Press Release of 24 May 2011

Statistics Debate: Child and Youth Poverty Still the Most Urgent Problem on the Policy Agenda

Differing methods of calculation explain recent discrepancies between OECD/DIW Berlin poverty figures

According to recent estimates by DIW Berlin, children and young adults were the group most severely affected by poverty in Germany in the year 2009. DIW Berlin rejects claims that it manipulated or withheld statistical data on poverty. “These accusations are false,” said Gert G. Wagner, Chairman of the DIW Berlin Executive Board. “To the contrary: we have actively raised the issue that our improved calculation methods result in changes in the poverty statistics.” This has been confirmed in recent news reports and in the official findings of a parliamentary inquiry released by the federal government (BT-Drucksache No. 17/4332).

"The fact that the recent OECD report Society at a Glance for 2009 comes to different results based on the figures we provided, concluding that retirees are the largest segment of the population in poverty is due the different calculation methods used," explained DIW senior researcher Markus Grabka. "As a national-level research institute, we make our calculations fit the life realities in Germany as precisely as possible. The OECD, on the other hand, has to produce internationally comparable figures. For that reason, they can only work with facts that apply to the majority of the countries, so they pay less attention to country-specific characteristics than we do." The OECD and DIW Berlin methods differ in three key points: poverty thresholds, income components, and equivalence scales (see below).

One of the key issues behind these differences in poverty figures is the use of different income components. The OECD poverty statistics do not take into account whether people own their own home. "In Germany, 52 percent of all households with a household head over the age of 65 live in their own home or apartment, and more than 84 percent of these properties are completely paid off," said Grabka. "So taking into account whether someone who reports having 500 euros per month in disposable income is living in their own home with the mortgage paid off or living on the same budget in a rental apartment is a crucial factor in answering the question of rich or poor in Germany-even if this factor is impossible to take into account in the OECD's international comparisons."

Poverty statistics: Internationally binding standards still lacking

To calculate income, DIW Berlin uses the variable "owner-occupied residential property." "That's also the standard for the German federal government's Poverty and Wealth Report, and the European Union also stipulates its use as an income component in a Commission Regulation," said Grabka. The use of this variable-and a lower poverty threshold-result in different rates of poverty risk based on the same basic data. "This kind of confusion arises again and again in different comparative poverty analyses and reports, since there is still no internationally accepted standard for data collection and analysis," explained Grabka. It is for this reason that the German federal government's most recent Poverty and Wealth Report (2008), for instance, cites poverty rates from three different representative data sources.

In the most recent poverty figures released by DIW Berlin, children and young adults remain the group most severely affected by poverty: data from the German Socio-Economic Panel (SOEP) study at DIW Berlin show that in 2009, at a poverty threshold of 60 percent of median disposable household income for the total population, 16.4 percent of all children and 24.4 percent of all young adults in Germany could be considered poor. The German federal government explicitly confirmed these results on child poverty rates in the findings of a parliamentary inquiry (the Große Anfrage of parliamentary representatives Dr. Martina Bunge et al., "Gesundheitliche Ungleichheit im europäischen Jahr gegen Armut und soziale Ausgrenzung," Deutscher Bundestag, Drucksache 17/4332, December 20, 2010). "Among young adults, however, poverty is often temporary. More than 50 percent of all young adults between the ages of 18 and 26 are in higher education or training and therefore have no or very little income. Almost one-fourth of young adults are therefore classified as low-income. But each year, around 25 percent of them finish their education or training, and 18 percent move directly into paid employment. For them, the risk of poverty drops by more than half: from about 25 percent to 10.5 percent. Then this group shows a below-average poverty rate," explained Grabka.

According to the new DIW calculations, with 16.4 percent of children living in poverty in Germany, the child poverty rate is higher than the average for all other age groups, which is 14.5 percent. The poverty rate among people of retirement age is still below average, at 14.0 percent, although only slightly. The OECD calculations, on the other hand, show a rate of child poverty in Germany of 8.3 percent, which is below the overall average poverty rate of 8.9 percent. The OECD also reports a 10.1 percent poverty rate among retirees-slightly above the average-due their failure to consider owner-occupied housing. These discrepancies can be attributed primarily to the fact that the rental value of owner-occupied residential property was not taken into account in the OECD figures.

"In our long-term observations, we see that poverty is rising among the elderly and children. The difference in poverty rates between the two groups is still large. But when looking at the long time-series data, we see that old-age poverty, which was below-average for many years, has been rising continuously since 2007. If this trend continues, it could become the higher of the two rates, statistically speaking," said Grabka. Developments in East Germany will play a major role in this: there, members of the generation that experienced the fall of the Berlin Wall as working-aged adults are entering retirement after having spent long periods in unemployment. This means that their pensions will be low. Simulations based on the SOEP data in combination with data from the German Pension Fund ("Künftige Altersrenten in Deutschland: relative Stabilität im Westen, starker Rückgang im Osten," Johannes Geyer and Viktor Steiner, Wochenbericht des DIW Berlin, 11/2010) have confirmed this finding.

Differences in calculation methods

The methods used by DIW Berlin and the OECD to calculate relative income poverty differ in three main respects. DIW Berlin follows the conventions used in the German federal government's third Poverty and Wealth Report.

Poverty threshold: The OECD defines a household as poor when it has less than 50 percent of the median disposable household income of the overall population. DIW Berlin uses a higher threshold of 60 percent. Only those who exceed the 60 percent threshold are not considered poor.

Income components: DIW Berlin explicitly considers imputed rental value in the calculations, whereas the OECD does not (due to the lack of comparable international data).

Equivalence scales: For reasons of data availability, the OECD uses the square root of household size to assign a value to households in proportion to their needs and thereby obtain comparable values across countries, whereas the DIW Berlin uses the "OECD modified scale." Equivalence scales are used to account for the economies of scale enjoyed by multi-member households compared to single households.

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Statistics debate: DIW data, OECD data compared (in German)
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