Being poor is expensive. Though it seems somewhat counterintuitive, doing just everything costs a bit more when you have less.
Consumers who can't maintain a minimum checking account balance pay monthly fees. Those who are unbanked pay to cash their checks, to get money orders to pay their bills and to buy and use prepaid cards. Low-income consumers are far more likely to find it difficult to secure mainstream credit sources and are thus much more likely to make use of high-cost alternative credit sources when financial emergencies hit, often in the form of a payday, title, tax refund anticipation or installment loan.
And that's just accessing money itself. It doesn't stop there. It also costs more when the actual spending of it begins.
As it turns out, it doesn't just feel like things costs more money when one has less money.
Things actually do cost more.
The cost of living rises faster for the poor than it does for the comparably well-off. From 2000 to 2013 (the last time period there is data for), prices on the things that most poor people buy disproportionately, such as food and sundries, and pay, such as rent and utilities, have risen steadily for 139 of 168 months, according to the Chicago Federal Reserve. All in, prices increased 3.2 percent more for the poor during that 13-year time period.
And more recent data indicates that things aren’t getting much better. Recent research from Harvard grad student Xavier Jaravel indicates that prices continue to go up faster for the poor than for their more affluent peers. Studying trends in everyday purchases at grocery and drug stores, Jaravel's data suggests that prices are increasing by an average of 2 percent per year for goods purchased by consumers with household incomes under $30,000 but by just 1.4 percent annually for those with incomes above $100,000.
Modeled over 20 years, that would mean that a dollar in the pocket of a low-income consumer is worth $0.88.
And, as is often the case, there are no easy answers.
In a refrain that ought to sound a bit familiar to anyone who has looked at the reasons the poor pay more for financial services, the reasons the poor pay more for food and other retail goods are complex and widely argued about.
Some of it is that more affluent consumers tend to buy more in bulk — buying 32 rolls of toilet paper is proportionally less expensive than buying six — but the upfront cost is higher. So, poorer customers tend to have to soak the higher proportional cost.
There is also the surprising reality that goods that less affluent consumers favor also tend to stay in the market longer with fewer changes over time, meaning their prices more or less trend up with inflation. Jaravel's data indicates that premium goods are introduced to the market more often and are modified more often, because more affluent consumers have more diverse shopping habits. This actually leads to wider discounting, as brands are trying to shed the old version and entice shoppers to the new one.
Said simply, premium goods favored by wealthier shoppers go on sale more often than staple goods bought by more down-market shoppers.
And there is the availability issue — also known as the “food desert” problem. In various urban and rural areas, there simply aren't grocery facilities for lower-income consumers that don't have cars. Sometimes, like in New York's SoHo area, the area has gentrified out of the reach of the working and lower-class residents, who now find themselves in a neighborhood where the local supermarket has been displaced by boutique food markets and artisanal cheese shops. Sometimes, as in Chicago's Southside, the issue is crime and the inability to lure grocers to the area. Or sometimes, as is the case in rural Mississippi, the population is too sparse and thinly stretched to reasonably support stores that are accessed with anything but cars, despite the fact that 47 percent of the local population doesn't own or have regular access to a car.
This tends to push those populations toward more local convenience-type stores for grocery purchases, where prices are higher and selection is lower.
The situation creates something of a catch-22 for those in the lowest tax bracket — can't stop being poor with saving, can't save money until one stops being poor.
Is there any way out of that? Certainly, no easy one, but the USDA is pursuing an out-of-the-box one.
The Supplemental Nutritional Assistance Program (SNAP) — better know colloquially as food stamps — serves 43 million Americans at a cost of about $74 billion a year. SNAP benefits are open to low-income individuals and families (those with a gross income of 130 percent of the poverty line) and nets out to about $123 worth of benefits per household member per month. Those benefits can be used to buy fresh, non-prepared food — and only food.
Run by the USDA, SNAP has been acutely worried about food cost and nutritional access for low-income consumers — particularly the food desert problem centered on access. A problem it is hoping the digital age can help it address.
The USDA is in the process of rolling out a pilot program that will allow SNAP program enrollees to buy groceries online. The two-year program will go live this summer.
“Online purchasing is a potential lifeline for SNAP participants living in urban neighborhoods and rural communities where access to healthy food choices can be limited,” USDA Secretary Tom Vilsack said in a statement. “We're looking forward to being able to bring the benefits of the online market to low-income Americans participating in SNAP.”
The rollout will be small, limited to seven states: New Jersey, New York, Pennsylvania, Maryland, Washington, Oregon and Iowa. It will also involve a limited number of retail partnerships the first time through: Amazon, FreshDirect, Safeway, Dash’s Market, Hy-Vee, ShopRite and Hart's Local Grocers are the first-round participants.
The early iteration will test both online ordering with payments and online ordering with payments on order delivery. SNAP participants will only be able to use their benefits to purchase eligible items online — not to pay for service or delivery charges. The USDA has confirmed that, as the system rolls out during the two-year pilot, the plan is to add additional retailers in the future. The overall goal, according to the USDA, is to make online ordering a national option for SNAP participants, once the pilot phase is complete and the USDA can incorporate lessons learned into program rules.
So, in two years, will SNAP solve at least some of the high cost of buying problems?
The tough road forward
The announcement has engendered some notable excitement around its potential — notably from the firms taking part in it.
“We believe that fresh, high-quality and healthful food options should be accessible to all,” a FreshDirect statement said. “We look forward to bringing the online purchasing option to SNAP clients."
However, there are doubters. Some have noted that, by ceding more ground to online retailers, the USDA is actually making it harder for the smaller markets that already serve undeserved neighborhoods by introducing competition int the system that they can not possibly stand up to. That, critics noted, could actually have the effect of even further lowering local, physical access to grocery selection — when the intention of the program is to increase it.
Other have noted that, for online ordering to be any kind of a benefit, the people whom it is benefitting need to be able to access it. This is problematic since less than 50 percent of low-income Americans have smartphones and far less than half have regular high-speed internet access via a computer. Even among the half that have mobile internet access, that access is less consistent than their middle and upper-class counterparts since low-income customers tend to use prepaid phones that can run out of access minutes (as opposed to being on a consistent monthly phone plan).
Finally, while SNAP will pay for the groceries, it will not pay the delivery or services charges, and grocery delivery isn't cheap. For example, Amazon costs $99 a year for the Prime membership and $14.99/month for the Fresh add-on. It seems unlikely that a family on food stamps has an extra ~$370 a year to pay for delivering the groceries, over and above the groceries themselves.
The problem isn't going away, and it isn't realistically sustainable that the poorest Americans’ cost of living will continue to climb indefinitely for buying goods and services — particularly at the same time that the same group of Americans have ever-decreasing access to mainstream financial services (and while the various regulatory bodies are working double-time to make sure that various alternative forms of financing, like payday loans, are nonexistent).
Making SNAP benefits an option for low-income buyers likely won't be enough to untie this particular Gordian knot. It may not even loosen it up much if SNAP enrollees don’t sign on.
But if the program does have the effect of moving more low-income shoppers online — and into the more mainstream version of modern commerce — that could be a step toward greater financial inclusion in the U.S.
Even if it is a small one.