Geographic cost of living adjustment of poverty rates

Abstract

In this paper, we develop a method for adjusting poverty rates for geographic differences in cost of living. Although interarea differences in cost of living affect consumers in terms of their buying power, poverty rates and federal assistance guidelines have not been adjusted for these differences. Without such adjustment, poverty rates are underestimated in high cost areas and overestimated where cost is lower. Using estimates of area cost-of-living indices and data on income distribution, we adjusted poverty rates assuming log-normal and Pareto income distributions. Poverty rates were compared with and without cost-of-living adjustment for major U.S. cities. We found that poverty rates among Medicare beneficiaries are considerably lower when we adjust for geographic cost-of-living differences.