By Martha Heberlein

Let’s travel back in time to 1963 when the poverty threshold was originally developed by a woman at the Social Security Administration named Mollie Orshansky. To come up with the threshold, Mollie took the cost of an economy food plan and multiplied by three, as average spending on food was shown to account for about one-third of a household’s total budget. In 1969, this threshold was adopted as the federal government’s official definition of poverty. While the thresholds are adjusted each year to take into account changes in the Consumer Price Index (CPI), not much has changed since then.

Concerns about the adequacy of this measure have long been raised and various experimental measures have been released by those at the Census Bureau and elsewhere over the years. In 2009, a technical working group was formed and charged with developing a supplemental poverty measure (hereafter known as the fancy acronym – SPM). Earlier this week, the Census Bureau released a report  looking at this SPM in comparison with the official (Orshanksy) poverty threshold.

Now while the development of a more comprehensive measure of poverty is exciting to some people (and you can certainly count me in this group!), you may be asking, “what’s the difference?”

Well, if you look at the official definition of poverty, there were 46.6 million people living in poverty in 2010. Under the SPM, there were 49.1 million. While most groups have higher rates under the SPM, children actually see their rate of poverty decline from 22.5% to 18.2%. These differences arise largely as a result of the in-kind benefits and tax credits that are incorporated into the SPM (more about that later). For example, if you exclude the EITC from the calculation under the SPM, the rate of children living in poverty jumps up to 22.4%. If SNAP benefits are taken out, the rate of children in poverty rises to 21.2%. For children in families with very low income (less than 50% of the FPL), including the in-kind benefits reduces their poverty rate from 10.4% under the official metric to 5.3% under the SPM. For children at most other income levels (except those above 400% of the FPL), the rate of poverty is greater under the SPM definition.

Data such as these help to show that federal and state programs do their job by reducing the rate of poverty, in a way that the official measure cannot.

So why does the “official” measure and the SPM result in such varying assessments of poverty? It’s really in how they define the resources available to a family and the needs of those families, so it might help to think about the measure in those two parts.

First the resources (what the family has to meet their needs):

• The official measure defines “family” as all those living together who are related; for the SPM, the “family” is expanded to include any unrelated children who are cared for by the family (for example, foster children) and any other people living in the house. The rationale behind this is that income and resources available to the “family” are shared amongst this group.
•  The definitions of the resources that are available to these families also differ. Under the official measure, it includes only gross, pre-tax income; under the SPM, that definition is far more expansive. Here, the resources are equal to the sum of cash income, plus benefits the family can use to meet their basic needs. (“Basic needs” has another fancy acronym – FCSU, which stands for food, clothing, shelter, and utilities.) From that, the SPM subtracts, work expenses, out-of-pocket medical expenses, and taxes (and adds in any tax credits, such as the EITC).

Second, is the threshold – the measure of what families need to spend to meet the basic needs, with a little cushion:

• The poverty threshold under the SPM is based on the average FCSU expenditures for a family with two children at the 33^rd percentile (those whose spending is ranked 33^rd when compared against all households). This figure is then multiplied by 1.2 to account for additional basic needs. The official measure, as mentioned above, uses the minimum food diet from 1963 multiplied by three.

• The threshold under the official measure is adjusted by family size, composition (children vs. adults), and age (whether they’re 65 or older). The SPM adjusts for family size and composition, including an adjustment for single parents. It also adds in geographic adjustments for the cost of housing and looks at those who are renting vs. those who own a home (with and without a mortgage).

• To update the SPM, the Census Bureau uses a five-year average of FCSU expenditures, while the official measure uses the change in CPI from year to year. 

One parting note – the SPM is not designed to replace the official poverty measure and will not be used to determine eligibility for government programs. It is really designed as another measure to further enhance our understanding of poverty and the impact of those government programs. And on first blush, it certainly has.