How is the Poverty Threshold Calculated

Poverty Threshold Calculation Model

function calculatePovertyThreshold() { var baseFoodCost = parseFloat(document.getElementById('baseFoodCost').value); var numAdults = parseInt(document.getElementById('numAdults').value); var numChildren = parseInt(document.getElementById('numChildren').value); var povertyMultiplier = parseFloat(document.getElementById('povertyMultiplier').value); var economiesOfScaleFactor = parseFloat(document.getElementById('economiesOfScaleFactor').value); var resultDiv = document.getElementById('result'); resultDiv.style.color = '#333'; // Reset color for new calculations // Input validation if (isNaN(baseFoodCost) || baseFoodCost < 0) { resultDiv.innerHTML = 'Please enter a valid Base Annual Food Cost (non-negative number).'; resultDiv.style.color = 'red'; return; } if (isNaN(numAdults) || numAdults < 0) { resultDiv.innerHTML = 'Please enter a valid Number of Adults (non-negative integer).'; resultDiv.style.color = 'red'; return; } if (isNaN(numChildren) || numChildren < 0) { resultDiv.innerHTML = 'Please enter a valid Number of Children (non-negative integer).'; resultDiv.style.color = 'red'; return; } if (isNaN(povertyMultiplier) || povertyMultiplier <= 0) { resultDiv.innerHTML = 'Please enter a valid Poverty Multiplier (positive number).'; resultDiv.style.color = 'red'; return; } if (isNaN(economiesOfScaleFactor) || economiesOfScaleFactor 1) { resultDiv.innerHTML = 'Please enter a valid Economies of Scale Factor (between 0 and 1).'; resultDiv.style.color = 'red'; return; } var totalPeople = numAdults + numChildren; var totalFoodBudget; if (totalPeople <= 0) { totalFoodBudget = 0; resultDiv.innerHTML = 'The calculated Poverty Threshold for 0 people is: $0.00'; return; } else if (totalPeople == 1) { totalFoodBudget = baseFoodCost; } else { // Base food cost for the first person + adjusted cost for additional people totalFoodBudget = baseFoodCost + ((totalPeople – 1) * baseFoodCost * economiesOfScaleFactor); } var calculatedPovertyThreshold = totalFoodBudget * povertyMultiplier; resultDiv.innerHTML = 'The calculated Poverty Threshold for a household of ' + totalPeople + ' people is: $' + calculatedPovertyThreshold.toFixed(2) + ''; }

Understanding how the poverty threshold is calculated is crucial for grasping its implications for social policy, economic analysis, and individual well-being. In the United States, the official poverty thresholds are a set of dollar amounts used to determine who is considered poor. These thresholds are updated annually by the U.S. Census Bureau, but their underlying methodology has roots in the mid-20th century.

The Orshansky Method: A Historical Foundation

The current official poverty measure in the U.S. is largely based on the work of Mollie Orshansky, an economist at the Social Security Administration, who developed the thresholds in the early 1960s. Her method was groundbreaking for its time and provided a quantifiable way to define poverty.

Orshansky's core idea was based on the cost of food. She recognized that food was a necessity and that low-income families spent a significant portion of their income on it. Her methodology involved two key steps:

1. Determining a Minimum Food Budget: She used the U.S. Department of Agriculture's (USDA) "economy food plan" (later renamed the "thrifty food plan"), which outlined a nutritionally adequate diet at a minimal cost. She calculated the annual cost of this food plan for various family sizes and compositions.
2. Applying a Multiplier: Based on a 1955 USDA survey that showed families of three or more people spent approximately one-third of their after-tax income on food, Orshansky multiplied the cost of the economy food plan by three. For two-person families and single individuals, she used slightly different multipliers to account for different spending patterns.

Thus, the fundamental calculation was: (Cost of a Minimum Food Diet) × 3 = Poverty Threshold.

Adjustments for Family Size and Composition

Orshansky's original thresholds were not a single number but a matrix of 124 different thresholds, varying by family size, number of children, and age of the householder. This acknowledged that larger families generally need more income, but also benefit from economies of scale (e.g., shared housing costs, bulk purchasing). For instance, two people living together don't necessarily need twice the income of one person living alone.

Over time, these 124 thresholds were simplified to a set of 48 thresholds, and then further streamlined. Today, the Census Bureau publishes a simplified matrix of thresholds based on the number of people in the family and the number of related children under 18.

Our calculator above models this by allowing you to input a "Base Annual Food Cost (for 1 person)" and then applies an "Economies of Scale Factor" for additional family members before multiplying by the "Poverty Multiplier."

Annual Updates for Inflation

While the methodology for calculating the poverty threshold has remained largely unchanged since the 1960s, the dollar amounts are updated annually. The U.S. Census Bureau adjusts the thresholds each year to reflect changes in the Consumer Price Index for All Urban Consumers (CPI-U). This ensures that the thresholds maintain their purchasing power over time, even as prices for goods and services fluctuate.

Limitations and Criticisms of the Official Poverty Measure

Despite its historical significance, the official poverty measure has faced considerable criticism for its limitations:

• Outdated Food Budget Proportion: The "multiplier of three" is based on spending patterns from the 1950s. Today, food typically accounts for a much smaller share of a family's budget, while housing, healthcare, and childcare costs have risen significantly. Using the original multiplier may underestimate the true cost of living.
• No Geographic Variation: The thresholds are uniform across the contiguous United States, failing to account for vast differences in the cost of living between different regions, states, and urban vs. rural areas.
• Excludes Non-Cash Benefits: The measure only considers pre-tax cash income and does not account for non-cash government benefits (like food stamps, housing subsidies, or Medicaid) or tax credits (like the Earned Income Tax Credit), which can significantly impact a family's economic well-being.
• Doesn't Consider Assets: A family's assets (savings, home equity) are not factored into the poverty calculation.
• Arbitrary Multiplier: The choice of "three" as the multiplier is seen by many as arbitrary and not reflective of modern household expenditures.

Alternative Measures: The Supplemental Poverty Measure (SPM)

Recognizing these limitations, the U.S. Census Bureau, in conjunction with other federal agencies, developed the Supplemental Poverty Measure (SPM) in 2011. The SPM aims to provide a more comprehensive picture of poverty by:

• Using a different threshold based on a broader set of necessities (food, clothing, shelter, and utilities).
• Adjusting thresholds for geographic differences in housing costs.
• Including various government benefits (cash and non-cash) in income.
• Subtracting necessary expenses like taxes, work expenses, and medical out-of-pocket spending from income.

While the SPM offers a more nuanced view, the Orshansky-based official poverty measure remains the primary statistical measure used by the federal government for administrative purposes.

Conclusion

The calculation of the poverty threshold, while rooted in a decades-old methodology, continues to be a critical tool for policymakers and researchers. Understanding its components—a base food cost, a multiplier, and adjustments for family size—helps to illuminate its strengths and weaknesses. As economic realities evolve, so too does the discussion around how best to measure and address poverty in society.