Working Paper Series, La Follete School Working Paper No. 2010-004, November, Andrea Brandolini, Silvia Magri and Timothy M. Smeeding (2010)

The paper evaluates the measures of poverty that rely on indicators of household net worth. Two approaches are followed in the literature: income net worth measures and asset-poverty.

The most common criterion to define poverty in rich countries is the insufficiency of income relative to a pre-determined socially acceptable minimum level of income. In the U.S., a family and individuals are considered to be impoverished if the family’s total income before taxes is less than a threshold that varies according to family size and composition. The European Union (EU) measurement is different as it consists of persons with disposable income (after taxes) adjusted for family size below 60 percent of the median national income in each year. These different measurements are characterized by the absence of the role of assets in assessing poverty. However, assets and the lack of assets are important for measuring the material well-being and social exclusion that non-income poor people may face – it captures the other dimension of poverty. The income measure of poverty has been described as a very good proxy of the living standards of an individual / family by the authors, but it has its shortcomings. First, as the authors point out, income fails to represent the full amount of available resources as it excludes real and financial assets that individuals can rely on during adverse events. The second critique is that income does not take account the multiple dimensions of human well-being – aspects like adequate nourishment, clothing and shelter and social exclusion are ignored. The authors in this paper aim to study the significance of personal wealth in the analysis of poverty.

The authors state that assets and liabilities are very important to maintain consumption when income is unstable.  Such assets and liabilities act as insurance and are complements to the access to private and public insurance mechanisms.

As such, wealth accumulation through such “precautionary savings” has been described as the primary means for households to insure against income instability.

The authors construct a measure of asset-poverty, where a consumer is asset-poor whenever his/her wealth holdings are not enough to secure the socially defined minimum standard of living for a given period of time. The researchers clarify that such an asset-based measure refers to vulnerability rather than poverty. The asset-based measures of poverty were based on the Luxembourg Wealth Study (LWS) database. The database provides data on household income and wealth for ten rich countries. The authors use three wealth variables such as total financial assets, total debt and income-net worth. For each country they define two types of income poverty thresholds, where the first one is a standard relative poverty line set at 50 percent of the national median of disposable income.

The second measure is called the “US-PSID poverty line” and it is constructed by taking half of the median of income poverty line and converting the dollar amount to other currencies. Both these thresholds serve as reference points for the asset-based measure as well.

The researchers find that poverty incidence varies according to both the poverty measure and the measure of income net-worth. They find that income poverty is higher for the subgroup whose household heads are aged 55 and over. The findings held for population in Finland and the U.S., but lower in Italy and Germany.

The authors believe that the income-net worth indicator reveals this finding because households aged 55 and over tend to have low or no mortgage in these countries.

Another significant finding was that there is a narrowing of the relative national poverty line between the U.S. and the European countries, indicating that North American elderly people are relatively richer when income-net worth is used as the measure of well-being. In the case of the US-PSID lines, Sweden ranks at the bottom of the poverty measure along with Finland and the UK and Canada are close to the top. Using both the US-PSID poverty line and the relative poverty line, the authors reveal that Norway is the least poor country and most nations have around 20 percent to 30 percent of their populations who are both income and asset poor.

The researchers stress that regardless of which measure of the poverty threshold is used, the asset-poverty measure points to the fact that a large proportion of non-poor households in all countries are “vulnerable” and they do not have adequate financial assets to sustain themselves at or above the poverty line for at least three months.

The authors conclude the paper by stating that the concept of asset poverty has wide policy implications and countries like the U.S. are putting emphasis on the accumulation of financial assets by low income households to tackle poverty.