Published: August 2006

The poor (still) pay more

A new Brookings Institution study finds that reducing the costs of living for lower income families by just one percent would add up to over $6.5 billion in new spending power for these families. This would enable lower and modest-income families to save for, and invest in, income-growing assets, like homes and retirement savings, or to pay for critical expenses for their children, like education and health care.

Low-income residents of 13 cities across the nation pay extra for many everyday services, sometimes thousands of dollars more over a whole year, according to a new study by the Brookings Institution.

By taking out higher-interest mortgages, shopping at rent-to-own furniture stores, using check-cashing businesses instead of banks and buying groceries at convenience stores, the nation's working poor households pay much more than moderate- and high-income households for life's essentials. The report - From Poverty, Opportunity: Putting the Market to Work for Lower-Income Families - calls on government officials to create laws to curb services that gouge low-income consumers, and it proposes reproducing programs that the authors found across the country.

According to study author Matt Fellows, public and private leaders have a substantial, and widely overlooked, opportunity today to help lower income families get ahead by bringing down the inflated prices they pay for basic necessities, such as food and housing.

In general, lower income families tend to pay more for the exact same consumer product than families with higher incomes. For instance, 4.2 million lower income homeowners that earn less than $30,000 a year pay higher than average prices for their mortgages. About 4.5 million lower income households pay higher than average prices for auto loans. At least 1.6 million lower income adults pay excessive fees for furniture, appliances, and electronics. And, countless more pay high prices for other necessities, such as basic financial services, groceries, and insurance. Together, these extra costs add up to hundreds, sometimes thousands, of dollars unnecessarily spent by lower income families every year.

Reducing the costs of living for lower income families by just one percent would add up to over $6.5 billion in new spending power for these families. This would enable lower and modest-income families to save for, and invest in, income-growing assets, like homes and retirement savings, or to pay for critical expenses for their children, like education and health care.

According to Fellows, the policies needed to capture these savings for families will require few taxpayer dollars and true public-private partnership. Together, government, nonprofit, and business leaders can pursue a number of market and regulatory initiatives to improve the cost of living for lower income families. And unlike most traditional anti-poverty initiatives, limited (strategic) public investments can match or seed innovative market solutions.

For More Information

The Brookings Institution


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