Working Paper: NBER ID: w12680
Authors: Michael D. Hurd; Susann Rohwedder
Abstract: According to economic theory, well-being or utility depends on consumption. However, at the household level, total consumption is rarely measured because its collection requires a great deal of survey time. As a result income has been widely used to assess economic well-being and poverty rates. Yet, because households can use wealth to consume more than income, an income-based measure of well-being could yield misleading results for many households, especially at older ages. We use data from the Health and Retirement Study to find income-based poverty rates which we compare with poverty rates as measured in the Current Population Survey. We use HRS consumption data to calculate a consumption-based poverty rate and study the relationship between income-based and consumption-based poverty measures. We find that the poverty rate based on consumption is lower than the income-based poverty rate. Particularly noteworthy is the much lower rate among the oldest single persons such as widows. The explanation for the difference is the ability to consume out of wealth.
Keywords: Economic Wellbeing; Poverty Measures; Consumption; Income; Older Adults
JEL Codes: I32; J14
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Consumption-based poverty rates (I32) | Income-based poverty rates (I32) |
| Wealth utilization (E21) | Consumption (E21) |
| Income measures (I32) | Economic wellbeing (I31) |
| Consumption measures (E21) | Economic wellbeing (I31) |
| Income-based measures (I32) | Poverty rates (I32) |
| Consumption-based measures (E21) | Poverty rates (I32) |
| Underreporting of asset income (H26) | Income measures (I32) |
| Poverty defined by income (I32) | Overstatement of poverty rates (I32) |
| Poverty defined by consumption (I32) | Accurate reflection of economic wellbeing (P17) |