, yet the different needs of working and nonworking families were not reflected by modifying either the thresholds or the resource definition. In-kind benefit programs that provide such commodities as food and housing were small in scope when the current measure was developed but have increased enormously since then, yet the resource definition does not include their value.
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From page 205... ...
Not only does the current poverty measure violate the consistency principle, but so does much work to date to investigate alternative measures. For example, the Census Bureau over the past decade has published a series of "experimental" poverty rate estimates Dom the March CPS: they are based on changes to the family resource definition but not on changes to the thresholds (see, e.g., Bureau of the Census, 1993a, 1995~.3 In some instances, this approach makes good sense: thus, the Census Bureau's estimates in which federal and state income taxes are subtracted from resources reflect a definition that is more consistent with the original threshold concept than is the current before-tax resource definition.
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From page 206... ...
The problem with the gross money income definition of family resources in relation to the threshold concept is that it is both too inclusive and not inclusive enough. Gross money income excludes the value of such in-kind benefits as food stamps, school meals, and public housing, yet these benefits support the types of consumption that were implicitly included in the originally developed poverty budget of food times three (and are included in the proposed poverty budget of food, clothing, shelter, and a little more)
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From page 207... ...
If in the next year the second family's taxes were offset by the EITC, both the current measure and a measure that uses a disposable income definition would classify the family as not poor. The current measure would show no change in the family's poverty status across the 2 years, but a measure using disposable income would show the family as poor in the first year and as having moved out of poverty in the second.
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From page 208... ...
, for example, would use an income definition net of taxes and including values for in-kind benefits, but would account for out-of-pocket medical care costs, child care, and other work expenses in the thresholds rather than by adjusting income. 5 Indeed, adjusting the thresholds rather than estimating disposable income does not wholly reduce the data demands on the income survey.
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From page 209... ...
Specifically, resources should be calculated as follows: · estimate gross money income from all public and private sources for a family or unrelated individual (which is income as defined in the current measure) ; · add the value of near-money nonmedical in-kind benefits, such as food stamps, subsidized housing, school lunches, and home energy assistance; · deduct out-of-pocket medical care expenditures, including health insurance premiums; · deduct income taxes and Social Security payroll taxes; · for families in which there is no nonworking parent, deduct actual child care costs, per week worked, not to exceed the earnings of the parent with the lower earnings or a cap that is adjusted annually for inflation;
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From page 210... ...
In the remainder of this section, we review the major alternative family resource definitions and our reasons for deciding against them. In the rest of the chapter we develop in more detail the proposed definition of disposable money and near-money income.
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From page 211... ...
in the March CPS, the likelihood that income earned "off the books" or illegally is not reported at all, and the fact that self-employed people who report business losses are often able to take sufficient cash out of their business to sustain their own standard of living. Implications Consumption and income definitions of resources have somewhat different implications for who is counted as poor.
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From page 212... ...
but who sustain their consumption at a level above the poverty threshold by such means as borrowing from relatives or charging to the limit on their credit cards. In contrast, an income definition will count such people as poor.7 This statement applies both to the current gross money income definition and to the proposed disposable money and near-money income definition.8 What one thinks of the contrasting ways in which consumption and income resource definitions treat people who are income-rich but consumption-poor and people who are in the reverse situation depends on one's view of the meaning and purpose of a poverty measure.
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From page 213... ...
However, in the United States today, adequate data with which to implement a consumption-based resource definition for use in the official poverty measure are not available. Although the federal government sponsors several comprehensive largescale income surveys, the only regular consumption survey is the Consumer Expenditure Survey.
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From page 214... ...
Thus, the CEX obtains information on most types of in-kind benefits, taxes, out-of-pocket medical care expenses, child care costs, and child support payments. However, commuting costs cannot be separated from other transportation expenses, and imputations are required for subsidized housing.
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From page 215... ...
However, some analysts have argued that the resource definition for poverty measurement should add to income the values for asset holdings of at least some types. Thus, David and Fitzgerald (1987)
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From page 216... ...
Implications Some work has been done by the Census Bureau and others to evaluate the effect of including the value of one or more types of assets in the resource definition for measuring poverty. David and Fitzgerald (1987:Table 4)
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From page 217... ...
As noted above, to count assets as spendable is to take a short-term view of poverty. The year-long accounting period for the poverty measure, which we recommend retaining, argues for an income 13 The Census Bureau's estimates of realized capital gains, derived from its federal income tax simulation model, take account of losses as well.
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From page 218... ...
Money Income The proposed definition of disposable money and near-money income begins with gross money income as defined for the current poverty measure. In the March CPS, money income is the sum of about 30-odd sources that are identified separately in that survey-including, for example, wages, net selfemployment income, Social Security, private pensions, cash public assistance, 14 See the discussion below of adding imputed net rent to the income of homeowners.
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From page 219... ...
The Census Bureau's work to date has covered food stamps, public and subsidized housing, and regular and subsidized school lunches. Benefits from the Low-Income Home Energy Assistance Program (LIHEAP)
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From page 220... ...
(This problem affects other in-kind benefits as well, but perhaps not to the same extent; see below.) Census Bureau Valuation Procediures The Census Bureau's procedures for assigning values for food stamps, school lunches, and public housing rely on the market value approach, in which the full private market value of the benefit (minus contributions by the recipient)
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From page 221... ...
The relative subsidies estimated for two-bedroom units were assumed to apply to smaller and larger units. For 1981-1985, the Census Bureau developed values for in-kind benefits using two other approaches in addition to market value: the recipient value approach and an approach called "poverty budget shares" (see Bureau of the Census, 1986~.
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From page 222... ...
These results reflect the more conservative assignment of values to in-kind benefits of the recipient value approach and, to a lesser extent, the poverty budget shares method, compared with the market value approach. Assessment of Valuation Approaches The Census Bureau adopted the current market value approach for valuing inkind benefits and dropped the other two approaches on the basis of recommendations at its 1985 Conference on the Measurement of Noncash Benefits.~8 At this conference, Chiswick (1985)
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From page 223... ...
for people in subsidized as well as unsubsidized housing and so provides a much better basis for imputing rental subsidies than does the March CPS, which lacks housing cost data. The Census Bureau is currently developing an in-kind benefit valuation program for SIPP, and we urge that this work move forward.
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From page 224... ...
virtually all households spend at least some money for food, so the receipt of food stamps frees up money income for consumption of other goods and services; (2) the maximum food stamp allowance is low enough that it is unlikely households would receive more benefits than the amount they would otherwise choose to spend on food.
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From page 225... ...
Although the proposed measure excludes medical care from both the poverty thresholds and family resources, it does not ignore the effects of the health care financing system or of people's health status on economic poverty. If people incur higher out-of-pocket medical care expenses (e.g., because they are sicker or have inadequate or no insurance coverage)
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From page 226... ...
Current Poverty Measure When they were developed in the early 1960s, the official poverty thresholds implicitly included (through the multiplier) an allowance for some out-of-pocket medical care expenses.
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From page 227... ...
bEstimated total population is 100,225,000 families, excluding 0.4 percent with zero reported mcome. Adding Health Insurance Benefits to Income Work by the Census Bureau and others on valuing health insurance benefits was stimulated by the expansion of health insurance coverage in the public and private sectors.
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From page 228... ...
In all of this work, the Census Bureau has compared estimates of income including values for health insurance benefits to the official thresholds without adjustments. In brief, the fungible value approach for valuing Medicare and Medicaid benefits starts with the market insurance value but includes only the portion that is determined to be fungible in the sense that it frees up resources that could have been spent on medical care (see Bureau ofthe Census, 1993a:B-lB-3~.
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From page 229... ...
N.A. Including Medicare and 9.9 4.1 8.2 Medicaid Also including employer- 9.8 provided insurance NOTE: The Census Bureau uses a single market value approach to estimate the value of employer-provided health insurance benefits; the effects are shown in the fungible value column because the latter is the current preferred approach for valuing public health insurance benefits.
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From page 230... ...
Moon (1993:6-7) terms the current Census Bureau fungible value method for valuing government medical insurance benefits an improvement over previous approaches but still flawed: By allowing the value of benefits to fully fill in the gap between food and housing costs and the poverty line, the formula effectively assumes that all resources beyond food and housing would be devoted to medical expenses up to the poverty line.
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From page 231... ...
, but to add the value of health insurance benefits to income (in whole or in part) but not to add any amount to the poverty thresholds to allow either for medical care needs that would be covered by insurance or for higher out-ofpocket expenses is to ignore completely the increased costs of medical care and to assume the fungibility of medical care benefits.
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From page 232... ...
26 It is one of the healthier age groups people aged 18-21 who are most apt to report that they lacked health insurance coverage at any time during the year: 29 percent did so in 1992 compared with 15 percent of all people (bureau of the Census, 1993b:Table 24)
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From page 233... ...
would be compared with the nonmedical needs poverty threshold to see if enough additional income is available to cover the required expenses. If a family lacked health insurance coverage, its income would be evaluated to determine if the family could afford to buy a complete insurance package.
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From page 234... ...
insurance, in that it compares their insurance coverage with an insurance standard rather than adding insurance benefits to income and assuming that those benefits can be used for nonmedical needs. (This is the big problem in the work to date by the Census Bureau and others on valuing medical care benefits.)
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From page 235... ...
Separate Measures of Medical Care Risk and Economic Poverty Given all of the conceptual and operational difficulties with the alternatives, we believe that the proposed approach namely, to exclude medical care needs from the poverty thresholds and to subtract out-of-pocket medical care expenditures from incomes preferable. However, this approach is not without problems, and we would be remiss not to point them out.
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From page 236... ...
The assumption is that additional child care expenses, above a reasonable allowance to make it possible to work, bring added benefits that the family chooses to pay for, so that, for purposes of poverty measurement, it makes sense to cap the deduction. But it does not make sense to cap the deduction for out-of-pocket medical care expenses when they are incurred to treat an illness or disability.29 A sick person with high medical care expenditures is not made better off than a healthy person with no or relatively low expenditures; at best, the added expenditures serve only to restore the sick person to a healthy state.
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From page 237... ...
Not only do we recommend a consistent measure of economic poverty, in which disposable income net of out-of-pocket medical care costs is compared with a poverty budget for food, clothing, and shelter, and similar items, but we also support the development of one or more indexes of medical care risk. The necessity to monitor people's risks of incurring medical care costs that exceed their ability to pay is clear.
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From page 238... ...
Census Bureau Tax Estimation Procedures For more than a decade, the Census Bureau has published experimental poverty estimates that deduct payroll and federal and state income taxes from annual income as measured in the March CPS (see, e.g., Bureau of the Census, 1993a)
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From page 239... ...
Third, the Census Bureau computes the standard deduction according to the number of exemptions and calculates tax liabilities using the appropriate tax schedule for the simulated return type. Finally, the Bureau estimates the dependent care tax credit (using data from the June 1982 CPS supplement to estimate probabilities of tax filers paying for child care)
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From page 240... ...
. The Census Bureau has begun work to develop a tax estimation model for SIPP similar to the one used for the March CPS.
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From page 241... ...
Indeed, we used SIPP data to impute child care costs to the March CPS to analyze the effects on poverty rates of implementing the proposed measure (see Chapter 5~. On the question of how high to set the cap for child care expenses, one possibility is to set it at a percentage of median expenditures, following the procedure that we recommend to derive the food, clothing, and shelter component of the poverty thresholds.
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From page 242... ...
In other words, we propose treating child care costs solely from the viewpoint of calculating a measure of disposable income that recognizes that some portion of the earnings of working families is not available for consumption. We are very much aware that there are many other aspects of child care beyond out-of-pocket costs that are important to examine in order to measure well-being of children (and their parents)
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From page 243... ...
For working families with children, the earnings of the parent with the smaller amount of earnings should limit the combined deduction for child care expenses and that parent's own other work-related expenses. The reason to deduct a flat amount, rather than actual expenses, is because of the tradeoff that people often make between housing and commuting costs by choosing a more expensive home closer to work or a less expensive one farther away.
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From page 244... ...
. The March CPS does not ask about child support payments to another household, and no information is available with which to make a reasonable imputation.
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From page 245... ...
. 38 The AHS "low-income" measure is not the same as the current poverty measure: it uses the official poverty thresholds?
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From page 246... ...
It would seem inappropriate to impute a full rental value for a larger-than-needed home, although it is not clear what type of downward adjustment to the value would be appropriate. One approach would be to cap the amount of imputed rent at the level of the housing component of the poverty thresholds to recognize that the imputed rent offsets housing costs but does not represent additional money that is actually available for other con sumptlon.
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