In the first two parts of this series on income, we considered the various definitions of income commonly used and how exclusions of capital gains and non-cash payments can affect small area estimates in different ways. Here we consider measures of income that may merit consideration as alternatives.
Economists typically use two additional measures of income – disposable and discretionary income.
- Disposable Income
This is defined as the amount of income left after payment of taxes and non-optional benefit programs (Social Security, Medicare). In effect, this is ‘net income’, since mandatory payments have been removed. The Bureau of Economic Analysis most recent estimate of disposable income is $129,378 per household (compare to the total income of $182,425). - Discretionary Income
This is defined as disposable income less the cost of non-discretionary expenses for essential items. These essential items usually include:- Shelter
- Transportation for non-leisure purposes
- Food
- Utilities
- Insurance
- Healthcare expenses
- Childcare expenses
- ‘Necessary’ clothing
Disposable income is likely a better indicator of ‘wallet size’ for most business-to-consumer companies, but aside from state and local differences in taxation rates, does little to help us distinguish between high and low cost areas.
On the other hand, discretionary income measures will help to sort out cost of living differences, but for many companies, some or all of their sales fall into one of these categories. Further, we can then quibble all day about what food is essential for living, what kinds of insurance are necessary and in what quantity, and so forth.
The federal student loan repayment guidelines rely on a discretionary income measure to determine the monthly repayment amount. Rather than attempt to compute a household’s discretionary income (did you really need that donut?), they utilize the federal poverty level guidelines available at the state level that are based on household size. If a household has 3 people, and household income of $75000, with a poverty level of $35000, they are deemed to have a discretionary income of $40000 with loan repayments typically a percentage of that each year.
The problem? The poverty levels are computed using the census definition of income, which includes significant non-cash transfers to low-income households and excludes most capital gains.
Over the next couple of months, AGS will be experimenting with estimating several additional income measures, as we are redesigning our consumer expenditure models using our synthetic household model. As a result, we expect to release in November a broader range of income statistics at the block level that include:
- Census household income distribution
- Broader income estimates that include items typically excluded by the census bureau
- Discretionary income distribution
- Disposable income distributions, using both the student loan formulation and a broader measure that accounts for shelter, utilities, and food.
The results should be superior to census income in that they will better account for the substantially different cost of living between areas, especially as it concerns state/local taxation and shelter costs.
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