The American Dream gains a harder edge

The American dream, at least on the economic side, is fading. Most people see the United States as a special place where there is plenty of opportunity for someone to work hard, play by the rules, and get ahead - maybe even become wealthy.

Today, though, nearly 1 in 5 American households has zero net worth or actually owes more than it owns. And the odds of a son or daughter rising above their parents in such a financial predicament have shrunk.

"Income mobility has declined in the last 20 years," says Bhashkar Mazumder, an economist at the Federal Reserve Bank of Chicago.

What that means is that the US is becoming less of a meritocracy, where skill and intelligence determine success, and becoming more of a class-bound society, where economic background, including the better education money can provide, matters more. There are still many rags-to-riches stories. But there's stagnation in the underclass.

Most Americans don't believe that to be true, surveys show. But academic studies suggest that income mobility in the US is no better than that in France or Britain. It's actually lower than in Canada and is approaching the rigidity of Brazil.

That marks a change from the past.

From 1950 to 1980, Americans were more and more likely to see their offspring move up - or down - the income ladder. For example: poor parents in the US had good odds of seeing children make great strides in overcoming their parental heritage. And if they lived long enough, they might well find that a grandchild had risen to a median income level.

Today, it could take five or six generations to close the gap between poverty and middle-class status, calculates Mr. Mazumder.

Of course, there are always exceptions. Remarkable children still get rich - or plunge to the bottom - in one generation, depending on education, attitude, diligence, and other factors. The point is that average intergenerational experience seems to be more frozen in place today.

Of course, Mazumder's research looks at income - not wealth, which results from saving and investing income, and from inheritances.

A broader look at the overall financial security of American families isn't encouraging either. It measures ownership (homes, financial assets, and so on) and protections against financial setbacks, such as health insurance to cover large medical bills that cause almost half of individual bankruptcies.

"There are lots of people who have found it difficult to meet their basic needs," says Lillian Woo, an economist in Durham, N.C., with CFED, a national nonprofit research group that conducted the study. "The ratio of indebtedness seems to be growing."

That's not because these Americans have engaged in shopping sprees, though that sometimes happens. It is often because of medical bills or high housing costs. Many households are "hovering on the brink of financial disaster," Ms. Woo maintains. "The cushion is very thin."

For example: 1 in 4 households does not own enough to support itself - even at the poverty line - for three months.

The picture is worse for most minorities and women: 1 in 3 minority households has zero net worth or is in debt (compared with the average of 1 in 5). Black families have, on average, only one-sixteenth the net assets of white families. For every dollar of net worth of a household headed by a man, households headed by a woman have less than 40 cents.

The situation also differs widely between states, according to the CFED study. At the top, the median Massachusetts household has more than three times the net worth of median households in Arizona, Texas, Georgia, West Virginia, and a number of other states.

"This issue of net worth and what people owe is important," says Andrea Levere, president of CFED. Her goal for the organization is to widen the opportunities for Americans to build their net worth and ownership position by winning bipartisan support for government programs at the state and federal level.

In the states, CFED supports legislation requiring banks to provide "lifeline bank accounts" to bring more of the poor into mainstream financial services. Some 30 percent of families don't have bank accounts. It wants more states to give better tax breaks, somewhat like the Earned Income Tax Credit of the federal government, to the poor.

It also urges states to ban predatory lenders, who make high-cost loans that can strip the poor of their assets. At present, 29 states have such legislation.

At the federal level, meanwhile, Sens. Rick Santorum (R) of Pennsylvania and Joseph Lieberman (D) of Connecticut have drafted a bill that would provide tax credits for financial institutions that match the savings of low-income customers put into Individual Development Accounts.

But the cost, $1.2 billion, makes its prospects for passage dim in deficit-ridden Washington.