Fighting poverty one relationship at a time
How can we keep low social capital from working against financial wellness in the nation’s underserved communities?
By Shelly Gigante, Digital Content Writer
Asked to define the hardships afflicting America’s poor, outside observers often point to dollar signs: income instability, families living in poverty, households with no savings. But the challenges confronting those in left-behind communities extend beyond mere economic factors.
Social capital, a term used to describe the support many receive from their network of peers, plays a pivotal role as well. Millions who struggle in the nation’s most financially-challenged neighborhoods lack networks to help improve their financial stability. Strong social ties do exist within low-income communities—among family and friends, classmates and mentors. Yet many individuals may be unable to benefit from these relationships because they’re juggling multiple jobs and household responsibilities.
“Don’t look at the symptoms of poverty, go to the root,” said Jerry Corless, a financial advisor in Memphis, Tenn., 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. They often struggle to find affordable housing near employment opportunities and jobs that offer benefits and paid leave, the absence of which is a particular burden for single parents. Even simply getting to the doctor’s office can be a challenge when you can’t afford a car.
Beyond networks of personal relationships between neighbors, social capital also encompasses the community organizations and financial institutions that foster economic mobility. They include:
• Nonprofit groups that offer job skills training, food pantries and transportation services, while helping those in need find public programs that provide affordable housing, education grants, need-based tax credits and subsidized health care.
• Community banks that 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 absorb financial shocks.
Though community resources may be available, households that are scarcely able to meet basic needs are less likely to seek out support services. They may be unaware such resources exist or that they are eligible to access them. In some cases, traditional banking services may not be available in their neighborhood and, where access does exist, those experiencing financial hardship may not trust or understand many of these traditional offerings. Others may lack sufficient credit to open a traditional checking account. (Related: Watering the financial desert)
More than eight million households in the U.S. live without a checking or savings account, according to the Federal Deposit Insurance Corporation.
Instead, they rely on alternative financial services, such as payday loans, pawn shops and same-day lenders, 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. 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 they have worked for.
Alyssa Yun, author of a 2017 paper on financial deserts for Wharton School at the University of Pennsylvania, finds it’s simply more expensive to be poor.
“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 said. “There’s a great economic burden on unbanked individuals to complete even the most basic financial transactions.”
Yun determined that retail check cashing—often the only service available to people in financial deserts—costs an individual with a full-time job up to $40,000 on average over the course of a lifetime. If those costs could be avoided, each person in the millions of unbanked U.S. households could have an extra $108 every month for food, gasoline or clothing.
The challenges posed by low social capital can produce financial ripple effects for cash-strapped families. Without a savings account, for example, households can’t cope with unforeseen emergencies, such as a needed car repair that would leave them without transportation and the means of getting to work. This further jeopardizes their ability to purchase basic necessities or accumulate savings.
Need-based entitlement programs, such as Social Security and food stamps, provide a valuable layer of assistance, but present their own challenges. Those who qualify are often faced with being unable to accept a job that pays even slightly more, lest they lose eligibility for valuable childcare subsidies and other benefits, in what’s known as the cliff effect.
There’s no easy solution to the problem of poverty, but lawmakers and advocates increasingly see 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.
“To achieve greater economic mobility in the U.S., we need to identify and build institutions in communities that will encourage positive social and economic behavior,” she said 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’s been implemented, program organizers work 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 aimed at creating an easy-to-navigate solution to the defined obstacles, while establishing or activating physical spaces where community members can gather to meet and support each other.
The program also works to strengthen the community organizations themselves by connecting their leadership 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,” Corless said. “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.”
Relationships may be the key to ending endemic poverty. To reinforce public initiatives, community institutions can help raise social capital for people by creating connections that foster financial wellness.
For more information on MassMutual’s Live Mutual Project visit here.
Related content from MassMutual:
The neighborhoods that industry forgot
Amid robust economy, many are left behind
Opinions expressed by those interviewed are their own, and do not necessarily represent the views of MassMutual.
Sources: Consumer Financial Protection Bureau, Federal Deposit Insurance Corporation, the Heritage Foundation, the University of Pennsylvania
This content is paid for by Massachusetts Mutual Life Insurance Company (MassMutual) and published by WP BrandStudio. The Washington Post newsroom was not involved in the creation of this content. Learn more about WP BrandStudio.