When asked to define the hardships that afflict America’s poor, outside observers often point to dollar signs: income instability, families living in poverty, households with no savings. But the challenges that confront those who live in the communities left behind extend beyond mere economics.
Social capital, a term used to describe the support that many receive from their network of peers, plays a pivotal role as well. Millions who struggle in the nation’s most financially distressed neighborhoods lack networks that are positioned to elevate their financial stability. To be sure, strong social ties do exist within low-income communities, from family and friends, to classmates and mentors, but the relationships that are most prevalent may not provide the help that is needed. Or, more often, those who might benefit may not be able to access them because they’re juggling multiple jobs.
In more affluent ZIP codes, where interdependency thrives, neighbors share in childcare responsibilities, they pinch hit when one of their own falls ill, and they recommend each other for jobs. These relationships are built over time and characterized by trust.
“Don’t look at the symptoms of poverty; go to the root,” said Jerry Corless, a financial professional in Memphis, Tennessee, who promotes financial wellness through the nonprofit RISE Foundation and works closely with MassMutual Foundation’s Live Mutual Project to restore financial balance in the distressed North Memphis neighborhood of Frayser. “Lack of social capital is a root cause of poverty that has many manifestations, including financial disparity, crime, and even racial tension.”
Indeed, those with limited social capital face significant roadblocks to financial security, such as finding affordable housing near employment opportunities, getting to the doctor’s office without a car, and finding jobs that offer benefits and paid leave, the absence of which is a particular burden for single parents.
But social capital takes many forms. Beyond the network of personal relationships that exist between neighbors, it also encompasses the community organizations and financial institutions that foster economic mobility:
- Nonprofit groups offer job-skills training, food pantries, and transportation services, while assisting those in need with finding public programs that provide affordable housing, education grants, need-based tax credits, and subsidized health care.
- Community banks provide financial wellness education, mortgages, and business loans that can potentially help borrowers build wealth. They also offer interest-bearing savings accounts so consumers can establish an emergency fund to help themselves absorb financial shocks.
But poor households that want for basic needs are less likely to cultivate institutional contacts. They may not be aware that such resources exist. In some cases, traditional banking services may not be available in their hometown and, where access does exist, those experiencing financial hardship may not trust or understand them. Others may not have the resources or credit needed to open a traditional checking account. (Related: Watering the financial desert)
More than 8 million households in the United States live without a checking or savings account, according to the Federal Deposit Insurance Corporation.1
Instead, they rely on financial service alternatives, such as payday loans, pawn shops, and same-day lenders for liquidity, which in some states can charge up to 600 percent interest. Consumers typically pay a $15 fee for every $100 borrowed through a payday lender, equivalent to an annual percentage rate of almost 400 percent for a two-week loan, according to the Consumer Financial Protection Bureau. Thus, if they need to borrow $300 before their next payday, it could cost them $345 to pay it back—all for the privilege of using money that they have worked for.2
Alyssa Yun, author of a 2017 paper on financial deserts for the Wharton School of the University of Pennsylvania, finds that it’s simply more expensive to be poor.3
“The lack of access to traditional banking services makes millions of households turn to alternative financial services that charge exorbitant fees, leaving the unbanked and underbanked trapped in a cycle of poverty,” she wrote. “There’s a great economic burden on unbanked individuals to complete even the most basic financial transactions.”
Retail check-cashing services, she determined, cost an average individual with a full-time job up to $40,000 over the course of his or her lifetime. If those costs could be avoided, each individual from the millions of unbanked households in America could have an extra $108 every month for food, gasoline, or clothing.
The challenges that relate to low social capital can produce a financial ripple effect for cash-strapped families. Without a savings account, for example, households may not build a fund for future emergencies. As such, a car repair they cannot afford might leave the family without transportation and the ability to make it to work, which further jeopardizes their ability to purchase basic necessities or accumulate savings.
Raising social capital through community institutions
There’s no easy solution to the problem of poverty. Lawmakers and advocates, however, increasingly view social capital as an important piece of the alleviation puzzle.
Mary Clare Amselem, a policy analyst at The Heritage Foundation, believes community institutions can help.4
“In order to achieve greater economic mobility in the United States, we need to identify and build institutions in communities that will encourage positive social and economic behavior,” she writes in a report on rebuilding social capital. “To do that, we need to study how institutions have transformed low-income, crime-stricken neighborhoods into upwardly mobile communities.”
Private institutions, she suggests, must “take on a wider role” in building social capital in the future.
The MassMutual Foundation’s Live Mutual Project seeks to do just that.
In the communities where it is implemented, program organizers work together with local leaders to identify the unique challenges residents face, such as finding jobs, housing, loans, and financial support. The Live Mutual Project then brings together a network of existing community resources to create an easy-to-navigate solution to the defined obstacles, while establishing or activating a physical space where community members can gather to meet and support each other.
At the same time, the program works to strengthen the community organizations themselves by connecting them with networks, outside expertise, leadership development, and volunteers so they can better serve their clientele.
“There is tremendous validity in creating a network of healthy hearted and well-intended organizations in these cities so when they meet a person in need they are able to help,” said Corless. “It’s one thing to help reduce their expenses by 20 percent, but there is more to it than just that. It’s about making connections.”
The fight to end poverty has been a national priority for more than 50 years. Despite economic prosperity, however, millions still languish in the neighborhoods left behind.
Need-based entitlement programs, such as Social Security and food stamps, provide a much-needed layer of assistance, but present challenges of their own. Those who qualify are often caught in a position of not being able to accept a job that pays even slightly more, lest they lose eligibility for valuable child care subsidies and other benefits.
In the end, relationships may be the key.
To reinforce public initiatives, community institutions can help raise social capital for low-income residents by creating connections that foster financial wellness. For more information on MassMutual’s Live Mutual Project visit here.
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1 Federal Deposit Insurance Corporation, “2017 FDIC National Survey of Unbanked and Underbanked Households,” October 2018.
2 Consumer Financial Protection Bureau, “What are the costs and fees for a payday loan?” June 5, 2017.
3 Wharton School of the University of Pennsylvania, “Financial Exclusion: Why It Is More Expensive To Be Poor,” June 2, 2017.
4 The Heritage Foundation, “Rebuilding Social Capital Through Community Institutions,” Dec. 6, 2013.