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How much poverty is reduced by state income transfers?

Robert D. Plotnick is an associate professor at the Graduate School of Public Affairs and School of Social Work, University of Washington. This study was supported in part by a grant from the Northwest Area Foundation to the Institute for Public Policy and Management, University of Washington. The views in this paper are the author's and do not necessarily reflect those of the Northwest Area Foundation or the Institute.

Newly developed poverty data based on the CPS show that the impact of income transfer policies on poverty varies widely among States

Analyses of interstate poverty and antipoverty policies are scarce. One reason, of course, is the meager data on State poverty. Another reason is that antipoverty policy proposals tend to focus on national approaches to the poverty problem.' The major source of State poverty data, the 1980 Census, provides information on income for 1979. However, this information has become badly outdated by the economic changes of the 1980's.

This article presents State poverty data for die rnid-1980's and uses diem to derive and compare the impact of income transfer policies on poverty among die States. The article first describes how die data were developed. It explains die three alternative poverty measures used in the analysis and the different types of information they yield.2 Then, the poverty indexes and the impact of income transfer policies on poverty are presented.

Data and methods

The basis for this analysis is die Current Population Survey (CPS), conducted monthly by the Bureau of die Census. Supplemental questions to die March CPS provide national and regional earnings data from which poverty data are derived. The information obtained is from the previous calendar year. However, one drawback is ale fact that Cps samples at die State level are relatively small, with fewer that 1,000 households interviewed in most States. As a result, the estimated State poverty rates for any single year may be subject to significant sampling error.

To develop the estimates, I pooled the March CPS data tapes for 1985, 1986, and 1987. These tapes provide income data for calendar years 1984, 1985, and 1986. The advantage of pooling is that it doubles the effective sample size, leading to more reliable estimates.' The disadvantage of pooling is that it does not provide separate poverty data for each year. Instead, it gives die average level of poverty during the middle years of die 1980's.

During the mid-1980's, the Nation's economy steadily expanded, real per capita income grew, the unemployment rate declined, and inflation moderated. The national poverty rate declined from 14.4 percent in 1984, to 14.0 in 1985, and to 13.6 in 1986. It is likely, then, that for most States, year-to-year changes in poverty were also gradual and moderate. On balance, the improvement in precision from die larger pooled sample more than compensates for the lack of yearspecific poverty rates.

The poverty measures used here are based on the official lines provided by die Bureau of die Census. Poverty lines vary by family size, die number of related children, and the age of the household head. In 1985, the poverty lines ranged from $5,156 for an elderly person fiving alone to $22,083 for a family of mne or more with at least one child under age 18. The poverty line for a family of four was $10,989. The lines increase each year to match the rate of inflation as measured by the Consumer Price Index.

Poverty rates are estimated by comparing ale income of a family (or unrelated individual, a one-person family) to its corresponding poverty line. If the income is below the poverty line, then all persons in that family are counted poor. The base for die rates reported here is the total number of persons-not family units-in a State.

To obtain three alternative measures of poverty, this article uses the official lines, but varies the definition of income. The first measure uses die official Bureau of the Census definition of money income and, therefore, is simply the familiar official measure of poverty. "Money income" includes all cash income from labor market earnings, dividends, interest, rent, pensions, govemment income support programs, and any other periodic income source. Capital gains and noncash income such as fringe benefits or government benefits from food stamps or Medicare are not included, nor are taxes deducted.(4)

The official poverty measure does not separate market and private transfer income sources from government sources. As such, it does not separate the market economy's antipoverty performance from the performance of the entire society, including government transfer programs.

Suppose, for example, one wanted to know the impact of a State's public assistance programs. By itself, the official measure could not provide this infoffnation. To obtain it, one must examine prewelfare poverty. Prewelfare poverty shows the percentage of people who are poor before welfare is added to their other sources of income (private sources as well as any social insurance benefits). The prewelfare poor need welfare to escape poverty. Only by comparing the level of prewelfare poverty with the official level can one measure the effect of the cash welfare programs on poverty.' Because the States are responsible for setting benefits levels and, within Federal guidelines, eligibility rules of their welfare programs, this provides a useful way to compare the effects of State welfare systems.

By comparing prewelfare poverty estimates to the official poverty measure, one implicitly assumes that welfare induces no behavioral responses that would cause incomes without welfare to deviate from observed prewelfare incomes. However, it is argued that welfare may induce some decline in work effort, so recipients' net incomes are not increased by the full amount of the transfer benefit they receive.' Also, availability of welfare leads some persons (for example young single mothers) to live independently, but in prewelfare poverty when otherwise they might have remained in a larger family that was not prewelfare poor.(7) Measured prewelfare poverty, then, is likely to be greater than the level that really would exist in the absence of welfare. Therefore, the difference between the prewelfare and official poverty estimates provides upper bound estimates of welfare's effect on poverty(8)

States also control the administration and benefit levels of two important social insurance programs-unemployment insurance and workers' compensation. Suppose one wanted to assess how poverty is affected by all income transfer programs subject to State policy. To do so, one would need infomation on pre-State transfer poverty. Pre-State transfer income includes all private sources of income plus any fully Federal social insurance income; it excludes unemployment insurance, workers' compensation, and public assistance income. (The major Federal social insurance transfers are Social Security and veterans' disability compensation and pensions.) Pre-State transfer poverty shows how much poverty is left for State transfers programs to relieve after markets distribute incomes and the fully Federal cash transfer programs deliver their benefits. A comparison of the level of pre-State transfer poverty with the official level provides a measure of the effectiveness of a State's income transfer policies on povert .9

Some poor persons receive State income transfers, but not enough to move over the poverty line. If one examines changes in the level of poverty, improvements in the economic siWation of the poor will not be recorded. Thus, to supplement measures of the impact of transfers on poverty based on changes in the level of poverty, this article also examines the reduction in the poverty gap due to transfers. The poverty gap shows the dollar amount needed to bring all poor households up to the poverty line. By analogy to the comparisons discussed earlier, one can compare the prewelfare poverty gap to the official poverty gap, or the pre-State transfer poverty gap to the official gap. (The different gaps are based on the income concepts used to measure each coffesponding level of poverty.)


Level of Poverty. Table 1 shows the incidence of official, prewelfare, and pre-State transfer poverty by State, including the District of Columbia, arranged by region. (10)

The official poverty rate ranged from 5.6 percent in New Hampshire to 25.6 percent in Mississippi. The median was 13.4 percent. The interquartile range (showing values at the 25th and 75th percentiles) spanned 11.2 to 16.3 percent. Only five States had an official poverty rate less than 10 percent.

By construction, the other poverty measures are larger in each State. Prewelfare poverty ranged from 6.1 percent in New Hampshire to 27.3 percent in Mississippi around a median of 13.9 percent. Pre-State transfer poverty ranged from 6.7 percent to 28.6 percent, around a median of 14.8 percent.

New Hampshire had the lowest value of all three measures, and Mississippi had the highest. The simple correlations among the poverty measures all exceed 0.99.

Seventeen States scored below 90 percent of the average on all three measures. They are New Hampshire, Vermont, Massachusetts, Connecticut, New Jersey, Indiana, Minnesota, Kansas, Delaware, Maryland, Virginia, Colorado, Utah, Nevada, Washington, Alaska, and Hawaii. The 12 States that scored above 110 percent of the average on all three measures include the District of Columbia, West Virginia, South Carolina, Kenwcky, Tennessee, Alabama, Mississippi, Arkansas, Louisiana, Montana, Idaho, and New Mexico.

Impact of transfers. Table 2 presents the impact of State income transfers on the level of poverty. Column one shows the effect of cash welfare as the percentage difference between a State's prewelfare and official poverty rates. Column three shows the effect of all cash transfers under control by State govemment as the percentage difference between die pre-State transfer and official poverty rates. To facilitate comparisons, the figures in columns two and four show the index for each State's impact as a percentage of the median State's impact. Thus, values greater (less) than 100 indicate an impact above (below) the median.

In the median State (Kentucky), welfare reduced poverty by 4.1 percent. The impact of welfare varies substantially between States. The maximum impact is 11.9 percent (Alaska and Wisconsin); the minimum is merely 0.7 percent (Nebraska). The interquartile range covers 3.1 percent to 7.4 percent. The five States in which welfare had the largest impact on poverty are Alaska, Wisconsin (tied for best), Califomia, Massachusetts, and Vermont. The five with the smallest effects are Nebraska, Idaho, Connecticut, Arizona, and South Dakota.

All State controlled cash transfers reduce poverty by 10.5 percent in the median State (Mississippi). Again, the range of the impact is wide. The maximum is 17.5 percent (Alaska); the minimum is 3.9 (Nebraska). The interquartile range covers 8.2 percent to 13.3 percent. Thus, the five States with the largest reductions in poverty are Alaska (again top), Maine, New Hampshire, Massachusetts, and Pennsylvania. The smallest reductions are in Nebraska (again on the bottom), Arizona, Delaware, South Dakota, and the District of Columbia. Not surprisingly, the correlation between the impact of welfare and of all State transfers on poverty is positive with a value of 0.78.

Taken alone, the figures in table 2 may be deceptive because they examine changes in the extent of poverty but not its degree. Table 3, therefore, provides an alternative measure of the degree of poverty reduced by transfers based on the percentage reduction in the poverty gap. Column one shows the effect of cash welfare on poverty as the percentage difference between a State's prewelfare and official poverty gaps. Column three shows the effect of all State cash transfers on poverty as the percentage difference between the pre-State transfer and official poverty gaps. As in table 2, figures in columns two and four provide easy comparative information.

While the impact of welfare benefits on poverty appeared very minor in most States according to table 2, when based on changes in the poverty gap, the impact of welfare looks much larger. The median reduction in the prewelfare gap is 20.2 percent, versus a median of just 4.1 percent for the reduction in the rate of poverty. The maxium here is 42.0 percent (Wisconsin), versus the maximum of 11.9 percent in table 2. The minimum is 10.7 percent (Nevada), versus the minimum of 0.7 percent in table 2. The interquartile range spans 15.2 percent to 30.1 percent, Wisconsin, New York, Rhode Island, Massachusetts, and Califomia have the five largest reductions, while Nevada, North Dakota, Idaho, South Dakota, and Texas have the five smallest.

In every State, the percentage reduction in the prewelfare poverty gap well exceeds the percentage reduction in the rate of prewelfare poverty. The median, maximum, and minimum differences between the two reductions are 15.6, 34.9, and 7.5 percentage points. So, while welfare benefits pull few people completely out of poverty, they serve to lessen its severity by noticeably reducing the gap between income and the poverty line.

The contrast between tables 2 and 3 reflects the fact that maximum welfare benefits in every State are less than the poverty threshold. A family whose sole income is from welfare would not receive enough to be lifted above the poverty line. Many low income families with some private sources of income would not receive enough welfare to move above the poverty line, either. While these benefits may not be enough to lift such families out of poverty, they clearly lessen the degree of economic distress.

The effects of welfare on poverty presented in tables 2 and 3 are closely related to the generosity of States' welfare programs. The simple correlation between the maximum monthly benefit from Aid to Families with Dependent Children and the percentage reduction in prewelfare poverty is 0.71. The correlation between the maximum benefit and the reduction in the prewelfare poverty gap is 0.63. A State's willingness to assist its needy does make a difference.

The coffelation between the reductions in the level of prewelfare poverty and the prewelfare poverty gap is high (0.71), but not perfect. Note from earlier discussion, for example, that the five States with the greatest (smallest) reduction in die level of poverty due to welfare only partly coincide with the top (bottom) five in terms of reduction in the prewelfare gap. In some States, such as Connecticut, welfare has a relatively large impact on the gap, but a relatively small impact on the level of poverty. Other States, such as New Hampshire and Kansas, show the reverse.

The indexes of State-transfer related data in tables 2 and 3 show similar patterns. While the impact of all State benefits on poverty appeared minor in most States (table 2), when based on changes in the poverty gap, the effect of such benefits seems much larger. The median reduction in the pre-State transfer gap is 26.2 percent (table 3, Virginia), versus a median of just 10.5 percent (table 2, Mississippi) for the reduction in the rate of pre-State transfer poverty. The maximum gap reduction is 45.0 percent (again Wisconsin), versus the maximum rate reduction of only 17.5 percent (Alaska). The minimum gap reduction is North Dakota's 16.3 percent, versus the minimum rate reduction of 3.9 percent for Nebraska.

Again, in all States, the percentage reduction in the pre-State transfer poverty gap well exceeds the percentage reduction in the rate of pre-State poverty. The percentage point differences between the two reductions are 15.9 for the median, 31.6 for the maximum, and 6.8 for the minimum. All State transfer benefits, then, pull few people completely out of poverty, but do serve to significantly mitigate it by reducing the gap between income and the poverty line.

Summary and conclusion

Newly developed data on State poverty rates and the impact of State income support policies on poverty show wide differences among the States. Cash welfare programs reduce poverty by 0.7 percent to 11.9 percent with a median of 4.1 percent if measured in terms of the decline in the level of poverty, and by 10.7 percent to 42.0 percent with a median of 20.2 percent if measured in terms of the reduction in the poverty gap.

All State controlled transfers naturally have a larger impact on poverty. They reduce poverty by 4.0 percent to 17.5 percent with a median of 10.5 percent if measured by the decline in the level of poverty, and by 16.3 to 45.0 percent with a median of 26.2 percent if measured by the reduction in the poverty gap.

These initial findings provide useful information to persons interested in State income transfer policy issues. Moreover, the information in this article provides a factual basis upon which to explore further issues. What are the main sources of the differences among States in their battle against poverty? How will their effectiveness change as States adjust to the new policy environment created by the Family Support Act of 1988, and to other economic and social changes? Further research drawing on the methods and findings of this study can help provide answers.


ACKNOWLEDGMENT: The author thanks Tom Donley and Luise Cunliffe for programming assistance.

1 For representative recent studies in this tradition, see Sheldon Danziger, "The Economy, Public Policy and the Poor," in Harrell Rodgers, ed., Beyond Welfare: New Approaches to the Problem of Poverty in America (Armonk, NY, M.E. Sharpe, 1988), pp. 3-13; Sheldon Danziger, Robert Haveman, and Robert Plotnick, "Antipoverty Policy: Effects on the Poor and Nonpoor," in Sheldon Danziger and Daniel Weinberg, eds. , Fighting Poverty: What Works and What Doesn't (Cambridge, MA, Harvard University Press, 1987), pp. 50-77; and Greg Duncan, Years of Poverty, Years of Plenty: The Changing Economic Fortunes of American Workers and Families (Ann Artor, mi, Institute for Social Research, 1984).

2 See Sheldon Danziger and Christine Ross"Poverty Rates by State, 1979 and 1985: A Research Note," Focus, Vol. 10, Fall 1987, pp. 1-5 . Danziger and Ross used only one poverty measure, the official one.

3 The sample does not triple because of the nature of the CPS. Each household which enters the CPS sample is interviewed for 4 consecutive months, omitted from interviews for the next 8 months, again interviewed for 4 months, then dropped from the sample. Thus, half of the households interviewed in March 1985 would be in their first 4 months in the CPS and would again be interviewed in March 1986 during the last 4 months. Similarly, half of the households in the March 1987 CPS would have also been interviewed in the March 1986 CPS.

To obtain a data set in which all observations are independent of each other, I eliminated from the March 1985 data all households that would also be in the Much 1986 data. I also excluded from the March 1987 data households that already appeared in the March 1986 CPS. As a result, the March 1985 and 1987 CPS's each added half of their samples to the complete middle year CPS.

4 The Bureau of the Census now publishes national poverty estimates based on an income measure that includes the value of selected noncash transfers. See U.S. Bureau of the Census, Estimates of Poverty Including the Value of Noncash Benefits 1986 (Washington, Government Printing Office, 1987), Technical Paper 57. Adjustments to CPS data to replicate these estimates at the State level are beyond the scope of this swdy.

5 These are Aid to Families with Dependent Children (AFDC), Supplemental Security Income (SSI), and General Assistance.

6 Sheldon Dangizer, Robert Haveman, and Robert Plotnick, "How Income Transfers Affect Work, Savings, and the Income Distribution: A Critical Review," Journal of Economic Literature, September 1981, pp. 975-1028.

7 David Ellwood and Mary Jo Bane, "The Impact of AFDC on Family Structure and Living Arrangements," Research in Labor Economics, July 1985, pp. 137-207 .

8 Parallel comments apply to the concept of pre-State transfer discussed later in this article and its use in assessing the antipoverty impact of transfers.

9 Studies of national poverty (for example, Dangizer, Haveman, and Plotnick, "Antipoverty Policy,") have looked at the antipoverty effect of the entire Federal and State transfer system, using yet another measure-pretransfer poverty. The pretransfer poor do not have enough income from private sources to be above the poverty line. One compares pretransfer poverty with official poverty to gauge the effect of the combined Federal and State income maintenance system on poverty. For assessing the effect of State transfer policy, pre-State transfer poverty is more useful than pretransfer poverty.

10 For the standard errors of the estimates and infoffnation on how they are computed, see Robert Plotnick, "Poverty and Income Transfer Policy at the State Level" (University of Washington, 1988), unpublished paper.
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Author:Plotnick, Robert D.
Publication:Monthly Labor Review
Date:Jul 1, 1989
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