Felix Salmon

The social safety net is broken

Felix Salmon
Nov 8, 2011 20:07 UTC


A lot of the coverage of the Census Bureau’s new Supplemental Poverty Measure treats it as a bit of a wash — child poverty down, poverty among the elderly up. But for me the big news is that America’s safety net isn’t working.

The old poverty measure — which is still the official measure — excluded a lot of the programs designed to reduce the effects of poverty — things like food stamps and the Earned Income Tax Credit. On the other hand, it also excluded things which increase the effects of poverty, like payroll taxes, transportation costs of getting to work, and childcare and healthcare costs.

Put the two together, and you get the changes spelled out in the chart above. There are more people living in poverty than we thought — 16% of the population rather than 15.2%. A lot of people didn’t take the urgency of America’s poverty crisis seriously, given the old methodology, because they reckoned the “real” rate was lower, once you took into account things like the EITC. But it turns out that in reality, the poverty rate is even worse than we thought — much worse, in fact.

It’s true that the poverty rate for children has come down — but it’s still unconscionably high. There are 13.6 million children under the age of 18 living in poverty — that’s 18.2% of all the children in the country.

And most egregiously, even after taking into account food stamps and the like, 5.4% of the population — and fully 8.6% of the Hispanic population — is living on less than half the poverty level.

What does that mean, in practice? Here are the new poverty levels:


To live on less half the poverty level means that a family of four — two adults and two children — would have a total household income of no more than $12,172 per year. Call it $1,000 per month. And that’s after accounting for aid from the government.

Is it possible to feed and clothe and house four people on $1,000 a month? Evidently it is, because millions of Americans do. But I certainly wouldn’t want to attempt it. And it can’t be good for the kids in such families.

Up until now, I thought that the US social safety net, such as it is, was at least managing to catch people at the very bottom of the distribution. If you were earning less than half the poverty level, you’d be looked after somehow. But in fact, fully 80% of the ultra-poor in the official poverty statistics stay in the same place when you look at the new numbers. And that’s just unacceptable. As politicians try to compete for areas to cut spending, let’s at the same time try to increase the amount of aid going to the country’s poorest, through food stamps and Medicaid and the like. Because if America really aspires to be the greatest country in the world, it can’t have 16.1% of its population living in poverty.


Can’t take credit for that, y2kurtus. Am lucky to have found a school that makes this recipe work!!! Might not believe it if I didn’t see it daily.

Now if only we can find the money to stay open. :) Serving the disadvantaged isn’t a terribly profitable industry.

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How poverty has tracked global population

Felix Salmon
Oct 31, 2011 18:48 UTC


184x558_popchart_left_align.gif The world officially hit 7 billion people today, and so to celebrate I decided to take a look at what’s happened to poverty in the world as its population has increased — many, many thanks to Nick Rizzo and to Laurence Chandy and Homi Kharas at Brookings, two Englishmen who provided him with unpublished data and were extremely generous with their time.

The big picture can be seen in the chart at left: the number of poor people hasn’t been growing nearly as fast as the number of people. And indeed over the past 24 years, as the world’s population increased by 40% from 5 billion to 7 billion, the total number of people living in poverty has actually gone down. (One small note I should make about these charts: the dollar-a-day figures from 1987 onwards actually measure the population living on less than $1.25 a day, so a jump in the absolute-poverty numbers between 1974 and 1987 is partially a function of the fact that we’re raising the bar from $1 to $1.25.)

In fact, there’s pretty much the same number of people living in absolute poverty today — about 890 million, or 12.7% of the global population — as there were all the way back in 1804, when the world’s population hit 1 billion and 84% of them were living in absolute poverty.

Indeed, back in 1804, only 5% of the world was living on more than $2 a day. (All these numbers, of course, are real, and adjusted for purchasing power.) Today, that number is 4.7 billion, or 67% of the world’s population. The number of people in the world living out of poverty has been growing faster than the world’s population as a whole for pretty much all of recorded history.

And the “global middle” — people living on somewhere between $10 and $100 per day — is growing particularly fast. It was 1.14 billion in 1987; it’s 1.96 billion today. That’s an increase of 72%, even as the population of the world as a whole has gone up by just 40%.

A huge amount of what we’re seeing here is the effect of China, of course. Here’s what’s happened in East Asia over the past 24 years:


Absolute poverty in East Asia has gone down to 142 million today from 822 million in 1987, even as the population as a whole has risen from 1.5 billion to 1.9 billion. 24 years ago, more than half of East Asia lived in absolute poverty; today, it’s just 7%.
The other big global population center is South Asia, which includes India, Pakistan, and Bangladesh; its history of poverty reduction is less heartening but still substantial.


There’s a lot of work to be done, here, with two thirds of the South Asian population still living in poverty. But absolute poverty has declined quite dramatically in the past dozen years, which is certainly a start.

You won’t be surprised to hear that the most depressing story is in AIDS-ravaged sub-Saharan Africa.


Even here, however, the percentage of the population living in poverty is no higher than it is in South Asia, and the number of people living in absolute poverty hasn’t actually gone up over the past 12 years.
Here are the other regions:




It should be noted that all of these figures, and especially the African ones, come with massive error bars and caveats; Shanta Devarajan is very good on this. But the big picture is clear: there’s nothing Malthusian going on here. As the world’s population grows, we’re taking people out of poverty, rather than consigning them to it. Which is heartening news in a world of limited resources.


I am happy that we have had a time span where both population and some form of prosperity have coexisted. No one should assume that this relationship is an eternal verity. Our planetary population growth will continue to exert rising pressure on finite natural resources. We can all hope that the future will bring economic gains equal or exceeding population growth. But no natural law guarantees this, and we now have a decades-long failure to make the early promise of unlimited cheap nuclear power come true. A list of known problems–global climate change, depletion of fertilizer natural resources, etc., have conspired to raise food costs and render more nations dependent on imported food. At the least we should strive to enable individuals to have the means to choose whether or not to procreate.

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The longevity trend bond arrives

Felix Salmon
Dec 27, 2010 16:39 UTC

Swiss Re reinsures a lot of life insurance. As a result, it could lose billions of dollars if a lot of insured people die young, due to pandemics, terrorism, or the like. To hedge that risk, it has sold about $1.8 billion in mortality bonds to date. Such bonds earn a healthy yield, so long as there’s no big rise in mortality. If there is, then the bondholders lose some or all of their principal, and it’s used instead to make those unexpected life-insurance payouts.

Mortality bonds are an expensive hedge, though — one last year had a yield of 617bp over benchmark lending rates. Swiss Re would much rather hedge its mortality risk in a profit-making manner, by writing longevity risk. That’s what it did last year with the UK’s Royal County of Berkshire Pension Fund: in return for a steady stream of insurance premiums, Swiss Re contracted to pay out Berkshire’s pension obligations. The risk in that kind of deal is that the pensioners live too long, and that Swiss Re’s total payouts will be much bigger than the total insurance premiums.

Insuring longevity risk, then, is a great deal for Swiss Re: not only should it be profitable, if it’s priced correctly, but it also helps to naturally offset the company’s mortality risk. If people live longer, then pension payouts will be higher, but life-insurance payouts will be lower. And vice versa.

As a result, you’re unlikely to see a market in longevity bonds developing alongside the market in mortality bonds. Insurers’ longevity risk is already hedged, by their larger mortality risk, so they don’t need to go to capital markets to buy expensive hedge there.

Still, the hedge is not perfect, and so now we’re beginning to see Swiss Re come to the market hedging its basis risk: the risk that its longevity portfolio won’t act as a hedge for its mortality portfolio.

“We are hedging against the risk that life duration patterns between older, retired British males and younger US males diverge significantly,” said Alison McKie, head of life and health risk transformation at Swiss Re.

Swiss Re transferred $50 million of longevity trend risk to investors through an off-balance sheet investment vehicle called Kortis. “The bond is triggered by how the risks diverge,” McKie said.

This bond is small, at just $50 million, but the way it works is interesting. Swiss Re is essentially short the life of UK pensioners, and long the life of US workers. So the worst case scenario for the reinsurer is that UK pensioners start living longer even as US workers start dying early. And if that happens, the people who bought this bond, which pays a coupon of 4.72% per year through 2017, will lose some or all of their principal.

It’s an interesting concept, but it seems to me that basis risk is a very difficult thing to hedge, just because the sums involved when the two legs of your trade both move against you are so enormous. I suspect that basis bonds like this—the term of art seems to be “longevity trend bond”—are going to be a bit like catastrophe bonds: a good idea in theory, which has difficulty taking off in practice, and which never really reaches the critical mass needed to make a difference. Especially since there’s no natural buyer of this risk.

Update: Be sure to see the great comment from David Merkel below.


Thanks David!

Would love to know more about those three wealthy Canadians…

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