Poverty in the U.S.

Abstract

In 1964, President Lyndon B. Johnson declared a ‘war on poverty.’ Since then, the U.S. poverty rate declined from 19% to 11.6% in 2021, but one may wonder why it has not dropped further. In this issue of PERCspectives on Policy, Dennis Jansen and Andrew Rettenmaier examine how poverty thresholds in the U.S. were first established, the problems caused by leaving out transfer payments and tax credits, and the disadvantages of using the Consumer Price Index (CPI) to annually update those thresholds. The authors also examine how those thresholds would change if based on the Personal Consumption Expenditures (PCE) price index. Using the PCE price index, the poverty threshold for a family of four in 2021 would have been 23% lower than the current CPI-based threshold. The authors note that while taxes and all transfers have reduced income inequality and its growth relative to income before taxes and transfers, many of the programs’ designs can actually reduce earned income.