Role of Government in Reducing Poverty

Poverty rates fell significantly from 2014 to 2015, based on new data from the U.S. Census Bureau, summarized in a recent North Star article. While poverty fell significantly in 2015, poverty rates in Minnesota and nationally remain above pre-Great Recession levels. Poverty rates would be much higher but for federal and state government programs that supplement the incomes of low-income families.

The official poverty rate calculated by the Census Bureau does not take into account non-cash benefits such as Supplemental Nutrition Assistance Program or SNAP (formerly known as food stamps) and refundable tax credits, such as the federal Earned Income Tax Credit (EITC) and Minnesota’s Working Family Credit (WFC). In order to gauge the success of these programs in reducing the economic hardship of low-income families, we must turn to an alternative measure of poverty: the Supplemental Poverty Measure (SPM). According the Census Bureau’s 2015 SPM report released in September:

The SPM extends the official poverty measure by taking account of many of the government programs designed to assist low-income families and individuals that are not included in the current official poverty measure.

In addition to the inclusion of the impact of government programs, the SPM differs from the official poverty measure in terms of the unit of measurement and the determination of the poverty threshold.* For all of these reasons, the poverty rate based on the SPM is not necessarily the same as the official poverty rate. The U.S. 2015 poverty rate based on the SPM is 15.1 percent, while Minnesota’s 2015 rate is 9.1 percent. Minnesota’s poverty rate based on the SPM is the third lowest among the fifty states, which is nearly identical to Minnesota’s ranking under the official measure.

The chart below shows the impact of various government programs in reducing the U.S. 2015 poverty rate, “holding all else the same and assuming no behavioral changes.” As with all Current Population Survey data, the estimates below have a margin of error that is stated in the SPM report.

pov1

Social Security is by far the single most potent government program in terms of reducing poverty, resulting in an estimated 8.3 reduction in the U.S. SPM poverty rate. Social Security alone has the effect of reducing the number of Americans in poverty by an estimated 45.7 million. The next largest reductions in the poverty rate are attributable to refundable tax credits (a 2.9 percent reduction), SNAP (a 1.4 percent reduction), and SSI (a 1.0 percent reduction). All other government programs included in this analysis (housing subsidies, child support received, school lunch, TANF/general assistance, unemployment insurance, WIC, workers’ compensation, and LIHEAP) have less than a one percent impact on the poverty rate.

The impact of government programs in terms of reducing poverty varies significantly between age groups. The next chart shows the estimated impact of government programs upon the SPM poverty rate of three separate age groups: under 18 years of age, 18 to 64, and 65 and over.

pov2

Not surprisingly, Social Security is the most potent government program in terms of reducing poverty among seniors; the rate of poverty in the 65 and over age group would nearly quadruple in its absence. Social Security is also the single most potent program in terms of reducing poverty for the 18 to 64 age group. However, refundable tax credits—such as the federal EITC and Minnesota’s WFC—are by far the single most potent program in reducing poverty among children. An additional 4.8 million Americans in the under 18 age group would be in poverty in the absence of refundable tax credits, based on SPM estimates.

While detailed single-year 2015 SPM data for individual states is not available, it is clear that Minnesota’s WFC is a contributor to Minnesota’s low SPM poverty rate relative to other states. In 2014, the legislature enacted enhancements to the WFC which had the effect of increasing the amount of the credit and increasing the income levels at which families could qualify for the credit. The specifics of the WFC and its effectiveness in terms of reducing poverty, encouraging work, and increasing tax fairness was the subject of an April 2016 North Star article.

The message of the Supplemental Poverty Measure report is clear: government programs have a major impact in terms of reducing poverty in America. While Social Security is the most potent program in terms of reducing poverty among seniors, refundable tax credits—including Minnesota’s Working Family Credit—result in the greatest poverty reductions among children.

 

*The unit of measurement for the official poverty measure is “families or unrelated individuals,” while the unit of measurement for the SPM is “families (including any coresident unrelated children, foster children, unmarried partners and their relatives) or unrelated individuals (who are not otherwise included in the family definition).” The poverty threshold for the official poverty measure is “three times the cost of a minimum food diet in 1963,” whereas the poverty threshold for the SPM is based on mean expenditures on food, clothing, shelter, and utilities for specific consumer units.

 SNAP refers to the Supplemental Nutrition Assistance Program. SSI refers to Supplemental Security Income. TANF refers to Temporary Assistance for Needy Families. WIC refers to the Supplementary Nutrition Program for Women, Infants, and Children. LIHEAP refers to the Low Income Home Energy Assistance Program.