Poster Paper: Revising the U.S. Poverty Threshold Measure to Capture An Individual's Net Present Value

Saturday, November 10, 2012 : 12:00 PM
Liberty A & B (Sheraton Baltimore City Center Hotel)

*Names in bold indicate Presenter

Peter Manda, University of Pennsylvania - Fels Institute (graduated Dec. 2012)

It's all fine and good to define poverty as "below a certain income threshold" but such a measure does not capture the growing disparity in wealth and burgeoning asset inequities. Thus, the poverty and supplemental poverty measures calculated by the Census Bureau and utilized by Congress are insufficient policy benchmarks if the objective is to alleviate poverty. While the supplemental income threshold adopted by the Census Bureau in the Fall of 2011 is a good analytical step forward; more could be done to measure poverty in a way that would allow decision-makers to understand how much is actually required to alleviate poverty. This policy proposal therefore suggests combining factors for determining wealth and income with factors that act as barriers to accumulating wealth and generating income to derive a truer measure of poverty and how much it costs to overcome it.

On November 7, 2011, the U.S. Census Bureau adopted a supplemental poverty measure to better capture the threshold below which individuals and families would be deemed unable to survive. This supplemental poverty measure expands on the official threshold by incorporating factors such as welfare benefits received, basic living needs, and the costs of basic housing. The supplemental measure is a great step forward because it allows policy makers to visualize the contributions welfare benefits make to alleviate poverty in the United States. However, even the supplemental measure remains insufficient in guiding policy-makers in the direction of adapting policies aimed at fully eradicating poverty. This policy proposal therefore suggests that the administration initiate steps toward developing (and having Congress adopt) a poverty threshold measure that takes into account not only an individual's and family's current wealth but also incorporates the barriers they face when seeking to obtain the income, and accumulate the wealth, necessary to overcome and escape poverty.

This proposal suggests that the administration should further take advantage of this opportunity and continue its relentless work toward addressing the severe inequalities in our nation. As some researchers have already concluded, "a poverty measure should take household wealth into consideration together with income in order to get a better assessment of well-being." This is because "[a]ssets provide an economic protection for the hard times and enable people to invest in their future." However, having income and holding assets alone are not measures of mobility. That is, they do not incorporate the costs individuals (and families) living in poverty have to incur if they desire to improve their lot and move out of poverty. To incorporate these costs into the threshold, this proposal suggests a poverty measurement formula according to the following variables:

(1)             NPVw = Income + Net Worth + Home Equity + Liquid Wealth - Income Barriers - Wealth Barriers - Taxes Paid + Benefits Received

The formula calculates an individuals current wealth "net present value" based on the annuity (or fixed income streams) of cash and cash equivalents and the net present value of assets held discounted by a rate based on the consumer price index and inflation.