oversight

Poverty Measurement: Issues in Revising and Updating the Official Definition

Published by the Government Accountability Office on 1997-04-15.

Below is a raw (and likely hideous) rendition of the original report. (PDF)

                 United States General Accounting Office

GAO              Report to the Ranking Minority Member,
                 Committee on Finance, U.S. Senate



April 1997
                 POVERTY
                 MEASUREMENT
                 Issues in Revising and
                 Updating the Official
                 Definition




GAO/HEHS-97-38
      United States
GAO   General Accounting Office
      Washington, D.C. 20548

      Health, Education, and
      Human Services Division

      B-275689

      April 15, 1997

      The Honorable Daniel Patrick Moynihan
      Ranking Minority Member
      Committee on Finance
      United States Senate

      Dear Senator Moynihan:

      The official U.S. poverty measure, as devised 3 decades ago, compares a
      family’s income with a level believed necessary to purchase a minimum
      standard of living. This measure is widely used as an indicator of the
      economic well-being of the population, for analysis of government
      policies, and in allocating benefits in social welfare programs, but it has
      not changed significantly since 1965. Over the past 2 decades, researchers
      have questioned the accuracy of its measurement of family resources for
      this purpose, as well as the appropriateness of the level of income used to
      define poverty. Two years ago, the National Academy of Science’s National
      Research Council (NRC) Panel on Poverty and Family Assistance issued a
      report, Measuring Poverty: A New Approach (1995), recommending a
      thorough review and updating of the definition of family income and its
      standard for comparison.

      This letter responds to a request from your office that we describe various
      issues involved in updating the federal government’s measure of poverty.
      As agreed with your office, in this report we identify (1) the issues
      associated with measuring a family’s economic well-being and setting a
      standard below which families are considered poor, (2) the suggestions
      experts have for addressing these issues, and (3) recent developments on
      these issues since the NRC panel issued its report in 1995. To do this work,
      we reviewed the panel’s report and recommendations and literature
      published since 1995, and we interviewed selected experts in the areas of
      poverty measurement and government statistics. These experts included 4
      academic researchers, 3 of whom were members of the panel; the panel’s
      study director; and 10 federal government officials who were either
      involved in the production of poverty statistics or were consumers of
      those statistics. As agreed with your office, we did not independently
      analyze the various technical approaches discussed, but, instead, are
      summarizing expert opinion on these issues. Previously, you asked for
      information about an experimental measure suggested as a replacement
      for the current measure, which uses the amount a family spends on goods
      and services, rather than its income, as the measure of a family’s




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                   well-being. In separate correspondence we provided a description of this
                   methodology.1 We conducted our work between June 1996 and
                   February 1997 in accordance with generally accepted government auditing
                   standards.


                   Defining a measure of the extent of poverty consists of two fundamental
Results in Brief   decisions: first, how to define a family’s resources and, second, how to
                   select a threshold, or standard, to represent a “minimally adequate
                   standard of living.” While the two decisions are distinct, the two
                   definitions must be consonant with each other so that the eventual
                   comparison of a family’s resources with a standard is considered fair.
                   Developing a useful and practical measure involves making a number of
                   choices that require balancing conceptual and practical considerations as
                   one addresses these two fundamental decisions.

                   The choices or issues to address in developing a routinely available,
                   reliable measure of a family’s economic resources include (1) whether to
                   directly measure a family’s spending on basic necessities or use income
                   and other economic resources as a proxy for their ability to buy these
                   necessities, (2) which economic resources should be considered available
                   for meeting a family’s basic needs, and (3) whether existing data sources
                   are adequate (for whichever resource definition is selected) or should be
                   modified to improve the reliability of poverty estimates.

                   Some issues in updating the family resource measure seem to be fairly
                   well resolved in the scientific community, while additional discussion and
                   research may be needed to reach consensus on some of the practical
                   details. Although assessing a family’s expenditures might provide a more
                   direct picture of its economic well-being than income, measuring income
                   is considered to be more feasible for obtaining routinely available poverty
                   statistics. The panel recommended that the official poverty measure
                   should define a family’s economic resources to include disposable money
                   income and near-money government benefits, although experts differ on
                   how to make some of the adjustments to cash income. Finally, an existing
                   survey of income is believed capable, with some modification, of providing
                   more accurate and comprehensive data on family economic resources
                   than the source currently used for poverty statistics.

                   Issues to address in developing a contemporary set of poverty thresholds
                   to represent a “minimally adequate standard of living” for families in

                   1
                    Alternative Poverty Measures (GAO/GGD-96-183R, Sept. 10, 1996).



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                       different circumstances include (1) what basis should be used to set the
                       level of the thresholds, (2) whether to accommodate changes over time in
                       standards of living as well as in prices, (3) how to quantify the differences
                       in needs between families of different size and composition, and
                       (4) whether and how to accommodate geographical differences in the cost
                       of living.

                       In contrast to defining family resources, additional research may lead to
                       consensus on some issues in selecting a set of poverty thresholds, but
                       other issues will require policy judgment. It is generally recognized that
                       determining a minimum standard of living unavoidably requires judgment,
                       although research can provide guidance to bracket a set of alternatives.
                       We found mixed views on whether the thresholds should be automatically
                       updated for change in family spending patterns as well as for change in
                       prices. The panel proposed a statistical formula derived from the literature
                       to develop thresholds for different family sizes, but lacking an objective
                       way to measure the difference in needs between families, left setting the
                       formula’s exact terms to policy judgment. Finally, the experts we
                       interviewed agreed with the panel that geographic price differences were
                       appropriate to incorporate in the thresholds, but they were uncertain
                       about whether existing methods were technically adequate to do so.

                       The Office of Management and Budget (OMB) has not yet begun a formal
                       review of the poverty measure as the NRC panel recommended, but it plans
                       to create a working group soon with the Bureau of Labor Statistics (BLS),
                       the Bureau of the Census, and other interested agencies to explore general
                       issues in measuring income and poverty and consider alternative measures
                       to be developed and tested. BLS and Census staff have initiated exploratory
                       work examining the current feasibility of implementing some of the
                       panel’s recommendations and modifying existing surveys. However, since
                       these agencies may have several data collection projects under way to
                       address issues other than poverty measurement, it is important that
                       proposed changes to ongoing surveys are carefully coordinated.



Background

The Official Poverty   Researchers have defined poverty in a variety of ways. It can be defined as
Measure                deprivation experienced in material terms, such as hunger or poor housing
                       quality; in economic terms, such as inadequate income; or in social terms,




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                            such as isolation from the community or feelings of low self-esteem. In
                            U.S. government statistics, poverty is defined as economic
                            deprivation—that is, lacking the economic resources to meet basic
                            needs—which can put families at high risk of material deprivation.
                            Although some might prefer to directly measure a family’s level of material
                            deprivation, this is impractical for an annual statistic because it is difficult
                            to objectively assess the quality of a family’s standard of living and then to
                            combine measures for various basic needs (such as food, shelter, and
                            clothing) into a single indicator that can be readily analyzed.

                            In 1969, the federal government officially adopted a poverty measure to
                            determine how many people across the country had incomes that were
                            inadequate to meet expenses for basic needs. The official measure
                            determines a family’s poverty status by comparing its resources, defined
                            as before-tax money income, with a standard income level, or “threshold,”
                            designated for that family’s size and composition. Information on income
                            received in the previous calendar year is collected from households by the
                            Bureau of the Census using the March Income Supplement of the Current
                            Population Survey (CPS), which is jointly sponsored by the Bureau of the
                            Census and BLS. Poverty statistics are published each year that allow
                            comparisons of economic well-being across families, population groups,
                            and regions and over time.

                            Thresholds for families of different size and composition were initially
                            defined as three times the cost of a minimum diet for a family of that size.
                            This approach was based on the finding of the U.S. Department of
                            Agriculture’s (USDA) 1955 Household Food Consumption Survey that, on
                            average, families of three or more persons spent one-third of their income
                            on food. Costs of a minimum diet for various family sizes were calculated
                            from USDA’s Economy Food Plan, the least costly food plan designed by
                            USDA.2 Since then, the poverty thresholds, of which there are currently 48,
                            have been updated annually, to adjust for price inflation nationwide using
                            the Consumer Price Index (CPI). In 1995—the year of the most recent
                            update—a family of four with cash income of less than $15,569 was
                            considered to be living in poverty.


Criticisms of the Poverty   The problems in the official measure of poverty are well documented. The
Measure                     value of the resources a family receives from noncash government
                            assistance programs like the Food Stamp Program was never included in

                            2
                             The original thresholds also considered sex of the family head and farm/nonfarm residence. In 1981,
                            these distinctions were eliminated; also, thresholds were extended up to families of nine or more
                            members.



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the formal definition of income, in part because the poverty measure was
developed before the advent of such programs. In considering the 1981
Commerce Department appropriations, the Senate Appropriations
Committee criticized the official poverty statistics for ignoring the “billions
of dollars of Government in-kind benefits, such as food stamps, housing
subsidies and medical care.” In the conference committee report, the
House and Senate conferees urged the Secretary of Commerce to
“continue research and testing of techniques for assigning monetary values
to in-kind benefits, and for calculating the impact of such benefits on
income and poverty estimates.”3 In the early 1980s, the Bureau of the
Census embarked upon research programs to examine the effects of both
government in-kind (noncash) benefits and taxes on poverty and other
measures of income distribution and has published the results since 1982.4

A 1990 review of concepts and approaches to measuring poverty
concluded that although the official poverty thresholds “represented a
reasonable approach, given existing data, . . . in the 1960s, the rather
minimal consumption data on which they were based became outdated
long ago.”5 For example, recent surveys find that food now represents
about one-seventh rather than one-third of average family expenditures. In
addition, the report noted that the methods used to update thresholds over
time and to adjust for differences in family size and type were questionable
and sometimes inconsistent.

In 1995, NRC’s Panel on Poverty and Family Assistance published an
in-depth review of the U.S. poverty measure addressing concepts,
measurement methods, and information needs. In addition to reviewing
the literature and numerous experts’ views, with help from federal
agencies, the panel conducted data analyses to assess the effects of its
recommended poverty concept and alternative measures on the numbers
and characteristics of persons in poverty. It concluded that the official
measure of poverty required revision and recommended that OMB adopt a
revised measure.6 Specifically, the panel recommended that new

3
U.S. Senate Report No. 949, 96th Congress, 2nd Session, Sept. 16, 1980, p. 33; and U.S. House of
Representatives Report No. 1472, 96th Congress, 2nd Session, Nov. 20, 1980, p. 9.
4
 See, for example, U.S. Department of Commerce, Bureau of the Census, Estimates of Poverty
Including the Value of Noncash Benefits: 1984, Technical Paper 55 (Washington, D.C.: U.S.
Government Printing Office (GPO), 1985); Measuring the Effect of Benefits and Taxes on Income and
Poverty: 1990, CPR P-60, #176-RD (Washington, D.C.: GPO, 1991); and Poverty in the United States:
1995, CPR P-60, #194 (Washington, D.C.: GPO, 1996).
5
 Patricia Ruggles, Drawing the Line: Alternative Poverty Measures and Their Implications for Public
Policy (Washington, D.C.: The Urban Institute Press, 1990), p. 164.
6
Constance F. Citro and Robert T. Michael, eds., Measuring Poverty: A New Approach (Washington,
D.C.: National Academy Press, 1995).


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                            thresholds be developed using actual consumer expenditure data to
                            represent a budget for basic needs and adjusting that budget to reflect the
                            needs of different family types and geographic differences in housing
                            costs. It recommended that family resources be redefined as the sum of
                            money income and near-money benefits, minus necessary expenses (such
                            as taxes), and thus the net amount available to buy the goods and services
                            in that poverty budget. (App. I reproduces the panel’s recommendations in
                            their entirety, including some issues not discussed in this report.)

                            More recently, a researcher criticized the reliance of the official poverty
                            measure on reported income, pointing out that some families are
                            misidentified as poor because they can increase their purchasing power by
                            either taking out loans or drawing on their savings to avoid material
                            deprivation.7 He and others have suggested that a family’s economic
                            well-being is more appropriately assessed with a measure of what it
                            spends on goods and services than with a measure of its income.


                            In developing, as well as evaluating, a poverty measure, certain
Issues in Assessing a       assumptions and choices must be made as one addresses two fundamental
Family’s Economic           decisions: first, how to define a family’s resources and, second, how to
Well-Being                  select a threshold, or standard, to represent a “minimally adequate
                            standard of living.” While the two decisions are distinct, the two
                            definitions must be consonant with each other so that the eventual
                            comparison of a family’s resources with a standard is considered fair. For
                            example, if government medical benefits are considered as part of a
                            family’s resources, then need for medical care should be considered in
                            defining the threshold. Although many technical choices must be made in
                            developing a valid and practical measure of family economic well-being
                            for the purposes of determining poverty status, we identified three key
                            choices to be made:

                        •   whether to directly measure a family’s spending on basic necessities or to
                            use income and other economic resources as a proxy for its ability to buy
                            those necessities,
                        •   which economic resources should be considered available for meeting a
                            family’s basic needs, and
                        •   whether existing data sources are adequate or should be modified to
                            improve the reliability of poverty estimates.


                            7
                             Nicholas Eberstadt, “A Poor Measurement,” Wall Street Journal, Vol. CCXXVII, No. 79 (Apr. 22, 1996),
                            p. A22, describes the research of Daniel T. Slesnick, including that reported in “Gaining Ground:
                            Poverty in the Postwar United States,” Journal of Political Economy, Vol. 101, No. 1 (1993), pp. 1-38.



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Should Well-being Be   Some poverty researchers have proposed examining families’
Measured Through       consumption of goods and services, rather than their income, to assess
Spending or Economic   more directly whether they are able to obtain a minimal standard of living.
                       Many on the NRC panel and some of the experts we interviewed were
Resources?             sympathetic with that view. The panel report noted that consumption is
                       more closely related conceptually to material deprivation—the core
                       concept underlying poverty—than is income. However, as we previously
                       noted, efforts to directly measure material deprivation meet with both
                       conceptual and practical difficulties. For example, some readily identified
                       deprivations, such as loss of housing, may not result from low income but
                       from imprudent spending or difficulties with one’s landlord. And defining
                       housing adequacy would require subjective judgments to select standards
                       for living space; cooking and plumbing facilities; and heating and, perhaps,
                       cooling needs. Even when expert-defined standards exist, assessing the
                       nutritional adequacy of a family’s diet, for example, would likely require a
                       costly expert assessment and the collection of detailed data on family
                       meals. Thus, measures of material deprivation are more often
                       recommended as a supplement to, than as a replacement, for data on
                       family resources.8

                       Instead, researchers who assess poverty status through consumption
                       typically use as their measure the dollar value of a household’s reported
                       spending (excluding taxes, gifts, and savings). The primary source for
                       these data is the Consumer Expenditure Survey (CEX), which collects
                       detailed data from households on their expenditures. Because we do not
                       know whether a family’s level of expenditures is sufficient to meet its
                       material needs, the dollar value of expenditures is really only a proxy for
                       the family’s level of material deprivation. However, some researchers still
                       prefer to look at what families spend rather than their income because
                       expenditures reflect what they were able to obtain with all their available
                       economic resources (including savings, assets, and credit), whereas
                       income is only a proxy for those resources.

                       There were mixed views in the field about whether income or
                       expenditures were more conceptually consistent with the intended uses of
                       the poverty measure. A perceived disadvantage of measuring family
                       well-being with income is that it tends to overstate the material
                       deprivation of families who experience a temporary economic setback and
                       of those low-income families who can use savings to maintain their level of
                       expenditures. But, precisely because families can smooth out the effects of

                       8
                        See Maya Federman and others, “What Does It Mean to Be Poor in America?” Monthly Labor Review
                       (May 1996) for an analysis of the living conditions and material deprivations reported by families with
                       incomes below the poverty level in nine national surveys.



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                            dips in income, expenditures tend to vary less among families and over
                            time than income does. Thus, for policy planning and evaluation purposes,
                            an expenditure-based measure might not be as sensitive an indicator of
                            families’ economic need as income would be. In contrast, a perceived
                            advantage of measuring poverty with family income is that much of
                            government antipoverty policy is expressed and analyzed in terms of
                            change in total or disposable family income. If poverty was measured on
                            the basis of expenditures, forecasting the effects of a change in economic
                            policy would require estimating how the expected change in family
                            income would affect a family’s expenditures, which are more difficult to
                            predict than income.

                            In the end, the NRC panel concluded, and experts we interviewed
                            concurred, that, at least at present, measuring poverty for official purposes
                            with expenditures was simply not feasible. The only available national
                            survey of household expenditures, the CEX, is not currently appropriate for
                            measuring poverty. Its sample size is too small to support the level of
                            detail on demographic subgroups that we now obtain from the income
                            surveys. Because the CEX is also expensive to administer and time
                            consuming to process, experts considered it prohibitively costly to greatly
                            expand the survey in its current form. Moreover, the panel reported
                            concerns about its design and response rate that raised questions for them
                            about its quality and appropriateness as a source for an
                            expenditures-based poverty measure. For example, because estimates of
                            different types of expenditures are currently derived from different
                            samples answering different surveys, the panel had questions about how
                            to obtain a comprehensive resource estimate for individual families. (App.
                            II provides more detail on this survey.) Nevertheless, because the
                            conceptual advantages of an expenditure measure of poverty have appeal,
                            the NRC panel also recommended research into improving available
                            expenditure data.


Which Economic              For more than a decade, critics have pointed out that the official poverty
Resources Should Be         measure’s use of gross cash income does not fully represent the resources
Counted as Available        families actually have available to meet basic needs. Specifically, gross
                            cash income excludes the value of in-kind benefits (like food stamps and
Toward Meeting a Family’s   public housing rental subsidies), which clearly increase the resources
Basic Needs?                available for basic needs, and fails to account for taxes and payment of
                            child support, which reduce available resources. Since the poverty
                            measure was developed, there have been significant increases in payroll
                            taxes and noncash government transfers for low-income families, as well



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as significant changes in income taxes, so these omissions have become
more problematic over time. The NRC panel believed that it was also
critical to take into account both in-kind benefits and tax payments in
order for the poverty measure to reflect the antipoverty effects of
government tax and assistance policies.

We found disagreement among the experts, however, about how far to go
in making these adjustments to cash income. The NRC panel recommended
adding the value of near-cash, nonmedical in-kind benefits (such as food
stamps, rental housing subsidies, school lunches, and home energy
assistance) to families’ gross money income and deducting income taxes,
Social Security taxes, payment of child support, out-of-pocket medical
expenditures, and child care and other work-related expenses (up to a
limit). One of the panel members dissented from the panel’s
recommendations on how to incorporate out-of-pocket medical expenses
and the value of public medical insurance (Medicaid and Medicare). Over
the years, efforts to find a generally acceptable method for valuing public
medical insurance have been unsuccessful, in part because the value of
insurance to recipients depends on whether they need to use it. In
addition, the dollar value of expenses covered by insurance can be so large
that it exceeds the amount of money a low-income family has available for
other needs, yet it cannot be spent on those needs. The panel’s suggestion
to deduct out-of-pocket medical expenses from income, instead of adding
the value of insurance coverage to income, avoids ascribing unrealistically
large amounts of resources to families who never made use of their
insurance and those whose insurance covered unusually high expenses.
But one panel member preferred to treat health care as another basic need
such as food, shelter, and clothing, and incorporate out-of-pocket medical
expenses as part of the family budget used to develop the thresholds.

Deciding which income adjustments to make also depends on how
accurate these adjustments can be made, at reasonable expense. The
Bureau of the Census, which has developed ways to approximate values
for food and housing assistance received and taxes paid for the families
that are surveyed to produce the poverty statistics, has used those figures
to calculate adjusted poverty rates on an experimental basis. However,
Bureau of the Census officials were not confident about the success of this
approach for some of the other recommended income adjustments
without expanding the CPS questionnaire. One expert stressed that if
estimates are used, it is important that they accurately reflect the real
choices made by lower-income families, because using average family
expenditure values could introduce bias into the poverty estimates.



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                            Another consideration raised by government officials in deciding whether
                            and how to change the way family economic resources are officially
                            defined for measuring poverty is the implications of such a change for
                            those government programs that link receipt of assistance to the official
                            poverty measure. Some programs determine eligibility, in part, by
                            comparing an applicant’s income with the poverty guidelines (which are
                            derived from the thresholds) or some multiple of them. Poverty guidelines
                            are issued annually by the U.S. Department of Health and Human Services
                            (HHS) by smoothing the official poverty thresholds for different size
                            families, increasing the levels for Alaska and Hawaii, and updating them
                            for price inflation.

                            To aid coordination of assistance programs, it is preferable for programs
                            to share a common definition of “income”; one way to simplify a program’s
                            application process is to limit its resource definition to gross monetary
                            income, based on readily obtained information. The panel believed that its
                            disposable income definition of family resources is a substantial
                            improvement over the current measure, and so encouraged consideration
                            of, but did not directly recommend, the use of this definition by programs
                            that currently compare gross income to the administrative poverty
                            guidelines. The panel recognized that, in programs that currently employ a
                            fairly crude measure of gross income, implementing its proposed resource
                            definition would require obtaining additional data on applicants’ in-kind
                            benefits and expenses. The panel also recognized that this could place a
                            burden on both clients and administrators. As an alternative, the panel
                            suggested that such programs could choose to use a simplified definition
                            of disposable income if the programs were willing to give up some
                            precision in determining eligibility status in order to minimize data burden.


Are Existing Data Sources   Part of the argument for using expenditures rather than income to
Adequate or Should They     measure a family’s economic well-being is the claim that many apparently
Be Improved?                low-income households underreport their income. This claim is primarily
                            based on the finding that in the single national household survey that
                            collects extensive data on family expenditures (the CEX), low-income
                            families report higher levels of expenditures than income.9 Although the
                            Bureau of the Census acknowledges some income underreporting in the
                            survey that is used to derive the official poverty statistics (the CPS), this
                            problem is understood to be somewhat greater in the CEX, which was not
                            specifically designed to measure income.

                            9
                             In comments on an earlier draft, BLS suggested another explanation for this anomaly: some families
                            that report low levels of income do so because of business income losses, yet they may have
                            expenditure levels more typical of higher-income consumers.



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                         The NRC panel recommended changing the data source for poverty
                         statistics from the CPS to the Survey of Income and Program Participation
                         (SIPP), which is also conducted by the Bureau of the Census. The CPS is
                         basically a labor force survey that is supplemented in March of each year
                         with a large battery of income questions used for measuring poverty. In
                         contrast, the SIPP was specially designed as a survey of household income
                         and, through both different questions and more frequent interviews,
                         provides more detailed and more accurate data on income than the CPS. In
                         addition, because the CPS survey does not collect certain data on expenses
                         (notably taxes, child care, and child support payments), estimates of the
                         likely value of such payments (that is, imputations) would be required to
                         make some of the recommended income adjustments. In the absence of
                         some of the information needed, the technical adequacy of the imputations
                         becomes increasingly important. Thus, many experts prefer the SIPP
                         because they believe it provides a more accurate report of income for
                         low-income people and provides most of the information required for the
                         additional income adjustments recommended by the panel. (App. II
                         provides more detail on these surveys.)

                         Currently, the decennial census, due to its broad coverage, is the primary
                         source of poverty rates for small areas such as cities and counties; yet, it
                         does not gather the detailed information that would be required to
                         implement the panel’s proposed resource definition. Officials of the
                         Bureau of the Census indicated that they have tested several limited
                         questions in the National Content Survey (the main content-testing vehicle
                         for the year 2000 census) on the receipt of in-kind benefits and payments
                         for child support but that no expansions are planned to the census
                         long-form questionnaire at this time. Thus, if the panel’s definition of
                         family resources was adopted, simulations would be required to produce
                         comparable estimates from the census. Differences between estimates
                         from the two surveys would likely result, but some comparability
                         problems exist currently between poverty estimates derived from the CPS
                         and the census.


Developments Since the   OMB has not yet acted on the panel’s recommendations to revise the
NRC Report               poverty measure but has discussed forming an interagency working group
                         with BLS, the Bureau of the Census, and other interested agencies to
                         explore general issues in measuring income and poverty and consider
                         alternative measures to be developed and tested. BLS has not yet begun a
                         comprehensive study of how to improve the CEX as a tool to measure
                         family resources for the purposes of determining their poverty status per



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se, as the panel recommended, but awaits direction from OMB and
additional funds to undertake such research. However, efforts are under
way to address some of this survey’s data quality problems that were
noted by the panel.

Staff of the Bureau of the Census, in a joint project with BLS staff, have
begun to examine the feasibility of implementing the panel’s
recommendations for a revised resource definition. After replicating the
panel’s procedures on the CPS, they concluded that “[t]he Panel’s
recommendation that resources be measured as disposable income places
much faith in the Census Bureau’s ability to expand data collection efforts
or do better modeling in an environment in which small annual changes in
poverty are perceived as important, since there is no national survey that
currently collects all the information necessary to portray a family’s
poverty status under the proposed measure.”10 Bureau of the Census staff
report that researchers within the Bureau are currently examining nearly
every dimension of the resource measure they employed (including the
valuation of housing subsidies and imputation of work, child care, and
out-of-pocket medical expenses) and are currently working on
implementing the resource measure in the SIPP instead of the CPS.11

In 1996, the sample design of the SIPP was changed in order to focus on
collecting longitudinal information on change in families’ income and
behavior over time. As a result, the SIPP is no longer able to provide
nationally representative estimates of family income each year. The
Bureau of the Census has developed a proposal to supplement the SIPP’s
new sample design to ensure this survey’s ability to provide national
estimates from year to year, comparable to current practice. However,
additional funds would be required for this new design. The Bureau is also
considering an alternative process for conducting the 2010 decennial
census that would involve collecting more detailed data from samples of
respondents throughout a 10-year period rather than only once every 10
years. However, it is not clear at this time whether this process will be
adopted and, if so, whether it would include the detailed information on
family resources and expenses needed to implement a disposable income
definition. Nevertheless, because government analysts are also just
beginning to recognize the implications for existing surveys of the new
reporting requirements of the 1996 welfare reform legislation, we believe it

10
  Thesia I. Garner and others, “Experimental Poverty Measurement for the 1990’s,” paper presented at
the Allied Social Science meetings (New Orleans, La.: Jan. 4, 1997), pp. 28-29.
11
 Kathleen Short, Martina Shea, and T.J. Eller, “Work Related Expenditures in a New Measure of
Poverty,” paper presented at the American Statistical Association meetings (Chicago, Ill.: Aug. 7, 1996).



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                             is critical that all proposed changes to the SIPP and census be carefully
                             coordinated.12


                             The current thresholds, or levels of income below which families of
Issues in Updating the       different sizes are considered poor, are based on family consumption
Poverty Thresholds           patterns of 4 decades ago and contain certain logical inconsistencies. As a
                             consequence, many experts believe that the thresholds should be revised,
                             but there is less consensus on how to do so. Although many technical
                             choices will need to be made in developing thresholds, we highlight four
                             key choices:

                         •   on what basis to set the level of a poverty threshold,
                         •   whether to accommodate changes over time in standards of living as well
                             as in prices,
                         •   how to quantify the difference in need among families of different size and
                             composition, and
                         •   whether and how to accommodate geographical differences in the cost of
                             living.


How Should an                The NRC panel concluded that “[a]lthough judgement enters into nearly all
Appropriate Threshold        aspects of the poverty measure . . . questions of the threshold concept and
Level Be Identified?         level are more inherently matters of judgment than other aspects of a
                             poverty measure.”13 Many of the experts we interviewed believed that
                             scientists should not set the poverty thresholds on their own but instead
                             should provide information about what it means to live at one income
                             level or another (in terms of expenditures or living conditions) and let
                             policymakers make the judgment. That is, the poverty level is viewed as
                             essentially an arbitrary point selected to represent what society defines as
                             constituting a “minimally adequate standard of living.” However, the panel
                             noted that several sources are available to inform the selection of a
                             particular income level: public opinion on what level of income is believed
                             necessary to “get along,” the distribution of family or household income,
                             and poverty budgets that estimate what income levels families need to
                             obtain basic necessities.

                             From 1946 to 1989, the Gallup poll has asked the following question: “What
                             is the smallest amount of money a family of four (husband, wife, and two

                             12
                               The Personal Responsibility and Work Opportunity Reconciliation Act of 1996, P.L. 104-193, was
                             signed into law on Aug. 22, 1996.
                             13
                               Citro and Michael, Measuring Poverty, p. 99.



                             Page 13                                          GAO/HEHS-97-38 Alternative Poverty Measures
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children) needs each week to get along in this community?” Denton
Vaughan’s 1993 analysis of these data found that the “get-along” amount,
while remaining below the median level of post-tax income for four-person
families, has increased over the years along with increases in median
family income. In contrast, the official poverty level, in constant dollars,
while similar to the “get-along” amount from 1947 to 1950, declined
sharply thereafter relative to both median income and the “get-along”
amount through the early 1970s. Vaughan concluded that the official
poverty threshold, by remaining fixed while real incomes and expectations
rose, “is no longer fully consistent with the standards of the American
people.”14 The NRC panel recommended against using these or similar poll
findings directly to set the poverty level because (1) responses are quite
variable, both over time and with the exact wording of the question and
(2) the knowledge that their response would be used to set the poverty
standard (and thus, perhaps, benefit levels) might affect the way in which
people respond. Indeed, a government official pointed out that precisely
because these surveys did not directly ask what level of resources families
should be guaranteed, these responses were not appropriate for setting
guidelines that would determine public assistance benefit levels. However,
opinion surveys were considered a valid way of tapping societal norms, so
experts suggested that their results be used as a confirmatory source to
help bracket figures derived from other sources.

Alternatively, poverty can be treated as a relative notion and the poor
defined as all those with income below a particular point on the
distribution of family or household income, such as the bottom fifth or
those below a point representing 50 percent of the median income. This
approach emphasizes the socially defined aspect of poverty, that “[t]hose
whose resources are significantly below the resources of other members
of society, even if they are able to eat and physically survive, are not able
to participate adequately in their relationships, and therefore are not able
to participate fully in society.”15 The NRC panel noted that relative
thresholds are easy to understand and calculate, are thus often used in
international comparisons of poverty, and are self-updating.

The panel also noted that some find the relative, arbitrary, and
self-updating features of relative thresholds to be drawbacks, instead. For
example, creating a purely relative poverty level (such as the bottom fifth


14
 Denton R. Vaughan, “Exploring the Use of the Public’s Views to Set Income Poverty Thresholds and
Adjust Them Over Time,” Social Security Bulletin, 56(2) (summer 1993), p. 37.
15
 Citro and Michael, Measuring Poverty, p. 125. See also Peter Townsend, The International Analysis of
Poverty (Hemel Hempstead, England: Harvester-Wheatsheaf, 1992).



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of the distribution) was unappealing because it would mean that the
statistic would no longer serve as a measure of progress against poverty.
Every year, no matter how much family incomes improved, one fifth of the
population would automatically be defined as poor. That problem can be
avoided, however, by defining the threshold as a percentage of median
income, which would not require a particular proportion of the population
to be labeled as poor.

The third major approach to setting a poverty threshold is to develop some
form of poverty budget based on expert judgment of families’ needs, the
observed expenditures of low-income families, or some combination of
the two. Poverty budgets based on expert judgments “have the appeal of
being based on the notion of minimum standards of physical needs,” but
“large elements of relativity and subjective judgment invariably enter the
process” because few established standards exist to guide the choice of
what to include in these budgets.16 The dilemma is that there are many
different ways to meet basic nutritional needs, for example, but to cost out
a poverty budget, the expert must select one nutritionally adequate diet
over another, which requires subjective judgment. Therefore, in practice,
experts must base their judgments on either their own beliefs about the
needs of low-income families or on observations of families’ spending
patterns.

The primary choice in developing a poverty budget is whether to specify in
detail a comprehensive poverty-level family budget or to cost out one or a
few categories of spending that can then be multiplied by a factor to
represent the rest of a family’s needs. Comprehensive detailed budgets
that attempt to mimic an entire family’s budget have the advantage of
appearing to be absolute rather than relative and provide a concrete
picture of what it would look and feel like to live at that particular income
level. But the experts also cautioned that a carefully detailed budget was
very burdensome to create and required a substantial number of
subjective judgments to justify (such as about what to include and at what
cost).

In contrast, a budget based on specifying one or two budget categories,
such as food, paired with a multiplier to cover the rest of a family’s needs,
is much simpler to create, but using a large multiplier can distort the
measure over time if it is not reassessed. This is precisely what happened
with the official poverty measure. The original formula (three times the
cost of a poverty food budget) no longer reflects contemporary family

16
  Citro and Michael, Measuring Poverty, p. 107.



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consumption patterns because costs of different budget categories have
changed differentially. Food costs have not risen as much as other costs
since the 1950s and standards of living have climbed, so food now
represents about one-seventh rather than one-third of family budgets.
Thus, a literal update of the original poverty measure would multiply the
current cost of a poverty food budget by seven rather than by three.

To ground the thresholds in families’ basic needs yet avoid the numerous
judgments involved in detailing a comprehensive budget, the NRC panel
recommended developing a budget for a four-person reference family for
the three categories of food, clothing, and shelter needs from actual family
expenditure data, along with a small multiplier to account for other needs.
It recommended basing the budget on a fixed proportion of the median
expenditures of two-adult, two-child families on these basic needs. It
further recommended that that proportion and the multiplier be selected
in concert with both expert judgment and public opinion concerning what
constitutes a minimally acceptable standard of living. As one expert
argued, since poverty is, in the end, a social construct, triangulation
between threshold levels generated through expert judgment, family
expenditure data, and public opinion polling is most likely to achieve the
desired consensus.

Another consideration in deciding whether and how to revise the poverty
thresholds is the implications of such a change for those government
programs that link receipt of assistance to the administrative poverty
guidelines. Some programs providing cash, in-kind benefits, or services to
low-income persons have as one of their income eligibility criteria that
their income be compared with the poverty guidelines or some multiple of
them; others have their own income standards. Currently, the
administrative poverty guidelines issued by HHS are a simplified version of
the poverty thresholds. If changes to the poverty thresholds were made,
OMB officials indicated that the administrative guidelines would not
necessarily be affected, unless a separate decision was made that revised
measures were more appropriate for those programs that use the
guidelines. Nevertheless, even changing the level of these poverty
guidelines would only have direct caseload and budget implications for
some programs, and only if the newly eligible people applied for services.
This is because only some of the programs that link eligibility to the
poverty guidelines are entitlement programs, that is, they must provide
benefits to all eligible applicants (for example, Medicaid, food stamps,
School Lunch, and School Breakfast). In others, legislatively set budget
limits determine how many eligible people who apply for services will



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                               actually be assisted and how many will be put on waiting lists. The NRC
                               panel recommended that program agencies carefully review the proposed
                               measure to determine whether it is appropriate as an eligibility standard
                               and whether it may need to be modified to better serve program
                               objectives. “Other considerations, such as funding constraints and
                               competing use of scarce tax dollars, may dictate that assistance program
                               benefits be set at a level below the statistical poverty thresholds.”17


Should the Thresholds          No matter what level is selected to represent the income needed to
Accommodate Changes            purchase a “minimum adequate standard of living,” some mechanism is
Over Time in Standards of      needed to maintain its currency over time. Currently, the thresholds are
                               updated annually for price inflation, but we found mixed views on whether
Living as Well as in Prices?   to also update them regularly for real changes in income levels or
                               expenditures. As noted before, by not reestimating the food share of
                               families’ budgets, the current method’s adjustment of the 1960s’ thresholds
                               for price inflation alone is believed to have misestimated the effect of
                               changes in the cost of living on the entire poverty budget.18

                               In support of routinely adjusting for changes in standards of living, the
                               panel noted that, historically, the levels of estimated minimum
                               standards—whether from expert budgets, programmatic standards, or
                               public opinion polling—have in fact risen over time with real (that is,
                               inflation-adjusted) growth in both income and consumer expenditures.
                               Additionally, of course, it would be administratively simpler to have a
                               routine mechanism for updating the thresholds, rather than wait until
                               serious concerns arise to instigate a major reevaluation and revision. To
                               keep the thresholds current, the NRC panel proposed updating them
                               annually to reflect changes in median family expenditures on food,
                               clothing, and shelter, with the amount averaged over the previous 3 years
                               to reduce the thresholds’ volatility over the cycles of the economy.

                               However, other experts were concerned that such annual adjustments
                               would turn the poverty measure into a relative standard that would no
                               longer provide a stable target for assessing government programs’
                               progress. Moreover, they were concerned that, in the short run, a relative
                               threshold tied to median income (or expenditures) could end up yielding
                               perverse results. For example, in an economic recession, as median


                               17
                                 Citro and Michael, Measuring Poverty, p. 320.
                               18
                                 There have been discussions about moving the CPI toward a more comprehensive measure of cost of
                               living, but it is too early to know whether such changes, if implemented, would address experts’
                               concerns.



                               Page 17                                           GAO/HEHS-97-38 Alternative Poverty Measures
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                      expenditures declined, so would the poverty threshold, potentially leading
                      to lower rather than higher poverty rates. NRC’s proposed updating
                      mechanism would not create a truly relative measure because the
                      threshold would be updated on the basis of families’ expenditures on food,
                      clothing, and shelter, which represent about 45 percent of total
                      expenditures for four-person households and do not tend to rise as fast as
                      income. Additionally, updating thresholds with median expenditures
                      averaged over the past 3 years would moderate the effect of year-to-year
                      economic fluctuations.


How Should the        Thresholds for different types of families were initially developed in an
Thresholds Reflect    effort to ensure the equivalence of the poverty level, conceptually, across
Differences in Need   families whose different circumstances implied different needs. The USDA
                      food plans were developed to reflect presumed differences in the food
Among Families of     needs of children and elderly individuals and those of nonelderly adults,
Different Size?       and the thresholds were developed to accommodate the economies of
                      scale enjoyed by larger families compared with smaller ones. However, it
                      was pointed out in 1990 that the initial equivalence scales (that is, the set
                      of differences between thresholds for different families) were not entirely
                      systematically based on variation in family consumption patterns and the
                      data that were used are now out of date. Additionally, the scales exhibit
                      some abnormalities in terms of natural economies of scale for different
                      family sizes.

                      Analysts want the thresholds to reflect only those sources of variation in
                      family needs for which empirical evidence of sizable systematic variation
                      exists. While elderly people do have different consumption patterns from
                      the nonelderly, evidence that the elderly have consistently lower income
                      needs is limited. Thus, the panel proposed dropping the distinction made
                      in the current method that provides a lower threshold for elderly
                      individuals living alone than that for nonelderly adults. In response to a
                      legal challenge, the distinction between female and male heads of
                      households was removed in 1981.

                      A large body of research has developed a variety of approaches for
                      creating equivalence scales to represent the variation in needs among
                      different family types. However, no single approach can be clearly
                      demonstrated to be more accurate than the others because of conceptual
                      difficulties in assessing whether two families of different types are equally
                      well-off. For example, although married couples with one child may spend
                      less on food outside the home than those without children, we have no



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                             measure of whether they are equally well-off. Thus, it is difficult to identify
                             the extent of economies of scale from simply comparing different families’
                             expenditure patterns. Moreover, in any consumption-based analysis, care
                             must be taken to avoid simply institutionalizing the status quo. If larger
                             families also tend to have lower incomes than smaller families, their
                             smaller per capita spending could represent the effects of their lower
                             income rather than lower needs.

                             In the absence of an objective procedure for determining the relative costs
                             of living for families of different sizes and composition, the NRC panel
                             proposed using a statistical formula to produce thresholds for various
                             combinations of adults and children so that the resultant equivalence scale
                             would at least be logical and internally consistent. The panel developed a
                             formula reflecting the general form of the varied formulas in the literature,
                             which treats the cost per child as a fixed proportion of the cost per
                             additional adult and provides for the scale economies of larger families. It
                             also made suggestions for the choice of the actual terms of the formula.
                             These choices need to be carefully examined because, by raising or
                             lowering the thresholds for different families from what they are now, the
                             demographic profile of people defined as living in poverty can be
                             substantially changed. For example, the panel found that applying one of
                             the proposed scales while retaining the current threshold for a two-adult,
                             two-child family would reduce the threshold for single people and thus
                             increase the poverty rate for that group.


Should Thresholds Reflect    Another important source of variation in family circumstances that affects
Geographic Differences in    the cost of meeting families’ basic needs is geography. It has long been
Cost of Living and, if so,   recognized that, “because some parts of the country have higher prices
                             than other parts, families that live in relatively expensive areas actually
How?                         may need higher incomes to maintain the same level of consumption as
                             lower income families in less expensive places.”19 The experts we
                             interviewed agreed that it was conceptually appropriate to adjust the
                             poverty thresholds to account for reliable differences across areas in the
                             cost of living but were unsure about whether adequately reliable data
                             would be available to do so. Another noted that such a change could cause
                             the Congress to consider the effects that such a change would have on the
                             distribution of funds to states and localities from federal programs whose
                             distribution formulas currently consider the differences in poverty rates
                             between areas.


                             19
                               Ruggles, Drawing the Line, p. 82.



                             Page 19                               GAO/HEHS-97-38 Alternative Poverty Measures
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Long-standing data and conceptual problems have prevented any
adjustment of poverty measures for geographic differences in cost of living
in the past and may continue to do so. Currently, no standard index of
comparative prices exists that reflects variation both within and across
regions and that covers all areas of the country. Previous efforts to
develop such an index have been stymied by lack of comprehensive and
comparable price data on samples large enough to provide reliable
estimates for areas within regions, as well as by the problem of how to
adjust for differences in local preferences or standards of living. That is,
while it seems reasonable to account for differences in types of
expenditures that are directly related to the climate, such as heating costs,
some other differences, such as food preferences, may also represent
differences in quality that are related to differences in income levels
between areas.

As an alternative to a comprehensive interarea price index, the NRC panel
proposed adjusting the poverty thresholds with an interarea price index
for shelter, because shelter costs show considerable geographical
variation and are a major component of consumer spending. The NRC panel
proposed developing an interarea housing cost index for metropolitan
areas of various population sizes within nine regions and developed an
experimental one themselves, using a modified version of the “fair market
rent” methodology developed by the U.S. Department of Housing and
Urban Development (HUD). To administer rental housing subsidies, HUD
sets “fair market rents” at the 45th percentile of the rent distributions in
metropolitan areas and nonmetropolitan counties for apartments that
meet specified quality standards and that are occupied by recent movers.20
 The NRC panel applied this methodology to rental housing data from the
1990 census to develop index values for metropolitan and nonmetropolitan
areas. We previously reported, however, that experts have criticized the
use of the HUD method for creating an interarea price index for adjusting
poverty thresholds because HUD’s estimates do not cover all types of rental
housing; fail to adjust for interarea differences in the quality of housing;
and, of course, capture only one component of the cost of living.21

While experts agreed it was rationally justified to adjust the thresholds for
geographic cost-of-living differences, we found little consensus on which
methodology would be both reasonably accurate and practical for creating

20
 The data sources for the HUD rent distributions include the decennial census, the American Housing
Survey, and local-area random digit dialing telephone surveys.
21
 Poverty Measurement: Adjusting for Geographic Cost-of-Living Difference (GAO/GGD-95-64, Mar. 9,
1995).



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                         and maintaining such an index. One concern is that no single data source,
                         including the decennial census, had both adequately reliable data on
                         metropolitan and nonmetropolitan areas within regions and the detail on
                         housing characteristics required to accurately distinguish differences in
                         prices from those in quality. Another concern is that housing prices may
                         differ as much within metropolitan areas as they do between them.
                         Moreover, because housing markets can experience large changes within a
                         10-year period, developing a method to produce reliable updates between
                         decennial censuses is important to ensure that the geographic adjustments
                         do not create more error than they were intended to reduce. However,
                         there was no consensus among the experts we interviewed that a solution
                         to the periodic updating problem had been found.


Developments Since the   Staff of BLS, in a joint project with the Bureau of the Census, have begun
NRC Report               exploratory work to examine the feasibility of implementing the panel’s
                         proposals for developing poverty thresholds should they be asked to do
                         so. Applying the panel’s recommended procedures to expenditure data
                         from 1987 to 1994, they found the thresholds seem to be stable over time.
                         However, in testing alternative valuation procedures, they found that
                         replacing a homeowner’s shelter costs with a rental equivalence value
                         produced higher thresholds and thus higher poverty rates.22 They report
                         that BLS researchers are currently examining (or planning to examine)
                         numerous issues related to the panel’s recommendations, including other
                         methods to estimate the service flows from owned housing and vehicles,
                         the impact of using data from consumer units reporting a full year of
                         expenditures, and which Consumer Price Index to use to update the basic
                         bundle of expenditures.

                         Professor David Betson, a member of the panel, has continued research on
                         the evidence underlying the current and alternative equivalence scales and
                         the consequences of alternative scales for who is considered poor. In a
                         preliminary summary, he reports that several different sets of scales are
                         consistent with the research on spending on children but yield quite
                         different results for single adults. Yet, with limited research evidence on
                         the scale relating one and two adults, additional research will be required
                         to choose among these scales.23



                         22
                           Thesia I. Garner and others, “Experimental Poverty Measurement.”
                         23
                          David M. Betson, “Is Everything Relative? The Role of Equivalence Scales in Poverty Measurement”
                         (unpublished paper, dated March 1996, available from the author at the Department of Economics,
                         University of Notre Dame, South Bend, Ind.).



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                   Additionally, BLS has been conducting some experimental work on
                   interarea indexes of price differences that may help resolve concerns
                   regarding the quality of available data for adjusting the thresholds for
                   geographical differences in the cost of living. Specifically, BLS is using
                   sophisticated statistical techniques to isolate the relative differences in
                   prices among geographic locations when, as is done in developing the CPI,
                   price information is collected for similar but not identical items across
                   localities. If these techniques are deemed successful, an interarea price
                   index could be developed and regularly updated from BLS’ existing data
                   sources. However, the CPI sample would still need to be increased to
                   produce estimates for rural areas.


                   Some of the issues involved in updating the poverty measure seem to be
Conclusions        fairly well resolved in the scientific community. Although a family’s
                   economic resources are only a proxy for its ability to obtain an adequate
                   standard of living, they clearly provide the most reliable data for assessing
                   and comparing families’ ability to meet their needs. Similarly, we found
                   agreement that the measure of a family’s economic resources should
                   include near-money government benefits and exclude income and payroll
                   taxes.

                   But additional discussion and research may be needed for experts to reach
                   consensus on other issues, such as how to incorporate government
                   medical assistance in a measure of disposable income and how to
                   accommodate geographical differences—and changes—in the cost of
                   living. Even though some adjustments are clearly preferable conceptually,
                   not all will be considered worth the effort and expense required.

                   Updating the thresholds, in contrast, poses issues for which scientific
                   evidence can only bracket a set of alternatives. Determining what
                   constitutes a minimally adequate standard of living is, in essence, a social
                   judgment that should reflect both societal and experts’ views. A broader
                   discussion would also seem to be appropriate for the issue of whether to
                   incorporate changes over time in standards of living as well as in prices.


                   The Bureau of the Census, within the U.S. Department of Commerce; BLS,
Agency Comments    within the Department of Labor; and the Office of Information and
and Our Response   Regulatory Affairs (OIRA), within OMB, provided written comments on a
                   draft of this report. Both OIRA and the Bureau of the Census stated that the
                   report was a good summary of the important issues regarding



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improvements in the official measure of poverty. But OIRA also believed
that in considering these issues, it should also be noted that broadening
the definition of income to include noncash transfers and the net effect of
direct taxes is bound to lower the measured poverty rate unless the
thresholds are adjusted to reflect a higher level of economic well-being.
Each agency provided some technical comments and corrections that we
have incorporated, as appropriate, throughout the text. BLS focused its
comments on issues surrounding the use of the CEX. BLS noted that it is
engaged in ongoing efforts to improve the CEX collection instrument to
ensure that its data are of the highest quality but thought criticism of it
was overstated in several places. We have changed the text to clarify that
these comments pertained to use of the survey to measure individual
families’ economic well-being, a purpose outside its current mission. The
agencies’ comments appear in appendixes III, IV, and V.


We are sending copies of this report to the Chairman, Senate Committee
on Finance; the Secretary of Commerce and the Director of the Bureau of
the Census; the Secretary of Labor and the Commissioner of BLS; the
Director of OMB and the Administrator of the Office of Information and
Regulatory Affairs; and interested congressional committees. We will also
make copies available to others on request.

If you have any questions concerning this report or need additional
information, please call me on (202) 512-7215 or Stephanie Shipman,
Assistant Director, on (202) 512-4041.

Sincerely yours,




Jane L. Ross
Director, Income Security Issues




Page 23                              GAO/HEHS-97-38 Alternative Poverty Measures
Contents



Letter                                                                      1


Appendix I                                                                 26

Recommendations of
the National Research
Council’s Panel on
Poverty and Family
Assistance
Appendix II                                                                33

The CEX, CPS, and
SIPP Surveys
Appendix III                                                               37

Comments From the
Bureau of Labor
Statistics
Appendix IV                                                                40

Comments From the
Bureau of the Census
Appendix V                                                                 42

Comments From the
Office of Information
and Regulatory Affairs
Bibliography                                                               44


Related GAO Products                                                       48




                         Page 24   GAO/HEHS-97-38 Alternative Poverty Measures
Contents




Abbreviations

BLS        Bureau of Labor Statistics
CEX        Consumer Expenditure Survey
CPI        Consumer Price Index
CPS        Current Population Survey
GPO        Government Printing Office
HHS        Department of Health and Human Services
HUD        Department of Housing and Urban Development
NRC        National Research Council
OIRA       Office of Information and Regulatory Affairs
OMB        Office of Management and Budget
SIPP       Survey of Income and Program Participation
USDA       Department of Agriculture
WIC        Special Supplemental Food Program for Women, Infants and
                Children


Page 25                           GAO/HEHS-97-38 Alternative Poverty Measures
Appendix I

Recommendations of the National Research
Council’s Panel on Poverty and Family
Assistance
                         Reprinted with permission from C. Citro and R. Michael, eds., Measuring
                         Poverty: A New Approach (Washington, D.C.: National Academy Press,
                         1995), pp. 4-15.


                         The official U.S. measure of poverty should be revised to reflect more
Recommendation 1.1       nearly the circumstances of the nation’s families and changes in them over
                         time. The revised measure should comprise a set of poverty thresholds and
                         a definition of family resources—for comparison with the thresholds to
                         determine who is in or out of poverty—that are consistent with each other
                         and otherwise statistically defensible. The concepts underlying both the
                         thresholds and the definition of family resources should be broadly
                         acceptable and understandable and operationally feasible.


                         On the basis of the criteria in Recommendation 1.1, the poverty measure
Recommendation 1.2       should have the following characteristics:

                     •   The poverty thresholds should represent a budget for food, clothing,
                         shelter (including utilities), and a small additional amount to allow for
                         other needs (e.g., household supplies, personal care, non-work-related
                         transportation).
                     •   A threshold for a reference family type should be developed using actual
                         consumer expenditure data and updated annually to reflect changes in
                         expenditures on food, clothing, and shelter over the previous 3 years.
                     •   The reference family threshold should be adjusted to reflect the needs of
                         different family types and to reflect geographic differences in housing
                         costs.
                     •   Family resources should be defined—consistent with the threshold
                         concept—as the sum of money income from all sources together with the
                         value of near-money benefits (e.g., food stamps) that are available to buy
                         goods and services in the budget, minus expenses that cannot be used to
                         buy these goods and services. Such expenses include income and payroll
                         taxes, child care and other work-related expenses, child support payments
                         to another household, and out-of-pocket medical care costs, including
                         health insurance premiums.


                         The U.S. Office of Management and Budget should adopt a revised poverty
Recommendation 1.3       measure as the official measure for use by the federal government.
                         Appropriate agencies, including the Bureau of the Census and the Bureau




                         Page 26                             GAO/HEHS-97-38 Alternative Poverty Measures
                     Appendix I
                     Recommendations of the National Research
                     Council’s Panel on Poverty and Family
                     Assistance




                     of Labor Statistics, should collaborate to produce the new thresholds each
                     year and to implement the revised definition of family resources.


                     The Statistical Policy Office of the U.S. Office of Management and Budget
Recommendation 1.4   should institute a regular review, on a 10-year cycle, of all aspects of the
                     poverty measure: reassessing the procedure for updating the thresholds,
                     the family resource definition, etc. When changes to the measure are
                     implemented on the basis of such a review, concurrent poverty statistics
                     series should be run under both the old and new measures to facilitate the
                     transition.


                     A poverty threshold with which to initiate a new series of official U.S.
Recommendation 2.1   poverty statistics should be derived from Consumer Expenditure Survey
                     data for a reference family of four persons (two adults and two children).
                     The procedure should be to specify a percentage of median annual
                     expenditures for such families on the sum of three basic goods and
                     services—food, clothing, and shelter (including utilities)—and apply a
                     specified multiplier to the corresponding dollar level so as to add a small
                     amount for other needs.


                     The new poverty threshold should be updated each year to reflect changes
Recommendation 2.2   in consumption of the basic goods and services contained in the poverty
                     budget: determine the dollar value that represents the designated
                     percentage of the median level of expenditures on the sum of food,
                     clothing, and shelter for two-adult/two-child families and apply the
                     designated multiplier. To smooth out year-to-year fluctuations and to lag
                     the adjustment to some extent, perform the calculations for each year by
                     averaging the most recent 3 years’ worth of data from the Consumer
                     Expenditure Survey, with the data for each of those years brought forward
                     to the current period by using the change in the Consumer Price Index.


                     When the new poverty threshold concept is first implemented and for
Recommendation 2.3   several years thereafter, the Census Bureau should produce a second set
                     of poverty rates for evaluation purposes by using the new thresholds
                     updated only for price changes (rather than for changes in consumption of
                     the basic goods and services in the poverty budget).




                     Page 27                                    GAO/HEHS-97-38 Alternative Poverty Measures
                     Appendix I
                     Recommendations of the National Research
                     Council’s Panel on Poverty and Family
                     Assistance




                     As part of implementing a new official U.S. poverty measure, the current
Recommendation 2.4   threshold level for the reference family of two adults and two children
                     ($14,228 in 1992 dollars) should be reevaluated and a new threshold level
                     established with which to initiate a new series of poverty statistics. That
                     reevaluation should take account of both the new threshold concept and
                     the real growth in consumption that has occurred since the official
                     threshold was first set 30 years ago.


                     The four-person (two adult/two child) poverty threshold should be
Recommendation 3.1   adjusted for other family types by means of an equivalence scale that
                     reflects differences in consumption by adults and children under 18 and
                     economies of scale for larger families. A scale that meets these criteria is
                     the following: children under 18 are treated as consuming 70 percent as
                     much as adults on average; economies of scale are computed by taking the
                     number of adult equivalents in the family (i.e., the number of adults plus
                     0.70 times the number of children), and then by raising this number to a
                     power of from 0.65 to 0.75.


                     The poverty thresholds should be adjusted for differences in the cost of
Recommendation 3.2   housing across geographic areas of the country. Available data from the
                     decennial census permit the development of a reasonable cost-of-housing
                     index for nine regions and, within each region, for several population size
                     categories of metropolitan areas. The index should be applied to the
                     housing portion of the poverty thresholds.


                     Appropriate agencies should conduct research to determine methods that
Recommendation 3.3   could be used to update the geographic housing cost component of the
                     poverty thresholds between the decennial censuses.


                     Appropriate agencies should conduct research to improve the estimation
Recommendation 3.4   of geographic cost-of-living differences in housing as well as other
                     components of the poverty budget. Agencies should consider
                     improvements to data series, such as the BLS area price indexes, that have
                     the potential to support improved estimates of cost-of-living differences.




                     Page 28                                    GAO/HEHS-97-38 Alternative Poverty Measures
                         Appendix I
                         Recommendations of the National Research
                         Council’s Panel on Poverty and Family
                         Assistance




                         In developing poverty statistics, any significant change in the definition of
Recommendation 4.1       family resources should be accompanied by a consistent adjustment of the
                         poverty thresholds.


                         The definition of family resources for comparison with the appropriate
Recommendation 4.2       poverty threshold should be disposable money and near-money income.
                         Specifically, resources should be calculated as follows:

                     •   estimate gross money income from all public and private sources for a
                         family or unrelated individual (which is income as defined in the current
                         measure);
                     •   add the value of near-money nonmedical in-kind benefits, such as food
                         stamps, subsidized housing, school lunches, and home energy assistance;
                     •   deduct out-of-pocket medical care expenditures, including health
                         insurance premiums;
                     •   deduct income taxes and Social Security payroll taxes;
                     •   for families in which there is no nonworking parent, deduct actual child
                         care costs, per week worked, not to exceed the earnings of the parent with
                         the lower earnings or a cap that is adjusted annually for inflation;
                     •   for each working adult, deduct a flat amount per week worked (adjusted
                         annually for inflation and not to exceed earnings) to account for
                         work-related transportation and miscellaneous expenses; and
                     •   deduct child support payments from the income of the payer.


                         Appropriate agencies should work to develop one or more “medical care
Recommendation 4.3       risk” indexes that measure the economic risk to families and individuals of
                         having no or inadequate health insurance coverage. However, such
                         indexes should be kept separate from the measure of economic poverty.


                         The Survey of Income and Program Participation should become the basis
Recommendation 5.1       of official U.S. income and poverty statistics in place of the March income
                         supplement to the Current Population Survey. Decisions about the SIPP
                         design and questionnaire should take account of the data requirements for
                         producing reliable time series of poverty statistics using the proposed
                         definition of family resources (money and near-money income minus
                         certain expenditures). Priority should be accorded to methodological
                         research for SIPP that is relevant for improved poverty measurement. A
                         particularly important problem to address is population undercoverage,
                         particularly of low-income minority groups.



                         Page 29                                    GAO/HEHS-97-38 Alternative Poverty Measures
                     Appendix I
                     Recommendations of the National Research
                     Council’s Panel on Poverty and Family
                     Assistance




                     To facilitate the transition to SIPP, the Census Bureau should produce
Recommendation 5.2   concurrent time series of poverty rates from both SIPP and the March CPS
                     by using the proposed revised threshold concept and updating procedure
                     and the proposed definition of family resources as disposable income. The
                     concurrent series should be developed starting with 1984, when SIPP was
                     first introduced.


                     The Census Bureau should routinely issue public-use files from both SIPP
Recommendation 5.3   and the March CPS that include the Bureau’s best estimate of disposable
                     income and its components (taxes, in-kind benefits, child care expenses,
                     etc.) so that researchers can obtain poverty rates consistent with the new
                     threshold concept from either survey.


                     Appropriate agencies should conduct research on methods to develop
Recommendation 5.4   poverty estimates from household surveys with limited income
                     information that are comparable to the estimates that would be obtained
                     from a fully implemented disposable income definition of family
                     resources.


                     Appropriate agencies should conduct research on methods to construct
Recommendation 5.5   small-area poverty estimates from the limited information in the decennial
                     census that are comparable with the estimates that would be obtained
                     under a fully implemented disposable income concept. In addition, serious
                     consideration should be given to adding one or two questions to the
                     decennial census to assist in the development of comparable estimates.


                     The Bureau of Labor Statistics should undertake a comprehensive review
Recommendation 5.6   of the Consumer Expenditure Survey to assess the costs and benefits of
                     changes to the survey design, questionnaire, sample size, and other
                     features that could improve the quality and usefulness of the data. The
                     review should consider ways to improve the CEX for the purpose of
                     developing poverty thresholds, for making it possible at a future date to
                     measure poverty on the basis of a consumption or expenditure concept of
                     family resources, and for other analytic purposes related to the
                     measurement of consumption, income, and savings.




                     Page 30                                    GAO/HEHS-97-38 Alternative Poverty Measures
                     Appendix I
                     Recommendations of the National Research
                     Council’s Panel on Poverty and Family
                     Assistance




                     The official poverty measure should continue to be derived on an annual
Recommendation 6.1   basis. Appropriate agencies should develop poverty measures for periods
                     that are shorter and longer than a year, with data from SIPP and the Panel
                     Study of Income Dynamics, for such purposes as program evaluation.
                     Such measures may require the inclusion of asset values in the family
                     resource definition.


                     The official measure of poverty should continue to use families and
Recommendation 6.2   unrelated individuals as the units of analysis for which thresholds are
                     defined and resources aggregated. The definition of “family” should be
                     broadened for purposes of poverty measurement to include cohabiting
                     couples.


                     Appropriate agencies should conduct research on the extent of resource
Recommendation 6.3   sharing among roommates and other household and family members to
                     determine if the definition of the unit of analysis for the poverty measure
                     should be modified in the future.


                     In addition to the basic poverty counts and ratios for the total population
Recommendation 6.4   and groups—the number and proportion of poor people—the official
                     poverty series should provide statistics on the average income and
                     distribution of income for the poor. The count and other statistics should
                     also be published for poverty measures in which family resources are
                     defined net of government taxes and transfers, such as a measure that
                     defines income in before-tax terms, a measure that excludes means-tested
                     government benefits from income, and a measure that excludes all
                     government benefits from income. Such measures can help assess the
                     effects of government taxes and transfers on poverty.


                     Agencies responsible for federal assistance programs that use the poverty
Recommendation 7.1   guidelines derived from the official poverty thresholds (or a multiple) to
                     determine eligibility for benefits and services should consider the use of
                     the panel’s proposed measure. In their assessment, agencies should
                     determine whether it may be necessary to modify the measure—for
                     example, through a simpler definition of family resources or by linking
                     eligibility less closely to the poverty thresholds because of possible
                     budgetary constraints—to better serve program objectives.




                     Page 31                                    GAO/HEHS-97-38 Alternative Poverty Measures
                     Appendix I
                     Recommendations of the National Research
                     Council’s Panel on Poverty and Family
                     Assistance




                     The states should consider linking their need standard for the Aid to
Recommendation 8.1   Families With Dependent Children program to the panel’s proposed
                     poverty measure and whether it may be necessary to modify this measure
                     to better serve program objectives.




                     Page 32                                    GAO/HEHS-97-38 Alternative Poverty Measures
Appendix II

The CEX, CPS, and SIPP Surveys


              The following is a summary of the description of the three surveys in Citro
              and Michael, Measuring Poverty, pp. 391-420.

              The Consumer Expenditure Survey (CEX) is a continuing survey of
              households that primarily collects data on consumer expenditures through
              a quarterly Interview Survey and a 2-week Diary Survey about the U.S.
              civilian noninstitutionalized population, including military in civilian
              housing, students in college housing, and group homes. The CEX is
              sponsored by the Bureau of Labor Statistics (BLS) and conducted by the
              Bureau of the Census. The Interview Survey sample size is 6,800 consumer
              units interviewed in-person at 3-month intervals for 5 quarters; each
              month, one-fifth of the sample is new, and one-fifth is completing its final
              interview. The Diary Survey sample is an additional 6,000 consumer units,
              each of which records daily expenditures for 2 consecutive weeks.
              Consumer units are defined as a single person living alone or sharing a
              household with others but financially independent; family members
              sharing a household; two or more persons living together who share
              responsibility for two of three major expenses—food, housing, and other
              expenses. The respondent is any member of the consumer unit aged 16 or
              older with most knowledge of the unit’s finances. BLS makes use of data
              from both the Interview and Diary Surveys to develop a total picture of
              expenditures. Researchers who analyze expenditure data typically work
              with the Interview Survey, from which users can construct annual data on
              expenditures and income.

              The CEX Interview Survey includes data on demographic characteristics
              and work experience and job characteristics in the prior 12 months of unit
              members aged 14 and over. Detailed expenditure data are collected
              quarterly on rent, housing assistance subsidies, mortgage and home equity
              loan payments, and other home ownership costs such as condominium
              fees; expenses of telephone, utilities, and fuels, and home and household
              equipment maintenance and repair; purchases of household equipment,
              appliances, furnishings, clothing, watches, and jewelry; lease payments for
              and purchases of vehicles; vehicle maintenance, repair, parts and
              accessories, licensing, and other operating expenses; premiums for health
              and other insurance; coverage by Medicaid and Medicare; medical and
              health expenditures and reimbursements; educational expenses; trips and
              their expenses; and gifts for people outside the family. Global or usual
              expenditures are obtained for books, subscriptions, membership, and
              entertainment expenses; expenses for supermarkets and food stores,
              liquor, tobacco, and food away from home; food stamp benefits and other
              meals provided free; selected services and goods (for example,



              Page 33                              GAO/HEHS-97-38 Alternative Poverty Measures
Appendix II
The CEX, CPS, and SIPP Surveys




laundromats); miscellaneous expenses (including babysitting); and
occupational expenses and contributions (including alimony, child
support, and charitable contributions). An inventory is taken of major
household appliances and features of the dwelling unit, including
descriptions of each owned property, and the rental value of the owned
home. Data are obtained on financial assets, including credit balances and
finance charges paid, and changes in financial assets. Data on income for
the prior 12 months are obtained on wages, self-employment, Social
Security, and Supplemental Security Income for each member aged 14 and
over; and, for the household as a whole, on workers’ compensation and
veterans’ benefits, public assistance, and interest and dividend income;
income from trusts, pensions, and annuities; net income or loss from
roomers or rental property; and income from alimony, child support, or
other contributions from persons outside the consumer unit. Data are also
obtained on taxes paid through paycheck deductions, additional federal
and state income taxes, property and other taxes, and other taxes not
reported elsewhere (sales taxes are included in the component
expenditures).

The Current Population Survey (CPS) is a monthly survey of households
that collects primarily labor force data about the U.S. civilian
noninstitutionalized population. BLS sponsors the core of the CPS, which is
designed to provide monthly unemployment rates. The Bureau of the
Census sponsors the March Income Supplement to the CPS, in which
respondents are asked supplementary questions about money income
received in the previous calendar year. The CPS sample size is about 60,000
households; households are considered in the sample for 4 months, out of
the sample for 8 months, and in again for 4 months. The sample is updated
continually to account for new residential construction and periodically to
incorporate information from the decennial census. The March CPS
supplement includes military people living in civilian housing and an
additional sample of 2,500 housing units that contained at least one adult
of Hispanic origin as of the preceding November interview.

The core CPS interview elicits information on demographic characteristics
and labor force participation (such as hours worked, reason for part-time
work, industry, and occupation in which subjects worked in the prior
week, usual hours, and usual earnings). The March CPS supplement
includes information on labor force participation and job history in the
prior calendar year for each household member aged 15 or older; private
and public health insurance coverage; annual income for each household
member aged 15 or older by detailed source—about 30 types of regular



Page 34                             GAO/HEHS-97-38 Alternative Poverty Measures
                          Appendix II
                          The CEX, CPS, and SIPP Surveys




                          cash income, including wages and salaries; net self-employment income;
                          Social Security and other government program cash benefits; child
                          support; alimony; private, government, and military pensions; retirement
                          and insurance payments; money from relatives or friends; interest and
                          dividend income; and Pell grants and other educational financial aid; and
                          participation in noncash benefits programs, such as energy assistance,
                          food stamps, public housing, and School Lunch.

                          The Survey of Income and Program Participation (SIPP) is a continuing
                          panel survey conducted and sponsored by the Bureau of the Census. The
                          sample covers the U.S. civilian noninstitutionalized population and
                          members of the armed forces living off post or with their families on post.
                          The reporting unit is the household, and the respondents are household
                          members aged 15 or older. Up until 1996, each sample of households
                          (panel) was interviewed every 4 months for 32 months, and the sample
                          size varied from 12,500 to 23,500 households per panel; new panels were
                          introduced every year. Under the SIPP’s current design, a new panel will be
                          introduced every 4 years (that is, with no overlap across panels) and
                          interviewed every 4 months for 48 months, and the panel size will be
                          increased to 37,000 households.

                          The current SIPP core interview elicits the following: demographic
                          characteristics; monthly information on labor force participation, job
                          characteristics, and earnings; monthly information on public and private
                          health insurance coverage; detailed monthly information on sources and
                          amounts of income from public and private transfer payments and on
                          noncash benefits; and information for the 4-month period on income from
                          assets. In total, about 65 separate sources of cash income are identified for
                          each household member aged 15 or over, together with benefits from 7
                          in-kind programs; for a few sources, annual amounts are obtained in
                          special interview supplements called “topical modules.” Data are also
                          collected, once or twice in each panel, on a wide range of subjects,
                          including annual income and income taxes; educational financing and
                          enrollment; eligibility for selected programs (including expenditures on
                          shelter, out-of-pocket medical care costs, and dependent care); housing
                          costs and financing; individual retirement accounts; and wealth (assets,
                          including property, and liabilities).


Comparisons Between the   The SIPP obtains somewhat more detailed information on topics relevant to
CPS and SIPP              measuring poverty than the CPS does. For example, the March CPS
                          supplement asks no questions about any type of tax payment. The Bureau



                          Page 35                              GAO/HEHS-97-38 Alternative Poverty Measures
Appendix II
The CEX, CPS, and SIPP Surveys




of the Census, instead, models federal and state income taxes and payroll
taxes of each household for its experimental poverty estimates. The SIPP
includes twice for each panel questions about tax payments for the
previous year. However, its questions on such topics as tax liability and
adjusted gross income have high nonresponse rates, primarily because
only one-third of respondents use their tax forms to answer the questions,
as they are asked to do. In addition, the CPS asks whether a household
received benefits from the School Lunch Program or housing assistance
the previous year but asks about the amounts received only for food
stamps and energy assistance. The SIPP, on the other hand, obtains
monthly information on the number of people who receive and benefit
amounts for food stamps and the Special Supplemental Food Program for
Women, Infants and Children (WIC); information every 4 months about
energy assistance and the School Lunch and Breakfast programs; and
information twice a panel about public housing and subsidized housing.
Finally, whereas the CPS does not ask questions about expenses for
medical care or child care, the SIPP obtains detailed information on these at
least once each panel.

The National Research Council (NRC) panel, in reviewing research on data
quality in the two surveys, found that the SIPP is favored on some
indicators, such as item nonresponse rates and amounts of Social Security
and other income types collected (in comparison with independent
estimates), while the March CPS supplement fares better on household
nonresponse rates and the amount of wages and salaries collected. Citro
and Michael report that “[o]verall, however, SIPP appears to be doing a
better job at measuring income, particularly at the lower end of the
income distribution. SIPP’s more frequent interviews and detailed probing
for receipt of different income sources appear to be identifying more
recipients of many income types than the March CPS, although the dollar
amounts reported are not always more complete in SIPP than in the CPS.”24
As a consequence, SIPP poverty estimates are consistently several points
below those from the March CPS. In addition, the panel and Bureau of the
Census officials we interviewed felt that the SIPP, because of its focus on
income and program participation, was in a better position than the CPS to
provide both higher quality information on income and the other
information on family expenditures needed for a revised definition of
family resources for measuring poverty.




24
  Citro and Michael, Measuring Poverty, p. 411.



Page 36                                           GAO/HEHS-97-38 Alternative Poverty Measures
Appendix III

Comments From the Bureau of Labor
Statistics




Now on p. 11.




Now on p. 8.




Now on p. 10.




                Page 37   GAO/HEHS-97-38 Alternative Poverty Measures
                Appendix III
                Comments From the Bureau of Labor
                Statistics




Now on p. 10.




                Page 38                             GAO/HEHS-97-38 Alternative Poverty Measures
                    Appendix III
                    Comments From the Bureau of Labor
                    Statistics




Now on p. 21.




Now on p. 21.


Added to app. II.




                    Page 39                             GAO/HEHS-97-38 Alternative Poverty Measures
Appendix IV

Comments From the Bureau of the Census




Now on p. 1.


Now on p. 3.



Now on p. 4.



Now on p. 6.


Now on p. 11.




                Page 40    GAO/HEHS-97-38 Alternative Poverty Measures
                Appendix IV
                Comments From the Bureau of the Census




Now on p. 11.




Now on p. 11.



Now on p. 12.




Now on p. 12.



Now on p. 12.


Now on p. 21.




Now on p. 21.




                Page 41                                  GAO/HEHS-97-38 Alternative Poverty Measures
Appendix V

Comments From the Office of Information
and Regulatory Affairs




Now on pp. 3 and 11.




Now on pp. 10 and 16.




                        Page 42   GAO/HEHS-97-38 Alternative Poverty Measures
                Appendix V
                Comments From the Office of Information
                and Regulatory Affairs




Now on p. 23.

Now on p. 17.




                Page 43                                   GAO/HEHS-97-38 Alternative Poverty Measures
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Page 46        GAO/HEHS-97-38 Alternative Poverty Measures
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Page 47        GAO/HEHS-97-38 Alternative Poverty Measures
Related GAO Products


              Alternative Poverty Measures (GAO/GGD-96-183R, Sept. 10, 1996).

              Poverty Measurement: Adjusting for Geographic Cost-of-Living Difference
              (GAO/GGD-95-64, Mar. 9, 1995).

              Federal Aid: Revising Poverty Statistics Affects Fairness of Allocation
              Formulas (GAO/HEHS-94-165, May 20, 1994).

              Poverty Trends, 1980-88: Changes in Family Composition and Income
              Sources Among the Poor (GAO/PEMD-92-34, Sept. 10, 1992).

              Noncash Benefits: Methodological Review of Experimental Valuation
              Methods Indicates Many Problems Remain (GAO/PEMD-87-23, Sept. 30, 1987).




(973823)      Page 48                              GAO/HEHS-97-38 Alternative Poverty Measures
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