How to Make the American Dream More than Just a Dream

Last week, Pew released a report (Moving On Up: Why Do Some Americans Leave the Bottom of the Economic Ladder, but Not Others?) examining the failure of the “American Dream.” Americans like to think that economic mobility can be achieved through hard work and perseverance, but the report’s findings repudiate this ideal. Seventy percent of those in the lowest income quintile never escape the bottom rungs of the ladder.

The report compares the characteristics of those individuals who do and do not achieve upward mobility. Unsurprisingly, individuals with a college education, who live in households with two earners, and who do not experience unemployment are most likely to experience upward mobility from the bottom income quintile. The report also confirms the extent of racial bias in the American economy. As we’ve discussed before, race still matters: even controlling for education, employment status, number of household earners, and savings, whites were two times more likely than blacks to move out of the bottom quintile.

One of the report’s most important findings is that savings are crucial to achieving upward mobility. Pew has addressed this topic before in a much lengthier report published in 2009 (which included contributions from two members our team), and the current study both reinforces those findings and expands our knowledge of other family traits that are also associated with upward mobility. The authors remind us that while the present research does not show that having savings definitively causes upward mobility, they are quick to point out that the economic security that comes with increased wealth and the attendant economic mobility “go hand in hand.” But even without proving causation, the correlation is striking. “A tenfold increase in liquid savings was associated with a 5.5 times greater likelihood of also moving to at least the middle quintile,” the authors note.

One apparent anomaly in the report’s findings is instructive for drawing conclusions about the importance of wealth in general, and an emergency fund in particular. Those who moved to the middle income quintile evidently had slightly lower median parental wealth than those who moved up only to the second quintile. Significantly, this upside-down effect is not repeated in measures of liquid savings, which are positively correlated with moves into the middle income quintile. This finding confirms what the asset-building field has been saying for years: a solid financial foundation that recognizes multiple savings needs over the life-course is crucial to attaining economic mobility.

The report provides further support for policy solutions like the Financial Security Credit, which, as the name suggests, would support the kind of financial security through liquid savings found by the Pew study to be strongly correlated with economic mobility. If the American Dream of economic mobility is to be a reality, more needs to be done to promote financial security among low-income households. As the authors put it, “The health of family balance sheets directly contributes to greater prospects for mobility.” The Pew report shows us how to turn the American Dream into an American reality. We know what works: to fight for the American Dream, we have to fight for financial security.