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This paper was prepared for the first meeting of the United Nations Expert Group on Household Income Statistics, Canberra, Australia, December 2-4, 1996. This paper reports the general results of research undertaken by Census Bureau staff. The views expressed are attributable to the author and do not necessarily reflect the views of the Census Bureau or the U.S. government. The author would like to acknowledge and thank the following people for their comments and suggestions: Nancy Gordon, Charles Nelson, and Edward Welniak; they bear no responsibility for any errors that remain.
I. BACKGROUND -- THE OFFICIAL DEFINITION
The United States Census Bureau has been compiling income estimates annually since 1947. These estimates are from the Current Population Survey (CPS), a nationwide random sample of households, whose primary purpose is to collect labor force information monthly. In March of each year (April prior to 1956), data are collected on the household's income for the previous calendar year.
The official definition of income is not specified in law or regulation. In effect, what is included in income depends on the questions asked. As survey researchers know, the more questions one asks about income by source, the better able respondents are to identify all income.[citation?] Initially, there were only two questions asked of each adult:/1/ (1) "How much did ... earn in wages and salaries in 1947?" and (2) "How much income from all sources did ... receive in 1947?". In 1949, self-employment income was asked separately and in 1950 farm and nonfarm self- employment income was asked separately. In 1962, the Census Bureau began systematically assigning values to missing income items (based on reported characteristics using the "hot deck" method). In March 1967, the number of income questions was again expanded, from four to eight categories. These additional items dealt with Social Security, interest, dividends, and rent. In 1968, interest, dividends, rents, and royalties were combined into one question and separate questions were added on public assistance and on unemployment and workers' compensation. In 1975, the number of income questions increased from eight to eleven through addition of a question on the Supplemental Security Income program, a question on Aid to Families with Dependent Children and general assistance, and private and government pension income. A major change took place in 1980 -- the questionnaire was expanded to identify over 50 sources of income and recording of up to 27 different income amounts, including receipt of numerous noncash benefits, such as food stamps (coupons used as cash for qualified food purchases), and housing assistance. Except for minor wording changes, those questions are still in use today. The survey was converted to a computer-assisted interviewing mode in 1994.
The data on income thus cover money income received (exclusive of certain money receipts such as capital gains) before payments for items such as personal income taxes, Social Security payroll taxes, and union dues. Money income does not reflect the fact that some families receive part of their income in the form of noncash benefits, such as food stamps, health benefits, rent-free or subsidized housing, and goods produced and consumed on the farm. In addition, money income does not reflect the fact that noncash benefits are also received by some as fringe benefits, e.g. the use of company cars, and full or partial payments by business for retirement programs, medical insurance, and educational expenses.
Moreover, for many different reasons, there is a tendency in household surveys for respondents to underreport their income. From an analysis of independently derived income estimates, it has been determined that income earned from wages or salaries is much better reported than other sources of income and is nearly equal to independent estimates of aggregate earnings (Coder and Scoon-Rogers, 1996). Among the least well-reported sources are interest and dividends.
The current official U.S. definition of income is based on questions which are asked of each person in the CPS sample household 15 years old and over./2/ These questions cover the amount of money income received in the preceding calendar year from each of the following sources: Earnings from longest job (or self-employment) and other employment earnings can be classified into three types: (1) Money wage or salary income is the total received for work performed as an employee during the income year. This category includes wages, salary, Armed Forces pay, commissions, tips, piece-rate payments, and cash bonuses earned, before deductions were made for items such as taxes, bonds, pensions, and union dues; (2) Net income from nonfarm self-employment is the net money income (gross receipts minus expenses) from one's own business, professional enterprise, or partnership. Gross receipts include the value of all goods sold and services rendered. Expenses include items such as costs of goods purchased, rent, heat, light, power, depreciation charges, wages and salaries paid, business taxes (not personal income taxes);/3/ and (3) Net income from farm self-employment is the net money income (gross receipts minus operating expenses) from the operation of a farm by a person on their own account, as an owner, renter, or sharecropper. Gross receipts include the value of all products sold, payments from government farm programs, money received from the rental of farm equipment to others, rent received from farm property if payment is made based on a percent of crops produced and incidental receipts from the sale of items such as wood, sand, and gravel. Operating expenses include items such as the cost of feed, fertilizer, seed, and other farming supplies; cash wages paid to farmhands; depreciation charges; cash rent; interest on farm mortgages; farm building repairs; and farm taxes (not State and Federal personal income taxes). The value of fuel, food, or other farm products used for family living is not included as part of net income./4/
Unemployment compensation includes payments received from government unemployment agencies or private companies during periods of unemployment and any strike benefits received from union funds.
Workers' compensation includes payments received periodically from public or private insurance companies for injuries received at work.
Social Security includes Social Security (old age) pensions and survivors' benefits and permanent disability insurance payments made by the Social Security Administration prior to deductions for medical insurance. Medicare reimbursements for health services are not included.
Supplemental Security Income includes payments made by Federal, State, and local welfare agencies to low income persons who are 65 years old or over, blind, or disabled.
Public assistance or welfare payments include public assistance payments made to low-income persons, such as Aid to Families With Dependent Children, Temporary Assistance for Needy Families, and general assistance.
Veterans' payments include payments made periodically by the Department of Veterans Affairs to disabled members of the Armed Forces or to survivors of deceased veterans for education and on-the-job training, and means-tested assistance to veterans.
Survivor benefits include payments from survivors' or widows' pensions, estates, trusts, annuities, or any other types of survivor benefits. Payments can be reported from ten different sources: private companies or unions; Federal government (Civil Service); military; state or local governments; railroad retirement; workers' compensation; "Black lung" (miners') payments; estates and trusts; annuities or paid-up insurance policies; and other survivor payments.
Disability benefits include payments received as a result of a health problem or disability other than those from Social Security. Payments can be reported from ten sources: workers' compensation; companies or unions; Federal government (Civil Service); military; state or local governments; railroad retirement; accident or disability insurance; Black lung payments; State temporary sickness; or other disability payments.
Pension or retirement income includes payments reported from eight sources: companies or unions; Federal government (Civil Service); military; state or local governments; railroad retirement; annuities or paid-up insurance policies; withdrawals from special (tax-favored) retirement accounts such as Individual Retirement Account (IRA's); or other retirement income.
Interest income includes payments received (or credited to bank accounts), from bonds, treasury notes, IRA's, certificates of deposit, interest-bearing savings and checking accounts, and all other investments that pay interest.
Dividends include income received from stock holdings and mutual fund shares. Capital gains from the sale of stock holdings are not included as income.
Rents, royalties, and estates and trusts include the net income from the rental of a house, store, or other property, receipts from boarders or lodgers, net royalty income, and periodic payments from estate or trust funds.
Educational assistance includes Pell Grants; other government educational assistance; any scholarships or grants; or financial assistance from employers, friends, or relatives not residing in the student's household.
Child support includes all periodic payments made by parents for the support of children, even if these payments are made through a state or local government office./5/
Alimony includes all periodic payments to ex-spouses. One-time property settlements are not included.
Financial assistance from outside of the household includes periodic payments from nonhousehold members. Gifts or sporadic assistance is not included.
Other income includes all other regularly received payments that are not included elsewhere on the questionnaire. Some examples are State programs such as foster child payments, military family allotments, and income received from foreign government pensions.
Receipts not counted as income include capital gains received (or losses incurred) from the sale of property, including stocks, bonds, a house, or a car (unless the person was engaged in the business of selling such property, in which case the net proceeds would be counted as income from self-employment); withdrawals of bank deposits; money borrowed; tax refunds; gifts; and lump-sum inheritances or insurance payments.
II. ALTERNATIVE MEASURES OF INCOME
Because money income is but one measure of economic well-being, the Census Bureau also reports on 14 other definitions of income (the series begins in 1979). While not exhaustive, they do illustrate different perspectives on what could be included.
Table 12 is a reproduction of a table from U.S. Bureau of the Census (1996a) illustrating the different distributions of income that these definitions imply./7/
These alternatives definitions illustrate the dilemma faced by official statisticians when presenting income statistics. Different definitions serve different purposes. Money income has its uses -- it represents command over the resources available to purchase the necessities of life in the open market, including meeting the obligations of citizenship (taxes). Definition 4 probably comes closest to measuring what resources would be available in the absence of government, except that some benefits paid for or provided by employers are not included and others are mandated by the government, some benefits are not provided by employers because they are provided by the government, and work effort is presumably reduced by the existence of a tax on earnings. Definition 8 is closest to after-tax income. Disposable income tries to take account of the effect of taxes and transfers on the household's command of resources -- definition 14 probably comes closest to that approach. Finally, in definition 15 there is an attempt to include the income equivalent value of owning one's own home in that such an asset reduces the need for additional expenditures on shelter.
III. CONSIDERATIONS IN MEASURING POVERTY/8/
Formal measurement of poverty in the United States is less than three decades old. Not since the adoption of official poverty thresholds by the Federal government in the late 1960's has there been such a great interest as now in examining and possibly respecifying the thresholds and the income compared with them. The official poverty thresholds in use today by the U.S. Bureau of the Census to measure poverty have their basis in work by Orshansky (1963, 1965). Orshansky started with a set of minimally adequate food budgets calculated for families of various sizes and composition by the U.S. Department of Agriculture for 1961. Based on evidence from the 1955 Household Food Consumption Survey, she determined that expenditures on food represented about one-third of after-tax income for the typical family. This relationship yielded a "multiplier" of three, that is, the minimally adequate food budgets were multiplied by a factor of three to obtain 124 poverty thresholds that differed by family size, number of children, age and sex of head, and farm or nonfarm residence (ad hoc adjustments were made for families of size one and two).
In 1969, the U.S. Bureau of the Budget (now the U.S. Office of Management and Budget -- OMB) adopted the Orshansky measure using pre-tax income as the standard government poverty measure, mandating that thresholds be adjusted for inflation using the Consumer Price Index (CPI) published by the U.S. Bureau of Labor Statistics. With only minor modifications since then (mostly reducing the number of categories, now 48), the Orshansky thresholds still form the basis for the official poverty statistics./9/
When considering the adequacy of the official poverty thresholds, it is critical to realize that one cannot separate the issue of income measurement from poverty definition. When one defines the level of resources needed to be non-poor, one must also determine which resources are to be counted. Therefore, the discussion below covers both income measurement and poverty definition issues; income measurement is discussed first./10/
Whatever poverty thresholds are chosen should be the result of a carefully specified process that cannot be changed arbitrarily from year-to-year, and should be capable of being updated at reasonable intervals as the economic circumstances of the society and the behavior of its demographic and economic components change.
A. DEFINING INCOME FOR MEASURING POVERTY
The key measurement issues are three -- valuing and counting noncash income, subtracting taxes, and reducing survey underreporting and nonsampling errors. Also of interest is whether to continue to publish official estimates based on the CPS or switch to a newer survey designed to collect better income information, the Survey of Income and Program Participation (SIPP).
A.1. Noncash income
The issue of valuing noncash income spans the income distribu- tion. A more comprehensive income measure such as definition 14 above would place a value not only on noncash government trans- fers, such as food stamps, which typically go to low-income families, but also on elements of nonwage compensation (from employer-paid health insurance to company cars) that typically go to earners at all income levels or only at high levels. The noncash income of U.S. families has grown substantially in the past 25 years. In the 1990's, over half of government transfer spending for the poor is in the form of noncash benefits (U.S. Bureau of the Census, 1996a), whereas the only noncash benefit program that predated the 1960's "War on Poverty" was subsidized (public) housing. This growth of benefits to the poor has been paralleled by a growth of nonwage compensation to wage earners, induced in part by tax laws exempting such compensation from income and payroll taxes, and by growth in health benefits for the elderly. By 1990, employer costs for nonwage compensation had grown to over one-quarter (27.6 percent) of total compensation costs, up from 19.4 percent in 1966./11/ Further, nearly two-thirds of households own homes, which provide them with additional noncash income in the form of housing services.
Of key concern to understanding the well-being of U.S. households is the valuation of medical benefits, both the government health programs--Medicare (medical aid to the elderly and severely disabled) and Medicaid (medical aid to a portion of the poor)--and employer-paid health insurance. The valuation of medical benefits is particularly difficult since coverage of high medical expenses for people who are sick does nothing to improve their poverty status (although the benefits clearly make them better off). Even if one imputes the value of an equivalent insurance policy to program participants, these benefits (high in market value due to large medical costs for the fraction who do get sick), and cannot be used by the recipients to meet other needs of daily living. Accordingly, the Census Bureau developed a not- altogether-satisfactory method, termed fungible value (described in footnote 6), to avoid giving too high a value of these benefits to those toward the low end of the income scale.
A.2. Disposable income
Even though Orshansky's original calculations were based on post-tax income, poverty has always been calculated for the official statistics using pre-tax income because of the limited informa- tion collected on the CPS. After-tax income is a better measure of the ability to meet the daily necessities of life than is money income. Also important, in calculating disposable income though, is to address the advisability of deducting work expenses for wage earners such as child care, uniforms, and transportation costs.
A.3. Other issues
Research matching household survey responses to federal income tax returns and comparing them with national income accounts has revealed substantial areas where the level and receipt of certain income sources is underreported (see Coder and Scoon-Rogers, 1996). Attempts to reduce underreporting were made by revising the language used in the CPS questionnaire when the SIPP was launched. This was only partially successful, and response errors remain.
While current procedures of the Census Bureau reweight the data for full interview nonresponse and impute appropriate income responses for individual unanswered questions (item nonresponse), these corrections are insufficient to fully resolve the problem. Procedures to enhance the data through microsimulation or other means are being investigated, along with continued improvement in imputation for nonresponse.
In most societies, "underground," "nonmarket," or "black market" income from legal or illegal activities is typically poorly reported by household respondents to government surveys (or not even collected) and consequently is substantially omitted from official income statistics. This income ranges from barter transactions to home production (e.g., home gardens) to illegal income. Researchers are a long way from measuring this activity accurately, however, so including this income in official statis- tics would be quite difficult.
It has been suggested that consumption is a better measure of well-being than income (see Cutler and Katz, 1991, and Slesnick, 1993). If a family can maintain its consumption through judicious use of assets when income falls, is it truly poor? Unfortunately, it is difficult to collect accurate annual data on consumption or even expenditures. Further, consumption reflects choices on how to allocate resources, rather than need. Nevertheless, fuller investigation of a consumption-based measure would be useful.
A final issue of income measurement is the choice of surveys to use. As mentioned briefly above, the SIPP questionnaire design, as crafted to reduce income underreporting, does succeed for almost all income sources./12/ Yet, when compared with the CPS, it has historically had several drawbacks--a smaller sample size (one-third as large) and necessarily slower data release because of its much greater complexity. These defects are compensated for by the SIPP having greater income detail, both in number of sources and in time segments (by having monthly as opposed to the CPS's annual statistics,) and lower underreporting. The new version of the SIPP, as implemented in 1996, increased the sample size substantially (to 36,700 households) and oversampled low-income households. National estimates from the SIPP will then be comparable to or better than (in terms of sampling error) those from the CPS (reduced to 47,000 households but inefficient for national estimates because it uses a state-based design). One drawback for obtaining a consistent time series of annual national income or poverty estimates from the SIPP, though, will be sample attrition and time-in-sample bias as current plans call for only one SIPP panel to be in the field during any one four-year period. The CPS sample is constantly refreshed by new households.
While the timeliness issue may never be resolved fully in SIPP's favor, the SIPP can provide a preliminary estimate on much the same schedule as the CPS. Still, it is desirable to view the surveys complementarily. If modeling using administrative records can correct underreporting errors in both surveys, they would then give the same aggregate statistics. The CPS could be used for a quick snapshot, consistent with data collected since 1947 (the SIPP began in 1983), while the SIPP would be used for more detailed estimates, for subannual and multiyear estimates, and for understanding other dimensions of poverty (assets, disability, gross flows, and other dynamic aspects)./13/
B. SETTING THRESHOLDS TO DEFINE POVERTY
With an absolute measure of poverty, there are key decisions to be made about determining the appropriate level for poverty thresholds. The key research issues addressed here are minimal consumption levels for specific commodities, ways of correcting for differences in family size and composition, and ways of correcting for cost-of-living differences across time and among areas.
B.1. Minimal consumption standards
Minimal consumption standards for all necessary commodities could in theory be established, perhaps by an expert panel, but doing so would raise difficult ethical issues about which commodities to include (e.g., is a telephone a necessity?). One alternative is to define minimal consumption standards for a limited number of necessities (e.g. food, clothing, shelter) and obtain a poverty threshold by using a multiplier to account for necessities not measured./14/
B.2. Equivalence scales
The relationship embodied in the current U.S. poverty thresholds among families of different sizes (termed the equivalence scale) is supposed to represent the different relative costs of support- ing those families at a minimally adequate levels. In fact, the relationship is based solely on the relative food costs as they existed in 1961 and include some unfortunate anomalies (see Ruggles, 1990, pp. 64-68). While it is possible to develop minimal budgets for every type and size of family separately and thus eliminate the need for equivalence scales entirely, in practice it is difficult to do so. No one scale now exists that is generally accepted. Issues in developing equivalence scales include which distinctions in family circumstances (e.g. owner/renter) should lead to different thresholds, how resources are shared within the family or household, and whether a more useful basis for determining poverty is the household (those living in one housing unit) rather than the family (those in one household related by blood or marriage). See Betson (1996) for a further discussion of these issues.
B.3. Cost-of-living differences
In as large and diverse a country as the U.S., there are signifi- cant differences in the cost-of-living among localities. Unfortunately, there are no currently available data upon which to estimate interarea price differences reliably. (See Kokoski et al., 1992, and Moulton, 1992, for some work in this area.)
A related price issue is how to adjust for inflation. The U.S. poverty thresholds now use the CPI to adjust thresholds over time. If the measurement of minimal consumption is used as the basis for new thresholds, presumably this should be the basis every year, with components, prices, and multipliers reestimated as often. Clearly this is not practical. A reasonable compro- mise might be to respecify and reestimate the minimal consumption bundle at prespecified intervals as market baskets become outdat- ed, say every ten years, and use the CPI for interim adjustments. The market basket used for the CPI itself is typically reviewed and respecified once every ten years or so./15/
C. THE COMMITTEE ON NATIONAL STATISTICS REPORT
The National Academy of Sciences Committee on National Statistics (CNStat) released a report in May 1995 entitled Measuring Poverty: A New Approach (Citro and Michael, 1995). In that report, the committee recommended that the federal government redefine the way it measures poverty. OMB has requested that experts from the Census Bureau and other agencies examine technical methods for doing so.
The key changes they recommend are threefold: change the income measure, change the poverty thresholds, and change the survey used. To change the income measure from the current money income definition, they propose to add noncash benefits, subtract taxes, subtract work expenses, subtract child care expenses, subtract child support paid, and subtract medical out-of-pocket expenses (MOOP). The poverty thresholds are to be based on food, clothing, shelter, and "a little bit more" (75-83% of median expenditures on these items multiplied by 1.15-1.25), a new equivalence scale, an allowance for geographic variation, and updated annually based on growth in median expenditures. Finally, the panel recommended that the government use the SIPP instead of the March CPS to collect the basic income and poverty-related data.
Among the technical issues to be resolved before implementing such a new measure are the following:
Even if these technical issues can be resolved expeditiously, there are still policy issues that must be debated and resolved before a new measure is adopted. These include:
Open debate of these issues seems the most likely way to resolve them, potentially leading to a new way of measuring poverty that OMB would approve and that other policy makers would accept as an improved methodology for measuring poverty in the United States.
APPENDIX -- FAMILIES, HOUSEHOLDS, AND UNRELATED INDIVIDUALS
It should be noted that although the income statistics refer to receipts during the preceding calendar year, the demographic characteristics, such as age, labor force status, and family or household composition are as of the survey date. The income of the family or household as measured by the CPS does not include amounts received by persons who were members during all or part of the income year if these persons no longer resided in the family or household at the time of interview. However, income data are collected for persons who are current residents but did not reside in the household during the income year. The term "family" refers to a group of two or more persons related by birth, marriage, or adoption who reside together; all such persons are considered as members of one family. For example, if the son of the person who maintains the household and the son's wife are members of the household, they are treated as members of the parent's family. Every family must include a reference person. Two or more people living in the same household who are related to one another, but are not related to the householder, form an "unrelated subfamily." Households consist of all persons who occupy a housing unit. A house, an apartment or other group of rooms, or a single room is regarded as a housing unit when it is occupied or intended for occupancy as separate living quarters: the occupants do not live and eat with any other persons in the structure and there is direct access from the outside or through a common hall. A householder is the person in whose name the unit is rented or owned. A household includes the related family members and all the unrelated persons, if any, such as lodgers, foster children, wards, or employees who share the housing unit. A person living alone in a housing unit or a group of unrelated persons sharing a housing unit as partners is also counted as a household. The count of households excludes group quarters. The term "unrelated individuals" refers to persons 15 years and over (other than inmates of institutions) who are not living with any relatives. An unrelated individual may either: constitute a one-person household; be part of a household including one or more other families or unrelated individuals; or reside in group quarters, such as a rooming house. Thus, a widow living by herself or with one or more other persons not related to her, a lodger not related to the householder or to anyone else in the household, and a servant living in an employer's household with no relatives are examples of unrelated individuals.
Betson, David M. 1996. "'Is Everything Relative?' The Role of Equivalence Scales in Poverty Measurement." University of Notre Dame. March.
Citro, Constance F. and Graham Kalton (eds.). 1993. The Future of the Survey of Income and Program Participation. Washington, DC: National Academy Press.
Citro, Constance F. And Robert T. Michael (eds.). 1995. Measuring Poverty: A New Approach. Washington, DC: National Academy Press.
Coder, John and Lydia Scoon-Rogers, 1996, "Evaluating the Quality of Income Data Collected in the Annual Supplement to the March Current Population Survey and the Survey of Income and Program Participation," Working Paper, U.S. Bureau of the Census, July.
Cutler, David M. and Lawrence F. Katz. 1991. "Macroeconomic Performance and the Disadvantaged." Brookings Papers on Economic Activity No. 2, pp. 1-74.
Fisher, Gordon M. 1992. "The Development and History of the Poverty Thresholds." Social Security Bulletin vol. 55 No. 4 (Winter), pp. 3-14.
Kokoski, Mary, Patrick Cardiff, and Brent Moulton. 1992. "Interarea Price Indices for Consumer Goods and Services: An Hedonic Approach Using CPI Data." U.S. Bureau of Labor Statis- tics, January.
Moulton, Brent R. 1992. "Interarea Indexes of the Cost of Shelter Using Hedonic Quality Adjustment Techniques." U.S. Bureau of Labor Statistics, October.
Orshansky, Mollie. 1963. "Children of the Poor." Social Security Bulletin v. 26 (July), pp. 3-13.
Orshansky, Mollie. 1965. "Counting the Poor." Social Security Bulletin v. 28 (January), pp. 3-29.
Ruggles, Patricia. 1990. Drawing the Line. Washington, D.C.: Urban Institute Press.
Slesnick, Daniel T. 1992. "Gaining Ground: Poverty in the Postwar United States." Journal of Political Economy Vol. 101 No. 1 (February), pp. 1-38.
U.S. Bureau of the Census, Money Income in the United States: 1995, Current Population Reports P60-193, Washington, DC: US Government Printing Office, September 1996[a].
U.S. Bureau of the Census, Poverty in the United States: 1995, Current Population Reports P60-194, Washington, DC: US Government Printing Office, September 1996[b].
Watts, Harold W. 1993. "A Review of Alternative Budget-Based Expenditure Norms." Paper prepared for the Panel on Poverty Measurement and Family Assistance of the Committee on National Statistics, revised (May).
Welniak, Edward J., Jr. 1990. "Effects of the March Current Population Survey's New Processing System on Estimates of Income and Poverty," paper prepared for American Statistical Association annual meeting, August.
Weinberg, Daniel H. Forthcoming. "Measuring Poverty: Issues and Approaches", in Inner City Poverty (edited by C. Michael Henry, Yale University Press).