How CBO Adjusts for Survey Underreporting of Transfer Income in Its Distributional Analyses: Working Paper 2018-07

By Bilal Habib (CBO).

CBO’s analyses of the distribution of household income rely on the Census Bureau’s Current Population Survey (CPS) for information about receipt of government transfers, particularly means-tested transfers. CPS respondents underreport their receipt of those transfers, and that underreporting has increased over the past few decades.

This paper describes CBO’s method for adjusting for CPS underreporting in the agency’s analyses of the distribution of household income. CBO uses a probit regression to estimate a probability that people receive transfer income. CBO then imputes additional recipients on the basis of those probabilities so that the total number of people receiving a transfer in the model matches the actual number of recipients recorded in administrative program data.

This paper presents the results of CBO’s adjustment method for three means-tested transfer programs—Medicaid, the Supplemental Nutrition Assistance Program, and Supplemental Security Income—from 1979 through 2016. The paper examines how that method affects the distribution of household income. The results indicate that correcting for underreporting leads to higher estimates of the level and growth of income at the bottom of the distribution and to larger estimates of the effect of government transfers in reducing income inequality. CBO’s results are also compared with those from other methods and are found to be broadly comparable.