Researchers have defined poverty in a variety of ways. It can be defined as deprivation experienced in material terms, such as hunger or poor housing quality; in economic terms, such as inadequate income; or in social terms, such as isolation from the community or feelings of low self-esteem. In U.S. government statistics, poverty is defined as economic deprivation—that is, lacking the economic resources to meet basic needs—which can put families at high risk of material deprivation. Although some might prefer to directly measure a family’s level of material deprivation, this is impractical for an annual statistic because it is difficult to objectively assess the quality of a family’s standard of living and then to combine measures for various basic needs (such as food, shelter, and clothing) into a single indicator that can be readily analyzed. In 1969, the federal government officially adopted a poverty measure to determine how many people across the country had incomes that were inadequate to meet expenses for basic needs. The official measure determines a family’s poverty status by comparing its resources, defined as before-tax money income, with a standard income level, or “threshold,” designated for that family’s size and composition. Information on income received in the previous calendar year is collected from households by the Bureau of the Census using the March Income Supplement of the Current Population Survey (CPS), which is jointly sponsored by the Bureau of the Census and BLS. Poverty statistics are published each year that allow comparisons of economic well-being across families, population groups, and regions and over time. Thresholds for families of different size and composition were initially defined as three times the cost of a minimum diet for a family of that size. This approach was based on the finding of the U.S. Department of Agriculture’s (USDA) 1955 Household Food Consumption Survey that, on average, families of three or more persons spent one-third of their income on food. Costs of a minimum diet for various family sizes were calculated from USDA’s Economy Food Plan, the least costly food plan designed by USDA. Since then, the poverty thresholds, of which there are currently 48, have been updated annually, to adjust for price inflation nationwide using the Consumer Price Index (CPI). In 1995—the year of the most recent update—a family of four with cash income of less than $15,569 was considered to be living in poverty. The problems in the official measure of poverty are well documented. The value of the resources a family receives from noncash government assistance programs like the Food Stamp Program was never included in the formal definition of income, in part because the poverty measure was developed before the advent of such programs. In considering the 1981 Commerce Department appropriations, the Senate Appropriations Committee criticized the official poverty statistics for ignoring the “billions of dollars of Government in-kind benefits, such as food stamps, housing subsidies and medical care.” In the conference committee report, the House and Senate conferees urged the Secretary of Commerce to “continue research and testing of techniques for assigning monetary values to in-kind benefits, and for calculating the impact of such benefits on income and poverty estimates.” In the early 1980s, the Bureau of the Census embarked upon research programs to examine the effects of both government in-kind (noncash) benefits and taxes on poverty and other measures of income distribution and has published the results since 1982. A 1990 review of concepts and approaches to measuring poverty concluded that although the official poverty thresholds “represented a reasonable approach, given existing data, . . . in the 1960s, the rather minimal consumption data on which they were based became outdated long ago.” For example, recent surveys find that food now represents about one-seventh rather than one-third of average family expenditures. In addition, the report noted that the methods used to update thresholds over time and to adjust for differences in family size and type were questionable and sometimes inconsistent. In 1995, NRC’s Panel on Poverty and Family Assistance published an in-depth review of the U.S. poverty measure addressing concepts, measurement methods, and information needs. In addition to reviewing the literature and numerous experts’ views, with help from federal agencies, the panel conducted data analyses to assess the effects of its recommended poverty concept and alternative measures on the numbers and characteristics of persons in poverty. It concluded that the official measure of poverty required revision and recommended that OMB adopt a revised measure. Specifically, the panel recommended that new thresholds be developed using actual consumer expenditure data to represent a budget for basic needs and adjusting that budget to reflect the needs of different family types and geographic differences in housing costs. It recommended that family resources be redefined as the sum of money income and near-money benefits, minus necessary expenses (such as taxes), and thus the net amount available to buy the goods and services in that poverty budget. (App. I reproduces the panel’s recommendations in their entirety, including some issues not discussed in this report.) More recently, a researcher criticized the reliance of the official poverty measure on reported income, pointing out that some families are misidentified as poor because they can increase their purchasing power by either taking out loans or drawing on their savings to avoid material deprivation. He and others have suggested that a family’s economic well-being is more appropriately assessed with a measure of what it spends on goods and services than with a measure of its income. In developing, as well as evaluating, a poverty measure, certain assumptions and choices must be made as one addresses two fundamental decisions: first, how to define a family’s resources and, second, how to select a threshold, or standard, to represent a “minimally adequate standard of living.” While the two decisions are distinct, the two definitions must be consonant with each other so that the eventual comparison of a family’s resources with a standard is considered fair. For example, if government medical benefits are considered as part of a family’s resources, then need for medical care should be considered in defining the threshold. Although many technical choices must be made in developing a valid and practical measure of family economic well-being for the purposes of determining poverty status, we identified three key choices to be made: whether to directly measure a family’s spending on basic necessities or to use income and other economic resources as a proxy for its ability to buy those necessities, which economic resources should be considered available for meeting a family’s basic needs, and whether existing data sources are adequate or should be modified to improve the reliability of poverty estimates. Some poverty researchers have proposed examining families’ consumption of goods and services, rather than their income, to assess more directly whether they are able to obtain a minimal standard of living. Many on the NRC panel and some of the experts we interviewed were sympathetic with that view. The panel report noted that consumption is more closely related conceptually to material deprivation—the core concept underlying poverty—than is income. However, as we previously noted, efforts to directly measure material deprivation meet with both conceptual and practical difficulties. For example, some readily identified deprivations, such as loss of housing, may not result from low income but from imprudent spending or difficulties with one’s landlord. And defining housing adequacy would require subjective judgments to select standards for living space; cooking and plumbing facilities; and heating and, perhaps, cooling needs. Even when expert-defined standards exist, assessing the nutritional adequacy of a family’s diet, for example, would likely require a costly expert assessment and the collection of detailed data on family meals. Thus, measures of material deprivation are more often recommended as a supplement to, than as a replacement, for data on family resources. Instead, researchers who assess poverty status through consumption typically use as their measure the dollar value of a household’s reported spending (excluding taxes, gifts, and savings). The primary source for these data is the Consumer Expenditure Survey (CEX), which collects detailed data from households on their expenditures. Because we do not know whether a family’s level of expenditures is sufficient to meet its material needs, the dollar value of expenditures is really only a proxy for the family’s level of material deprivation. However, some researchers still prefer to look at what families spend rather than their income because expenditures reflect what they were able to obtain with all their available economic resources (including savings, assets, and credit), whereas income is only a proxy for those resources. There were mixed views in the field about whether income or expenditures were more conceptually consistent with the intended uses of the poverty measure. A perceived disadvantage of measuring family well-being with income is that it tends to overstate the material deprivation of families who experience a temporary economic setback and of those low-income families who can use savings to maintain their level of expenditures. But, precisely because families can smooth out the effects of dips in income, expenditures tend to vary less among families and over time than income does. Thus, for policy planning and evaluation purposes, an expenditure-based measure might not be as sensitive an indicator of families’ economic need as income would be. In contrast, a perceived advantage of measuring poverty with family income is that much of government antipoverty policy is expressed and analyzed in terms of change in total or disposable family income. If poverty was measured on the basis of expenditures, forecasting the effects of a change in economic policy would require estimating how the expected change in family income would affect a family’s expenditures, which are more difficult to predict than income. In the end, the NRC panel concluded, and experts we interviewed concurred, that, at least at present, measuring poverty for official purposes with expenditures was simply not feasible. The only available national survey of household expenditures, the CEX, is not currently appropriate for measuring poverty. Its sample size is too small to support the level of detail on demographic subgroups that we now obtain from the income surveys. Because the CEX is also expensive to administer and time consuming to process, experts considered it prohibitively costly to greatly expand the survey in its current form.