How Differences in the Cost of Living Affect Low-Income Families

by Lewis Warne and Marcelo Ostria, NCPA, Thursday, November 07, 2013

In the United States, eligibility for government social benefits is based mainly on an absolute measure of poverty - the federal poverty level - which is an income threshold that varies by family size. The level is supposed to be the minimum income required for a household to buy such things as food, clothing and shelter. In 2013, the poverty threshold varied from $11,490 for a one-person household to $23,550 for a family of four.¹

For similar-sized households, the federal poverty level is the same in all 48 contiguous states. (Hawaii and Alaska have different poverty thresholds.)

Because the cost of living varies widely across the United States, the federal poverty threshold is not a meaningful definition of minimum living standards. How much a family can buy with those benefits depends on where they live.

The Cost of Living: How Much Does a Dollar Buy? Prices and, therefore, the purchasing power of the dollar, differ by location. In areas where living costs are high, lower-income households must spend a larger portion of their income on necessities, and thus have less discretionary income.

The Council for Community and Economic Research (CCER) gathers and analyzes price data from about 300 American cities for six categories of living expenses:  housing, food, utilities, transportation, health care, and miscellaneous goods and services. The CCER uses this data to construct a Cost of Living Index (COLI).

Figure I illustrates the 2013 poverty level ($23,550 for a family of four), adjusted for the cost of living in various metropolitan areas. Comparing the price of the same basket of goods in each city reveals a wide variety of costs. For example:

• Living in New York City costs more than 2.25 times the national average; hence, an income of $23,550 would only buy $10,439 worth of goods in New York City.
• If a family moved from New York City to Fort Worth, Texas, the same $23,550 would buy $25,765 worth of goods.
• Thus, by moving from New York to Fort Worth, a family could increase their adjusted income, or purchasing power, by $15,326.

What causes differences in the cost of living?  Each region of the country has a different level of supply and demand for each good. For example, coastal areas provide plentiful and cheap seafood because the supply is close by, whereas transportation costs raise the price of seafood for inland locations.

Real estate supply and demand also differs by location. Take, for example, a house on an island like Manhattan or Honolulu, compared to a house on the open plains of Texas. The amount of money necessary to buy a 1,000 square-foot apartment in Dallas would only buy a 460 square-foot apartment in Honolulu.² Artificial supply constraints, such as regulations on housing development, further exacerbate cost of living variations.

Social Welfare Benefits and the Cost of Living. A number of government programs provide support to low-income families. However, some of these benefit programs only partially account for geographic variation in the cost of living, and others are not adjusted at all.

Housing. The cost of housing varies greatly by region. In the least expensive city in the CCER survey, housing costs only 66 percent of the national average, whereas in the most expensive area, housing costs 455 percent of the average.³ Though only 25 percent of the cities in the survey have housing costs above the national average, those cities are so expensive they raise the overall average significantly. For example [see Figure II]:

• In Oklahoma, average housing costs in Tulsa are only 66 percent of the national average and, in Oklahoma City, 78 percent.
• In Milwaukee, housing is 105 percent of the national average; in Baltimore, it is 155 percent, and in San Francisco, 295 percent.

Differences in housing prices significantly change the value of government aid to low-income families. The Housing Choice Voucher Program, the federal government's major aid program for low-income households and the elderly and disabled, is designed to provide affordable housing in the private market. The U.S. Department of Housing and Urban Development (HUD) manages the program by funding public housing agencies, which administer the vouchers locally. The program generally follows uniform criteria that limit eligibility to families with 50 percent or less of the median income for the county or metropolitan area in which they live.⁴ Moreover, housing authorities must provide 75 percent of their vouchers to households with incomes that do not exceed 30 percent of the area's median income.⁵

Local housing authorities set a payment standard based on the amount generally needed to rent a dwelling unit in the local housing market. That standard determines the amount of assistance a household receives.⁶ The Housing Choice Voucher is adjusted for metropolitan area or county income levels, but it is not adjusted for differences in the cost of living in these regions. Thus, families that do not receive a housing voucher, or still struggle with housing costs, could improve their standard of living by moving to a lower cost area.

Food. Unlike housing, grocery costs vary much less by region, likely because food and small consumer products are easily transported. Grocery costs in the middle 50 percent of cities range within approximately 5 percent of the national average cost. In Manhattan, food costs 158 percent of the national average, while in Tulsa, food averages 81 percent of the national average.

The Supplemental Nutrition Assistance Program (SNAP), administered by the U.S. Department of Agriculture, does not distribute food stamps to low-income families according to the cost of living in a city or metropolitan area. Though the states administer the program, SNAP eligibility is determined by a uniform national standard:⁷

• A nonelderly/disabled household's assets must not exceed $2,000.
• Assets for households with an elderly or disabled member must not exceed $3,250.
• The gross income standard for eligibility is 130 percent or less of the poverty threshold.
• The household's net income - after deductions for such things as high housing costs and child care - must fall at or below the poverty line.

In the 48 contiguous states, a household of four members has a maximum monthly SNAP allotment of $668 (Hawaii and Alaska allow higher allotments). However, the adjusted value of SNAP benefits is higher in areas with lower living costs than expensive areas. For instance, the maximum benefit is worth $275 more in Fort Worth than in Washington D.C.

The federal government spent about $74.6 billion on SNAP benefits in fiscal year 2012.8 Thus, families that receive SNAP benefits in high food-cost areas like Washington, D.C., or New York could move to lower cost areas and significantly increase the amount of food they can buy.

Conclusion. Prices and, hence, the cost of living, differ by location and, thus, have a significant impact on living standards. The federal government attempts to aid poor families throughout the country, but the eligibility criteria for various programs differ and usually do not account for differences in the cost of living.

Lewis Warne and Marcelo Ostria are research associates with the National Center for Policy Analysis.

Endnotes

1. United States Department of Health and Human Services, "2013 Poverty Guidelines," undated. Available at http://aspe.hhs.gov/poverty/13poverty.cfm#thresholds.

2. CCER Housing Data.

3. Respectively, Tulsa, Okla., and Manhattan, New York City.

4. United States Department of Housing and Urban Development, "Housing Choice Voucher Fact Sheet," August 2013. Available at http://portal.hud.gov/hudportal/HUD?src=/topics/housing_choice_voucher_program_section_8.

5. Ibid.

6. Ibid.

7. United States Department of Agriculture, "Supplemental Nutrition Assistance Program," July 2013. Available at http://www.fns.usda.gov/snap/applicant_recipients/eligibility.htm#employment.

8. United States Department of Agriculture, "Supplemental Nutrition Assistance Program Participation and Costs," August 2013. Available at http://www.fns.usda.gov/pd/SNAPsummary.htm.