Commentary | Wages, Incomes, and Wealth

Making ends meet on $21,834 a year

In the wake of the U.S. Census Bureau’s recent report on the number of Americans living in poverty, it’s a good time to ask, What is poverty, anyway? The Census Bureau says that in 2008, it was an annual income of $17,330 or less for a family of two adults and one child, $21,834 for a family of four with two children, with additional increases for larger families.

The way the thresholds graduate with the family size and get adjusted every year for inflation would seem to suggest they are carefully-considered limits, above which a family should be able to eke out the most modest of livings. But as anyone who has tried to pay for housing, food and other essentials on a low income understands, the costs of life’s most basic necessities can easily exceed take-home pay. Moreover, costs of living vary tremendously from place to place, making the notion of a single, nationwide poverty threshold faulty by definition.

Where in the country can a family of four keep a roof over its head and food on the table for $22,000 a year, before taxes, and still having something left over for health care and transportation? In 2007, EPI took a detailed look at basic costs in different parts of the country and built the Basic Family Budget Calculator, which assembled the costs of basic housing, food, child care, transportation, health care, taxes, and other necessities in different regions of the country. Besides offering detailed data on how much costs vary across rural and urban areas and different geographic regions, the calculator shows that poverty thresholds are too low just about everywhere.

Take Peoria, Illinois, often considered your typical American town. A family of four living in Peoria would, according to the Family Budget Calculator, likely require an annual income of $42,324, including $623 per month for housing and $643 for food, based on 2007 costs. That’s almost double the 2008 poverty threshold. Other regions would require a much higher income. In Chicago, for example, the Basic Family Budget Calculator says a family of four would need $48,800. On New York’s Long Island, where housing costs even more, the annual budget for a family of four shoots up to $71,913 a year. Basic family budgets in some other regions of the country come in much lower. Rural Arkansas comes in at $37,338 a year; rural Texas at $38,862. These regions are comparatively inexpensive, but still have costs for essentials that easily exceed incomes at the official poverty threshold.

In examining different family budgets around the country, it is also worth noting that the federal minimum wage — even after its July increase to $7.25 per hour — equates to an annual salary of $14,500 per year based on a 2,000-hour work year, which is just barely above the 2008 poverty threshold of $14,051 for a family of two.

Of course, each family has its own unique set of expenses. Just as some may cut costs by sharing housing with relatives, others may face exceptionally steep costs in the form of gasoline and car maintenance for long commutes, or medical care for a special-needs child. While it would be impossible to account for all the variables affecting an individual family’s housing, food, and other costs all around the country, the Family Budget Calculator attempts to get at the bare bones expenses. It estimates housing costs based on non-luxury, “privately-owned, decent, and safe rental housing” at the 40th percentile, or that which costs less than 60% of the rentals on the local market. Food cost estimates come from the U.S. Department of Agriculture’s “low-cost” food plan. Average transportation costs are based on the National Household Travel Survey and consider only travel related to work and other non-social purposes such as essential errands.

Critics of the Census Bureau’s existing methodology for calculating poverty thresholds note that it is based on an outdated formula that was put in place in the 1960s, and has not evolved with family budgets. Not only have overall costs gone up since then, but the portion of incomes spent on food, housing and other essentials has changed dramatically. This commentary notes that during the 1960s, the typical family spent a third of its budget on food, but today food consumes just one-seventh of its budget on food, with other essentials such as health care consuming much more. If that would seem to suggest that food has gotten cheaper, it also highlights the problem of calculating poverty as a multiple of food costs, under the formula that was established decades ago and is still used today. The Census Bureau acknowledges that because of this longstanding formula, it is no longer possible to say what share of a poverty-level income would go toward specific categories of consumption. Simply adjusting food costs for inflation over the past 40 years, in other words, would not be enough to keep the poverty threshold current.

The National Academy of Sciences is one of a number of groups that have proposed an updated method for calculating poverty. This report notes that if the Census adopted that new method, it would result in millions of additional Americans below the poverty threshold and would nearly double the number of seniors living in poverty, to about 20% of the over-65 population.

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