After publishing my post, Here’s How Much Money You Need To Retire Early And Live In Poverty, several readers were offended because the definition of poverty was too high. They commented that my premise was absurd and that they live quite comfortably or think they can live quite well on the income levels I highlighted.
I simply used the Federal Poverty Level guidelines and worked backwards to figure out how much capital was needed to earn government-determined poverty-level incomes.
I also wanted to demonstrate, thanks to a decline in interest rates, how difficult it is to accumulate enough capital to earn a reasonable amount of retirement income. I’m certainly feeling the strain.
Don’t shoot the messenger folks!
The negative feedback made me question whether the current government’s definition of poverty was appropriate. Perhaps it is simply too high and encapsulates too many people?
Perhaps if we lowered the poverty income levels for various-sized households, we’d not only save the government a lot of money, but we’d also insult fewer people who make poverty-level or near-poverty-level incomes.
Let’s review the official government definition of poverty and debate whether their levels are truly too high or actually too low.
The Definition Of Poverty
Below is the 2020 definition of poverty by household size according to the U.S. Department of Health & Human services.
I’m pretty sure that most of you would agree that these income levels per household size would make independent living truly a difficult task.
For example, if I only earned $12,760 a year as an individual, I would be forced to live in my mom’s basement, eat grilled cheese sandwiches every day, and pass on almost every outing with friends.
But given I can earn $13/hour flipping burgers at my old employer, McDonald’s, I should be able to earn at least $24,000 a year as an able-bodied citizen.
Today, we are a family of four. There is simply no way we could afford to live off only $26,200 a year. To my parents’ utter dismay, we would have to move in with them. Sending our kids to preschool would be out of the question because preschool, alone, costs about $24,000 a year. Worst case, we would be forced to rely on my parents for childcare as we both try and earn a combined $48,000 a year at minimum wage jobs.
So I got to thinking, perhaps the definition of poverty needs to actually increase across every household count, not decrease.
The New Definition Of Poverty
Some politicians argue all day long that we need to raise the minimum wage because it is currently not enough to provide for a basic standard of living. Raising the minimum wage will likely decrease job opportunities and raise prices for consumers. However, if you want to see change, you’ve got to pick your poison.
Only being able to earn a minimum wage income, no matter where you live in America, seems like poverty to me as well. Therefore, let’s use the minimum wage as the definition of poverty. After all, nobody is expected to earn the minimum wage forever. With more experience and training usually comes higher wages. If you are stuck earning a minimum wage income for more than several years, you should be considered trapped in poverty.
We can use the minimum wage as the baseline poverty level for one person and then use the same percentage increases by household size the government uses in its current definition of poverty.
As of 2020, the federally mandated minimum wage is $7.25/hour, although the minimum wage varies state by state. The District of Columbia at $14/hour, Washington at $13.5/hour, Massachusetts at $13.75/hour, and California at $13/hour currently lead the nation in minimum wage levels.
Based on a 40-hour, 5-day work-week, and 50 weeks of work a year, a $7.25 hourly wage comes out to $14,500 a year compared to the existing $12,760 figure to determine poverty for one person. The absolute dollar difference is not huge, but a 13.6% difference is.
I’ve gone ahead and created a table that highlights the new definition of poverty by household size according to various minimum wage rates. Using minimum wage rates between $7.25/hour to $15/hour is fair because the cost of living is quite different from state-to-state.
Using my new methodology, my family of four in San Francisco could earn up to $53,376 a year and still be considered to live in poverty. Given the median two-bedroom, two-bathroom apartment costs about $50,000 a year to rent in the City, we would certainly need some type of government subsidy in order to minimally survive.
Subsidy Eligibility Is Key
It’s important we recognize why the definition of poverty is so important. The government uses its Federal Poverty Limit guidelines for determining who gets government assistance when it comes to food, housing, healthcare, education and more. In fact, there are over 30 government agencies who use the FPL to determine subsidy amounts for households.
For example, under the Affordable Care Act, the federal government provides healthcare subsidies for households that earn up to 400% of the Federal Poverty Limit.
If you want the government to expand its government assistance programs, then you absolutely want to increase the income figures that define poverty. Given politicians say currently minimum wage levels aren’t high enough to provide for basic living expenses, it’s reasonable to at least increase current FPL to minimum wage levels.
If you want expanded government assistance, you will also want the government to increase the percentage figure based on FPL for determining who gets subsidies. But it seems highly unlikely voters would support subsidies for Americans who earn over 400% of FPL.
As of now, a family of 4 earning up to $104,800 can get healthcare subsidies under the existing definition of poverty. Using a $13/hour wage to define poverty, a family of 4 can then earn up to $213,504 before healthcare subsidies are cut off. Not bad, however, $213,504 seems like too high of an income to still get help from the government.
If you want smaller government and believe most people can at least find a minimum wage job, then you should want to keep the existing definition of poverty or reduce the income levels further. You’ll end up saving the government a ton of money.
By reducing the income levels that define poverty per household size, you also increase the pride and dignity of millions more Americans. With greater pride and dignity, perhaps more Americans would be motivated to learn new skills, work longer hours, take new career risks, and invest more aggressively to build passive income streams.
Break Through Poverty Minimum Wage
While I acknowledge not all of us have the same abilities and opportunities, hopefully, nobody will have to permanently stay at minimum wage-defined poverty levels.
The Socialist in me hopes that all Americans can at least earn a high enough wage to pay for basic living standards: food, clothing, and shelter. If an American cannot due to a disability, an accident, a health issue, or some unfortunate circumstance, we should absolutely pitch in to help our brothers and sisters out. And one way to do so is by arguing for higher income levels that define poverty by household size.
The Capitalist in me believes the government is inefficient and mismanaged. He prefers the government to shrink in size. Allowing people who earn between 300% – 400% of FPL to still get healthcare subsidies, among other things, seems overly generous. But if the government wants to provide subsidies for households that have over $1 million in investable assets that can generate on average $25,000 – $50,000 a year in income, I guess a Capitalist shouldn’t complain.
In conclusion, I wish everyone can make as much money as possible so that they can pay plenty of taxes and never have to receive any government subsidies. It is an honor and privilege to be able to contribute to the well-being of others. But if you do receive government subsidies, there is no shame because that is what they are there for.
Hopefully Financial Samurai along with other free personal finance resources can help folks build greater income and wealth over time.
Readers, what do you think about the government’s existing definition of poverty? Should we increase the income levels to provide more subsidies? Or should we decrease the income levels to reduce subsidies and increase the dignity and pride of millions of Americans?