Who is interested in exaggerating Israeli poverty?

The government has taken upon itself to combat poverty. How should it approach the task? There are many policies it could adopt and targets it could set. Clearly, accurate and objective information about the state of the poor would help the government make choices that are rational and effective.

If, for example, a large share of the poor population is already working, focusing on the labor market may be useful. If most poor do not work, reforming welfare programs or creating incentives to work may be more effective. If poverty is generally a brief episode in people’s lives, some might argue that transfer payments would be an effective tool while others would advocate a “hands-off” policy of less state involvement. If poverty is “hereditary” in certain families or segments of the population, then the debate might turn on investment in education.

Every year the National Insurance Institute (NII) publishes a report to supposedly give the government the information it needs to combat poverty.

Unfortunately, it does not include the accurate and objective data the government needs.

Earlier this month the NII published its annual report on the state of the poor, this time relating to 2011. The 70-page report includes heaps of tables, figures and data on the distribution of income in Israeli society, as well as conclusions that were widely quoted in the local media.

But a close examination of the NII report by the Jerusalem Institute for Market Studies reveals that it does not provide the accurate and unbiased data necessary for good policy-making.

When a government agency is tasked with reducing poverty it has an incentive to portray the problem as severe, which only more funding and authority can tackle. Such a portrayal is not always in line with the facts.

First, has poverty risen or declined? That depends on who you ask.

According to the NII, the share of poor families increased 0.1 percent in 2011. But the OECD defines poor families slightly differently from the NII, and according to the OECD’s methodology, Israel’s poverty rate actually decreased by 0.5 percent.

Similarly, the OECD’s methodology and the NII’s are at odds about Israel’s “working poor.” The NII reported a 6.7% poverty rate among Israelis living in a household with two workers, while according to the OECD’s methodology the figure is only 3.5 percent. This information was included on page 37 of the NII report but was omitted from the NII’s executive summary for policymakers, its powerpoint presentation and its press release for the media.

IS POVERTY among working families a serious problem or not? The NII further clouds the question by defining a worker as someone who has worked at least one hour in the three months preceding the NII survey.

NII does not incorporate the number of hours worked, so there is no way to know how many of those defined as “the working poor” by NII actually worked a significant number of hours. This is critical information, since in the OECD an average two-thirds of those classified as poor who live in working families were living in families in which the total amount of hours worked did not exceed one halftime position. In other words, contrary to the NII’s conclusion that working in Israel is not much help in getting out of poverty, it may be a great help.

Another question policymakers reading the NII report may be left clueless about is how many of those classified as poor in 2010 remained poor in 2011. How many people became impoverished? Social mobility is central to the issue; if people are “poor” for relatively short periods before their lot improves, a widely different policy is called for compared to a situation in which the same poor remain poor all their lives. The NII claims it is waiting for the results of a survey being developed by the Central Bureau of Statistics.

The NII chose not to use the huge NII database already available, of millions of Israelis who either pay NII taxes or receive NII transfer payments, in order to assess social mobility.

Another weakness of the NII report is that it is based on income reported in surveys. But how many of the people surveyed under-reported their income? One way to estimate the figure is to compare income to expenses. The spending of 37% of “poor” families is above the poverty line. Among the poor who own a business, who have more opportunities for tax evasion, the figure is as high as 59 percent.

While some of these families spending more than they reportedly earn may be going into debt, it is likely that most of them have other sources of income. So how badly off are the poor whose income does not cover their needs? Well, according to the Central Bureau of Statistics, 41.2% of families in the bottom decile (the lowest income group) and 54.9% of families in the second-lowest decile lived in an apartment they own.

The use of questionable definitions and interpretations renders the NII report virtually meaningless in any serious discussion of poverty. The NII consistently overestimates the rate of poverty and underestimates the importance of work in the process of exiting poverty. Such a strategy allows it to claim that only more funding and authority for its bureaucracy can help ameliorate the situation the bureaucracy itself has exacerbated.

No doubt the government needs an objective annual assessment of the state of the poor and the best means to improve it. But it seems that perverse incentives do not allow the NII to meet this task. A different, more objective body, such as the Central Bureau of Statistics or the Bank of Israel, would be better suited for the task.

The writer is a research fellow at the Jerusalem Institute for Market Studies (JIMS).