October 2, 2017

The U.S. Census Bureau recently released its annual Income and Poverty report, which includes detailed information on household income, unemployment, and poverty for 2016. Key findings include:

  • The official poverty rate in 2016 was 12.7%, down from 13.5% in 2015 — bringing it back to pre-recession poverty levels.
  • Median household income increased 3.2% to $59,039 in 2016, higher than at any point in history.
  • Real income increased for all groups, including non-Hispanic White, Black, and Hispanic-origin households

The poverty rate is a much reported number, but you may find that you have questions about how it is calculated, trends, how accurate it is, and how it relates to the budget.

How is poverty measured?

There are three concepts that relate to how we measure poverty: the poverty rate, poverty thresholds, and poverty guidelines. Each concept has different uses and is important for different reasons.

  • The Poverty Rate: Broadly speaking, the poverty rate is the percentage of people whose pre-tax income falls below a certain dollar amount. The poverty rate helps to track trends in poverty over time and across different demographic groups. For example, in 2016 the poverty rate was 12.7%.
  • The Poverty Thresholds: The poverty thresholds are dollar amounts that are used to define who is in poverty. Developed in the 1960s, the thresholds vary by family size and family composition, but not by geography, and are updated each year to reflect inflation. For example, in 2016, the poverty threshold for a single person under the age of 65 was $12,486.
  • Poverty Guidelines: Poverty guidelines are a simplified version of poverty thresholds. They define the range of financial eligibility for certain federal programs including the Supplemental Nutrition Assistance Program, the Children’s Health Insurance Program, and the Community Services Block Grant program.

Changing Trends in the Poverty Rate by Race and Age

In 2016, the poverty rate decreased by 0.8 percentage points from the previous year, falling to the same level as recorded in 2007 (just before the recession started). In 2016, most groups saw a decrease in poverty, with the Hispanic and Black populations seeing the largest decrease (approximately 2%).

While recent decreases in poverty are encouraging, the overall poverty rate has remained fairly constant since 1969, following a prolonged and drastic decrease in the previous decade.

While the percentage of children in poverty is currently similar to its level of 50 years ago, the poverty rate among the elderly has decreased significantly.

Another trend is that poverty rates among Black and Hispanic populations remain high compared to other groups.

Are our measures of poverty accurate?

Some observers believe that the current system for measuring poverty is flawed, arguing that:

  • The method is old, and does not reflect accurately the current cost of living and living standards.
  • The thresholds do not take into account geographical variations in cost of living.
  • The measures over-estimate resources because they do not take into account circumstances for people with additional expenses (for example, those who are disabled).
  • The measures under-estimate resources because they fail to take into account tax credits, housing subsidies, or other forms of assistance.

Are there other ways to measure poverty?

There are a number of other options to measure poverty. The most well-known is the Supplemental Poverty Measure (SPM). That measure helps to provide a deeper understanding of poverty and economic conditions by incorporating the effects of tax credits, housing subsidies, food assistance programs, work expenses, and medical costs.

Because the official measure does not account for taxes and non-cash transfers, one of the important aspects of the SPM is that it sheds light on the effect of government anti-poverty programs. It is also useful for considering the effects of “nondiscretionary” expenses such as those for health care.

In 2016, the SPM was higher than the official measure; it showed that 13.9% of people were poor, 1.2 percentage points above the official measure. Differences between the two measures are more significant for certain age groups. For example, the SPM shows lower poverty rates among children than the official measure does. This is due to differences in how the SPM measures resources and households.

Poverty and the federal budget

While there are many federal programs that benefit low income beneficiaries, a group of programs (called means-tested or need-tested) specifically target those with relatively low income or few assets. These programs include funding for Medicaid, Supplemental Security Income, child nutrition, housing assistance, and education (such as the Pell Grant Program).

CBO estimates that 19% of the federal budget is devoted to means-tested programs; many of those programs also receive funding from state governments. The majority of such spending on the federal level goes to health care programs — in particular, for Medicaid. Income security programs — such as Supplemental Security Income, the earned income and child tax credits, and family support and foster care — account for most of the rest of federal spending that is means-tested. Budget data show that spending for non-healthcare related means-tested programs rose as a result of the great recession, but is projected to decrease steadily as a share of gross domestic product as the recovery continues.

Related: What Are The Economic Costs of Child Poverty?

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