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How can you tell if someone is in poverty? It’s not an easy question. But we do have some guidelines.

The Max Out of Pocket crew would meet the federal poverty guideline if we had an annual income of less than $17,420. That’s according to the Department of Health and Human Services (HHS). They will bump that figure to $21,960 in a few weeks when little Max or Maxine arrives and we turn into a family of three.

Now, it would be easy for someone like me to scoff at the number. But would I be scoffing at how low it is or how high it is?

“If it is not possible to state unequivocally ‘how much is enough,’ it should be possible to assert with confidence how much, on an average, is too little.”

Mollie Orshansky, American economist and statistician

I like to think we could easily live off $20,000 if we needed to. But that is easy for me to say. We are educated, established, and have more than a basic understanding of budgeting and personal finance. Some might go as far as to call it an obsession.

So, for Max, this stuff is simple.

Unfortunately, it is just not that simple for everyone, and plenty of people out there need help. We often use the federal poverty guidelines to get them the financial help they need.

But the HHS poverty guidelines are just that – a guideline. And a dated one at best. Plenty of government and private financial aid programs use it to determine eligibility for aid. Head Start and the Children’s Health Insurance Program are just a few examples.

We use it a ton in healthcare – but what it is it?

Poverty Guidelines vs. Poverty Thresholds

I need to start this out by level setting a few things.

Let’s start by calling out a distinct difference between the poverty threshold and poverty guidelines. The poverty threshold is used for statistical purposes, whereas we use the poverty guidelines for administrative purposes.

You might use them to answer two entirely different questions:

• How many people are in poverty? Poverty Threshold.
• Do I qualify for (insert government program here)? Poverty Guideline.

There is a nice FAQ page on the Health and Human Services website explaining some other differences.

That said, the poverty guideline is just a simplified version of the poverty threshold. The Census Bureau maintains the poverty thresholds and the Department of Health and Human Services maintains the poverty guidelines.

Mollie Orshansky

My understanding is the poverty threshold was initially developed by Mollie Orshansky way back in the 1960s. Evidently, we have not seen much change in the calculation since then. These days, the Census Bureau keeps the poverty thresholds up to date.

In a nutshell, Orshansky took the cheapest of four food plans developed by the Department of Agriculture and multiplied it by three. Why three? Because the 1955 Household Food Consumption Survey (also administered by the Department of Agriculture) suggested that families of three or more persons spent about 1/3 of their after-tax income on food. Then they adjusted the figure for family size. This relatively simple function defined the poverty threshold. 

There have been some minor adjustments to the calculation over the years, but not many. The consumer price index is used each year to adjust the figure. The base year (1963) was $3,128 for a family of four.

At the risk of beating a dead horse, I want to be clear that the HHS poverty guidelines are derived and standardized from the Census Bureau’s poverty thresholds. Although they are similar, they are simply not the same thing.

What are the Federal Poverty Guidelines for 2021?

The Department of Health and Human Services updates the federal poverty guidelines in February of each year. They generally apply retroactively to sometime in January. You can find them here.

There is one table for the 48 contiguous states and the District of Columbia. Alaska and Hawaii get their own because they are considering a higher cost of living for those areas. 

Here is the table for 2021:

The federal poverty guidelines are adjusted each year by the Consumer Price Index for All Urban Consumers (CPI-U). For 2021, this update reflects a 1.2 percent price increase between calendar years 2019 – 2020.

One thing I found interesting about the poverty guidelines is they do not distinguish between farm and non-farm families. They also do not differentiate between aged and non-aged families; they lump them together.

Lastly, the guideline does not distinguish between before-tax or after-tax income. Although the official poverty definition uses “money income before taxes”, the guidelines leave it up to the administrative program (like Head Start) to define how they want to use the table.

Using the Federal Poverty Guidelines

In healthcare, we often refer to the federal poverty guidelines as the federal poverty level (FPL). That’s bad practice.

The Department of Health and Human Services specifically calls out the use of the term “federal poverty level” as ambiguous. They caution against the practice of loosely using the term “federal poverty level” when precision is important. So, I will use the proper term, guideline.

When financial aid programs use the federal poverty guidelines for determining financial eligibility, it is often a multiple of the income limit. For example, a family of two may qualify for a particular program at 200% of the federal poverty guideline.

So, we start with the federal poverty guideline for a family of two, which is $17,420. We then multiply that by 2 to get $34,840.

$17,420 X 200% = $34,840

If your family income is less than $34,840, you might qualify for that program.

Final Thoughts 

The Max Out of Pocket crew could easily live off $20,000. But I need to be careful here. Me living on $20,000 is not even close to the same as someone struggling on $20,000; they are mutually exclusive.

The federal poverty guidelines are just that, a guideline that doesn’t account for education or other factors. I think it is something that could use some updating.

In 2020, we spent 2.65 times the federal poverty guideline for a family our size. But that does not mean we were living at 265% of the poverty level. Remember, the poverty level is not the same thing as the poverty guideline.

$46,207 (2020 Expenses) / $17,420 (Poverty Guideline) = 265% Federal Poverty Guideline

Additionally, our overall income far surpasses the guideline by several multiples.

The tables are updated annually each February and are derived from the Federal Poverty Thresholds, which the Census Bureau maintains. The poverty guidelines are used for administrative purposes, whereas the poverty thresholds are figures used for statistical analysis.

Many healthcare assistance programs use the guidelines for determining eligibility. Therefore, having a basic understanding of the tables is meaningful if you or anyone you know needs assistance.

Have you ever used the federal poverty guidelines for anything?

Tags: Federal Poverty GuidelinesFederal Poverty ThresholdsFPL