Bruce Bartlett held senior policy roles in the Reagan and George H.W. Bush administrations and served on the staffs of Representatives Jack Kemp and Ron Paul. He is the author of “The Benefit and the Burden: Tax Reform – Why We Need It and What It Will Take.”

Last week, two new reports deepened our knowledge of poverty and efforts by the federal government to alleviate it.

Today's Economist Perspectives from expert contributors.

The first is by the Census Bureau, which annually calculates the poverty rate based on a formula devised in the 1960s that has been updated only for inflation since then. The latest official data were released on Sept. 17 and put the poverty rate at 15 percent of the population.

This figure is up sharply since 2000, when the poverty rate was 11.3 percent of the population. Although the economic crisis contributed to the rise in poverty, the rate was rising well before it struck in 2008. In 2007, the poverty rate was 12.5 percent. (For historical data, see Page 52 in “Income, Poverty, and Health Insurance Coverage in the United States: 2012.”)

The original poverty threshold was essentially arbitrary and based largely on food consumption data from the Department of Agriculture. At that time, food consumed 15.1 percent of disposable personal income. But since then, it has fallen to just 9.8 percent in 2011. (See Table 7, “Food Expenditures by Families and Individuals as a Share of Disposable Personal Income.”)

This is just one way in which the poverty rate is terribly out of date. In 1995, the National Academy of Sciences did a comprehensive study of measuring poverty that took into account many factors ignored in the official measure. In 2010, an interagency working group developed a measure of poverty based largely on this report. Known as the Supplementary Poverty Measure, it is calculated separately from the official poverty measure, which remains unchanged.



On Nov. 6, the Census Bureau published data based on the supplementary poverty measure for 2012. It shows a poverty rate of 16 percent, one percentage point higher than the official measure. The supplemental report also shows what the impact on poverty is of various government programs and personal expenses.

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Thus we see that if the Social Security program did not exist, the poverty rate would be 24.4 percent, 8.4 percentage points higher than the 16 percent supplemental rate. In other words, Social Security reduces the poverty rate by about a third. Items below 16 percent add to the poverty rate.

On Nov. 7, the Congressional Budget Office published a report that breaks down federal taxes and spending for individuals and looks at what the federal government does in the aggregate to change household incomes. The data are for 2006.

Income transfers to households totaled $785 billion, of which $541 billion was for Social Security. Other cash transfers, like refundable tax credits and unemployment insurance, came to $148 billion. “Near cash” transfers of in-kind benefits like food stamps and housing subsidies amounted to $97 billion. Total federal spending in 2006 was $2.7 trillion.

Additionally, the federal government provided $481 billion in health benefits, $326 billion through Medicare and $155 billion for Medicaid, a program that aids the poor. Thus total transfers totaled almost $1.3 trillion, about half the budget. But more than two-thirds of that amount went to the elderly, many of whom were not poor.

A crucial difference between benefits for the elderly and non-elderly is that the vast bulk of those going to the elderly are not means-tested. That is, they get the benefits regardless of their income or wealth, whereas all of those going to the non-elderly are means-tested – which means that as one’s income rises, benefits are withdrawn.

The effect of withdrawing means-tested benefits has exactly the same economic effect as taxes. According to a 2012 Congressional Budget Office report, effective tax rates – actual taxes plus the loss of benefits – approach 100 percent for many people with low incomes. (See Page 7 in “Effective Marginal Tax Rates for Low- and Moderate-Income Workers.”)

In terms of evaluating poverty, I think it is important to look not just at income and various measures of poverty, but people’s perceptions of their status. In terms of poverty, people tend to perceive themselves as somewhat better off than objective measures of poverty and income would suggest.

For example, a Sept. 10, 2013, NBC News/Wall Street Journal poll found that when people were asked about their economic circumstances, only 12 percent of people classified themselves as poor, with 28 percent putting themselves in the working class, 42 percent in the middle class, 16 percent in the upper middle class and 1 percent calling themselves well-to-do. A Nov. 30, 2012, USA Today/Gallup poll that asked about social class found that 10 percent of people defined themselves as lower class, with 31 percent in the working class, 42 percent in the middle class, 13 percent in the upper middle class and 2 percent in the upper class.

Gallup has been asking the same question for some years and the percentage of people in the lower class has trended up. In 2000, only 3 percent placed themselves in the lower class. At the same time, the percentage of people putting themselves in the middle class has fallen from 48 percent. The other classes are about the same.

One explanation for the difference in perception and reality is that some people technically poor in terms of income may be poor only temporarily. They may have suffered a one-time financial setback or are young and starting out in life. They may be poor, objectively, but don’t see themselves that way.

Especially at a time when the federal budget for poverty alleviation is under severe pressure, it is essential that we have a better understanding of who the poor are and how best to help them, so that scarce resources can be better aimed at those who really need them and where the greatest bang-for-the buck exists.