This past week the Census Bureau released their annual estimate of median income and poverty. For 2009, the poverty level increased from 13.2% to 14.3%. Economists and policy makers have been debating the definition and calculation of poverty since the introduction of the social welfare programs of the Great Society in the 1960s. Since the mid-nineties, many have called for a revision of the calculations that gives weight to cost of living variances in the country. To most people, that makes sense. Because it makes sense, it is a political hot potato. The thresholds of poverty are used to determine eligibility for a number of federal programs. Adjusting those thresholds would qualify many more people for assistance in some areas, particularly larger metropolitan areas, while disqualifying some in rural areas where the cost of living is less.
How does the Census Bureau measure poverty? They include all cash income but non-cash items like Medicaid, food stamps and housing subsidies, like Section 8, don’t count as income. (Source) To qualify for housing assistance, the family’s income may not exceed 50% of the median income for the county or metropolitan area in which the family chooses to live. The rent subsidy is generally the lesser of the payment standard minus 30% of the family’s monthly adjusted income or the gross rent for the unit minus 30% of monthly adjusted income.
Let’s look at two “traditional” families of four in Denver, Colorado, where wages and cost of living are only slightly above the national average. (Source)
In Family A, Dad works a regular job as a laborer for $12 an hour for 35 hours a week, slightly more than the median hours worked per week, earning about $22000 per year. Family A’s income is at the poverty level, qualifying them for housing assistance, Medicaid, food stamps and other assistance programs for meeting their monthly bills. Family A’s adjusted income per HUD standards is gross income less about $500 per dependent, or $20K. They would pay 30% of that for rent, $6000, for an apt renting for about $9600 annually, receiving about $3600 in tax free income. In addition, they would get about $325 in food stamps per month, or another $4000 in untaxed income. In addition, Dad would get $34 per week in Earned Income Credits, paid by his employer, for an annual total of about $1800. Since they qualify for Medicaid, this family would have no or minimal health insurance premiums. This family would pay no federal or state income taxes but they would be subject to the FICA payroll tax of about $1650 per year. This family’s net effective income is about $30K.
In Family B, Dad works for $22 per hour for 35 hours a week, earning an annual gross of $40,000, about 16% – 18% less than the median household income for Denver but about equal to the median wage. This family’s income is in the 40th percentile of Denver area income, slightly above that percentile for the country as a whole. This family does not qualify for either housing assistance, Medicaid, food stamps, the energy assistance program LIHEAP or the Earned Income Credit. Dad pays 50% of a $1200 HMO family medical plan which his employer offers, an annual cost of $7200. This family pays about $120 per year in federal and state income taxes and $2500 in FICA taxes. This family’s net effective income is also $30K.
Two families – one at the poverty level of income, one slightly below the median income level – have approximately the same level of disposable income. Either there are a number of families classified as poor who really aren’t poor or about 40% of the households in this country are effectively at or below the poverty level.