Understanding Poverty Measures and the Call to Update Them
Kolesnikova, Natalia, Liu, Yang, Regional Economist
Poverty means different things in different regions. The World Bank often defines living on less than $2 per day per person as the main poverty indicator in developing countries.1 The European Union considers 60 percent of the national median disposable income after social transfers as the threshold of being at risk for poverty.2
In the United States, individuals whose family income is less than the official poverty threshold are in poverty. The threshold itself depends on the size of the family, as well as the number of those in the family who are under 18 or are at least 65. For example, in 2010 a family of two adults with two children under 18 was living in poverty if its annual income was below $22,113; a family of four adults was living in poverty if its annual income was below $22,491.
As the table shows, the poverty rate in the United States rose to 15.3 percent in 2010, up 4 percentage points from a decade earlier.3 In the Eighth Federal Reserve District, which is served by the Federal Reserve Bank of St. Louis, all seven states and major metropolitan areas saw a similar trend-the poverty rate rose between 3.6 percentage points and 6.5 percentage points from 2000 to 2010. The increase was even bigger for the population under 18 years old.
Does the increase in the poverty rate mean more Americans fall short of a desired standard of living? Or does the increase mean more people lack the resources necessary for basic needs? To be able to answer these questions, we need a better understanding of poverty threshold.
History of U.S. Poverty Gauges
The official U.S. poverty measures are based on studies conducted by Social Security Administration economist Mollie Orshansky. In the 1960s, Orshansky created a poverty threshold using the cost of the Department of Agriculture's economical food plan. Orshansky assumed that U.S. families spent a third of their income on food and, thus, she used three as the multiplier to obtain the poverty threshold. It indicates the minimal monetary income required to pay for basic needs. If a family's total pretax monetary income is below the poverty threshold, then the family has inadequate resources for day-to-day necessities; every member in the family is considered in poverty.
In 1969, the U.S. government adopted this poverty threshold as the official statistical definition of poverty. The poverty threshold is used, for example, to estimate the number of Americans living in poverty. The U.S. Department of Health and Human Services uses a somewhat simplified version of Orshansky's poverty threshold as the official poverty guidelines.4 The poverty guidelines are commonly used for government administrative purposes, such as determining the eligibility for public assistance programs.
Limits of the Official Measures
For decades, the poverty measures have been criticized for their limitations. Complaints include that these measures are outdated, provide incomplete information and are not location-specific.
In addition, the U.S. economy has changed significantly since the 1960s, and the standard of living has been substantially improved. Yet the methodology behind the poverty threshold has remained unchanged. The 1960s economical food plan was "designed for temporary and emergency use when funds are low." 5 The nutrition offered by this plan no longer reflects what is considered to be adequate nutrition for Americans in the 2010s. As American families spend a much smaller portion (about one-eighth) of their income on food than they did 45 years ago, Orshansky's assumption and multiplier of three used for calculating the poverty threshold also have become outdated.6
The fact that the poverty threshold does not take into account other living costs and social benefits also raises some concerns. Poor families spend a substantial portion of income on clothing, shelter, utilities and out-of-pocket medical expenses. The official poverty measures are likely underestimating the true poverty level because they do not reflect such costs. …