Definition: In the United States, the Federal poverty level is used by the U.S. government to define who is poor. It's based on a family's annual cash income, rather than their total wealth, annual consumption or their own assessment of well-being.
It's important to know that there are two different definitions of the poverty level. They are used by two different agencies for completely different purposes.
However, both originated during President Johnson's War on Poverty as tools to measure and eradicate poverty. In his inaugural address, just weeks after the assassination of President John F. Kennedy, Johnson called for "The richest Nation on earth" to win the war, and assist "...American families with incomes too small to even meet their basic needs." From this War on Poverty came many of today's programs such as food stamps, Medicare and Medicaid. (Source: NPR, Lyndon Johnson's War on Poverty,January 8, 2004; Johnson Archives, Inaugural Speech)
What Is the Federal Poverty Level?
When most people talk about the poverty level or poverty line, they are usually referring to the Federal poverty guidelines. This is the definition of poverty issued each year by the Department of Health and Human Services (HHS). It's used to determine who receives federal subsidies or aid.
For 2014, the Federal poverty guideline is an annual income of $23,850 for a family of four. This is the most commonly used statistic. Add $4,060 for each additional person to compute the Federal poverty level for larger families. Subtract $4,060 per person to compute it for smaller families. For example, a single-person household is considered poor if his or her income is $11,670 or less. These are the guidelines for the 48 contiguous states. Guidelines for Alaska and Hawaii are a little higher, since it is more expensive to live there. The Federal poverty level is updated every year to keep up with price increases in the previous year. For more, see How the Poverty Level Accounts for Inflation.
The Federal poverty level is also used to give subsidies to some families who earn more. For example, some programs give subsidies to families that are 150% of the Federal poverty level. For a family of four, this would be 1.5 x $23,850 = $35,775. To find out more about these specific guidelines, see HHS 2014 Federal Poverty Guidelines.
Many Federal programs use the guidelines as a base for eligibility. These include: Head Start, Food Stamps, the National School Lunch Program, the Low-Income Home Energy Assistance Program, and the Children’s Health Insurance Program (CHIP). Programs that hand out cash don't use the poverty guidelines. Such programs include Temporary Assistance for Needy Families, the Earned Income Tax Credit, and the Supplemental Security Income. (Source: HHS, Frequently Asked Questions)
The Poverty Level and Obamacare
The poverty levelbecame relevant to millions more Americans in October 2013, when the health insurance exchanges for the Affordable Care Act opened for enrollment. That's because those making 400% or less of the poverty level are eligible for tax credits to help pay the cost of insurance. In 2014, that translates to $46,680 for individuals and $95,400 for a family of four. To see the levels for different household sizes, go to Will I Qualify to Save on Monthly Premiums?.
Those making 133% or less of the poverty level are now eligible for Medicaid. In 2014, that's $15,521 for individuals and $31,720.50 for a family of four. Specific eligibility depends on your particular state, so you'll find out when you apply on the exchanges. For more, see Obamacare Summary and How Will Obamacare Affect Me?.
The second kind of poverty level is the poverty threshold. This poverty line is used for statistical purposes. It's estimated by the Census Bureau to report how many Americans live in poverty each year. The poverty threshold is also used as the official Federal poverty definition by the Office of Management and Budget (OMB). Even the HHS uses the poverty threshold as a base to calculate its poverty guidelines.
The Census Bureau's definition of poverty is a little more complicated, though. It takes into account whether the head of the household is older or younger than 65, and the number of adults vs children. To give a comparison, the Census Bureau's definition of poverty for a family of four (two adults, two children) is $23,283. A single person under 65 is poor if his or her income is $11,945, or $11,011 if 65 or older. For 2011 (most recent data available), 46.2 million people, or 15% of the population, were living below these poverty thresholds. This was the same number as in 2010, the highest number ever recorded. (Source: U.S. Census, Highlights; Poverty Thresholds)
The poverty threshold is based on pre-tax income. This includes earnings, pension or retirement income, interest, dividends, rents, royalties, income from estates, trusts, educational assistance, alimony, child support, assistance from outside the household, and other miscellaneous sources. It does not include capital gains or losses.
It also includes cash benefits such as unemployment compensation, workers' compensation, Social Security, Supplemental Security Income, public assistance, veterans' payments, and survivor benefits. It does not include non-cash benefits, such as food stamps or housing subsidies.
It counts the income of family members, but excludes the income of roommates or other non-relatives. Each year's poverty threshold is updated by taking last year's poverty threshold and adjusting for inflation, using the consumer price index.
Poverty thresholds were originally calculated during the Johnson Administration. They were designed around making sure families had enough to eat, and so used the U.S. Department of Agriculture food budgets designed for families under economic stress, as well as data about what portion of their income families spent on food. The USDA budgets were originally developed during the Great Depression, and were used to determine how much agencies should budget to feed each family. (Source: U.S. Census, How the Census Measures Poverty; The Orshanky Method; University of Wisconsin, Alternatives to the Official Poverty Measure) Article updated February 4, 2014