Transfers Matter Most: How Changes in Transfer Systems of Canada and the United States Explain the Divergence in Household Poverty Levels from 1974-1994

Abstract

From 1974 to 1994, Canada and the United States experienced quite substantial divergences in relative household poverty rates and inequality levels from similar starting points.Although several scholars have attempted to explain Canadian and U.S. differences in poverty and inequality levels at one point in time, none have satisfactorily explained the causes of these divergent trends. Utilizing high quality, comparable data from the Luxembourg Income Survey, my analysis of the household poverty rates demonstrates that differences in the policies and reforms of the two country’s transfer systems explains the divergence relative household poverty rates. The data also seriously cast doubt on other potential market, cultural, or tax system explanations. Further, by selectively removing the income from each specific category and then specific type of transfer income and recalculating the household poverty rate, my “sensitivity-type” analysis clearly demonstrates the predominant explanatory power for differences in the structure and reforms of social insurance transfers income and, more specifically, social retirement benefits.

In Canada, the expansion of the Guaranteed Income Supplement (GIS) for low-income elderly families over this period provides the only plausible explanation for the dramatic reduction in the poverty rate of the elderly households relative to the United States and, perhaps somewhat surprisingly, explains most of the divergence in household poverty rates between the two countries from 1974 to 1994. As a large part of the divergence in inequality rates is also driven by reduction in household poverty rates in Canada relative to the United States, the expansion of the GIS benefits also provides a major explanation for the divergence in levels of household inequality over this period.