The Poverty Threshold Versus the Poverty Rate

Subject: Economics
Pages: 2
Words: 478
Reading time:
2 min

Poverty thresholds are used for determining the poverty status by comparing a set of dollar values to annual income, varying by the householder’s age, number of children, and family size. If a family’s threshold value is more than its before-tax income, the family and all its individuals are considered to live in poverty. In the case of evaluating single people’s status, the comparison of an individual’s poverty threshold to his or her income determines the poverty status.

While evaluating economic conditions, policymakers use some socioeconomic indicators, including the poverty rate. It is used to measure the proportion of the population whose income decreased below their poverty threshold. These estimates are further used by the state and federal governments for the appropriate allocation of funds to the local communities. In turn, the local communities use the poverty rate estimates to identify the number of families or individuals eligible for different programs.

Today, the official poverty threshold measure is still based on food costs data in 1961 and food consumption data in 1955, indexed to inflation. Therefore, it does not include and evaluate the effects of such factors as noncash benefits, tax credits (like the Earned Income Tax Credit), and taxes on the population with low income. The non-cash benefits include health insurance or SNAP (provided both publicly and privately). Moreover, the influence of medical and housing expenses is not taken into account either. The Census Bureau defines “income,” encompassing not only wages, but also worker’s compensation, unemployment compensation, public assistance, outside the household assistance, Social Security, child support and alimony, Supplemental Security Income, and educational assistance. Besides, veteran’s payments, income from trusts and estates, survivor benefits, royalties, retirement income or pension, rents, interest, and dividends are considered as well.

Nevertheless, not all the sources of de facto income are measured. Whereas capital losses and gains are not that crucial for low-income populations, food stamps, Medicaid, housing assistance, and similar in-kind benefits matter but do not count either. Only pre-tax is counted, hence, the refundable credits such as Earned Income Tax Credit and the Child Tax Credit do not figure in. As a result, under the current definition of poverty, it cannot be decreased, for example, utilizing the EITC rate increase.

Society needs another poverty measure that would reflect the required assessment of meeting basic needs. One of the variants could be disregarding the current poverty measure and working out two new ones instead. One measure would assess the median U.S. family income in, for instance, 2015 and adjust it for inflation over the whole period. The second measure would initially have the same level but aligned annually based on the average income for 5 years. Such an approach would allow avoiding the poverty line drifting away from the real living standards over time.