An Improved Means-Testing Formula for Better Targeting

Abstract

In Russia, means testing is used to identify low-income households and measure poverty headcount as well as to establish the eligibility of the applicants to targeted social assistance. The current means-testing formula, however, is restricted to comparing the per capita income with the cost of the so-called minimum consumer basket or the standard subsistence income. The authors propose an improved means-testing formula which is claimed to measure the wealth and consumption needs of a household more accurately and more equitably, as it includes a revised equivalence scale and а filter for the possession of certain valuable assets. Based on a representative household survey, which covers three subfederal jurisdictions and has been specifically designed to test the performance of the new formula, the authors measure the contribution of each of the proposed formula modifications and the combined effect of all modifications upon the overall poverty headcount and the total income gap as well as the effects upon the poverty status of selected categories of households. Even though during the modeling phase the poverty threshold had to be raised by 12–16% against the official poverty line effective in the respective jurisdictions in order to eliminate the influence of the proposed equivalence scale on the poverty headcount, the ultimate effect of the new formula, which combines the new equivalence scale and several property filters, is a 25% reduction of poverty. This reduction is mainly due to sorting out the households that own excessive property or cars from the low-income category.