The Road Ahead for Middle Class Families

Being middle class is the very heart  of the American Dream. In practical terms, it’s having a job (or two) that pays enough so you can own a home and a car (or two), save for college and retirement, take a vacation once a year, and enjoy a few luxuries without worrying too much

The Hallum FamilyPhotograph by Tamara Reynolds
Our faith that the power of hard work leads to a brighter future is being tested daily.

Being middle class is the very heart  of the American Dream. In practical terms, it’s having a job (or two) that pays enough so you can own a home and a car (or two), save for college and retirement, take a vacation once a year, and enjoy a few luxuries without worrying too much. Statistically, for a two-parent, two-child family, it’s having a household income in the range of about $50,000 to $122,000 a year. But perhaps most important of all, it means believing, against all odds and in the face of seemingly insurmountable obstacles, that our children can have an even better life than our own.

In 2011, our faith in a brighter future, and in the power of hard work to get us there, is being tested daily. Trapped in the worst economy since the Great Depression, plagued by unemployment and a busted housing market, millions of us have turned from the great, enduring goal of getting ahead to the wearying task of merely surviving. We are saving less and borrowing more because our incomes have stagnated while our expenses have soared. Housing, health care, and transportation are all much more expensive than a generation ago. Child care is an additional burden for two-income couples, and the cost of college, public and private, has skyrocketed. All the while, talking heads discuss our plight as if we were an endangered species — and sometimes it can feel that way.

Ultimately, this crisis is about jobs — good-paying jobs that enable not just our optimism but also the growth of our economy. The looming threat is what MIT economist David Autor describes as a “hollowing out” of the job market: a growing demand for highly paid trained professionals and low-skilled, low-wage workers but declining opportunities for those in the middle, the white- or blue-collar workers in clerical, administrative, sales, and manufacturing jobs. No wonder we’re living with such high anxiety.

The issues that took years to create aren’t likely to be solved overnight. But we aren’t powerless to rebuild. Reader’s Digest read the studies, talked to the experts, analyzed the data, and selected ten solutions to some of our basic problems. Some of the proposals are complex and long-term, others could help right now, a few are controversial. All offer hope, and all deserve to be part of any serious conversation about the future we all share.

Teach our kids more science and tech
Job growth in science, technology, engineering, and mathematics industries over the past decade has been three times faster than growth in other fields, and people in these professions earn 26 percent more than others. In a 2010 report, the National Science Board made these recommendations: Increase ties between schools and research centers so, among other benefits, students can see scientists at work; train teachers to get younger students interested in science and technology at an early age; and do a better job of identifying students with science and math skills, especially those from lower-income backgrounds. The President’s Council of Advisors on Science and Technology urges recruiting and training 100,000 math and science teachers over the next decade and creating a national network of 1,000 schools that emphasize science and math. If we don’t do it, Secretary of Education Arne Duncan has said, “the next generation will not be ready to be world-class inventors, doctors, engineers.”

Young people starting their careers; the United States, as we strive to compete in a high-tech-driven global economy.

Older unemployed workers without technical training.

The payoff is years away. And we’ll need many more teachers with specialized skills.

Remove roadblocks so companies will invest

Uncertainty about future government regulations can make companies hesitant to expand and add jobs. Meeting existing regulations can also slow growth. One solution, according to a recent report by the McKinsey Global Institute, is the creation of “Plug and Play” enterprise zones that would be preapproved for most zoning and environmental permits. McKinsey estimates that this could “cut in half the time needed to bring a new plant online.” Another job-promoting time-saver from the same report: streamline the U.S. Patent Office. In an editorial, the Washington Post says the patent system “struggles under an enormous backlog, takes far too long to approve legitimate patents, and paradoxically at times blesses weak ones that undermine serious innovation.”

Cash-rich companies looking to expand; inventors and entrepreneurs.

Struggling companies that are already laying off workers.

We don’t really know how much regulations affect job growth; concerns about impact on the environment.

Find creative ways to fund new ideas
New business ideas are the lifeblood of the American economy; innovation is essential for job creation. In the Harvard Business Review, Edmund Phelps, a Nobel Prize–winning economist at Columbia University, and Leo Tilman, president of the strategic advisory firm L.M. Tilman & Co., argue that the enormous pressure to produce ever-growing profit is “choking off funds for innovation.” To fix this problem, they propose the creation of the First National Bank of Innovation, a government-sponsored network of banks that would raise money around the globe to invest in new businesses here — the structure would be similar to the Farm Credit System, a nationwide network that serves farmers, rural homeowners, and other agricultural businesses. Entrepreneurs would borrow at rates reflecting the riskiness of their ventures. “Business innovation ought to be declared a public policy objective — one at least as important as boosting homeownership and agriculture,” Phelps and Tilman write.

Creative entrepreneurs with strong new business ideas and their employees; smart investors.

People in need of immediate relief. It takes time to build successful companies, and many new enterprises fail.

Will Congress support a new government-sponsored banking system? And the rocky global economy has investors looking for less risk.

Rebuild our infrastructure
During the Great Depression in the 1930s, millions of Americans found work through federal programs such as the Civilian Conservation Corps and the Works Progress Administration, which built highways, cleared slums, and even painted murals in public buildings. That history inspires political economist Robert Reich of the University of California at Berkeley, who served as secretary of labor under President Clinton. “The magnitude of the current jobs and growth crisis demands a boldness and urgency that’s utterly lacking,” Reich has written. He advocates reinstituting these New Deal programs because they put unemployed people directly to work. President Obama clearly agrees with that concept. His proposed American Jobs Act includes $140 billion for infrastructure projects that the White House says would put “hundreds of thousands of workers back on the job.”

Workers of all ages because the programs give young people valuable job experience and help older workers get back on their feet.

Workers who need to improve their technical skills in order to win higher-paying jobs.

Requires billions in federal spending. Is Congress willing to support a larger economic role for government?

Support community colleges
Every year, more than a third of U.S. workers change jobs, and more than 30 million Americans are working in newly created jobs. Many are also in occupations that didn’t even exist five years ago, such as social media coordinator. One of the best ways to meet the need for constant training is community colleges. “They’re a linchpin,” says Davis Jenkins, senior researcher at the Community College Research Center at Columbia University. “Community colleges do so many things and work with so many people.” Community colleges can partner with local industries to keep workers’ skills current and attract new business to a region. Community colleges also help people who cannot afford more expensive four-year schools. Programs that provide one- or two-year certificates in technical areas, such as engineering or health care, can really pay off. Twenty-seven percent of certificate holders earn more than people with a bachelor’s degree. Certificate holders in engineering, for example, earn around $47,000 annually.

Older workers looking for retraining and younger workers who don’t want or are unable to afford a four-year degree; employers facing a shortage of skilled workers.

People whose high school education hasn’t prepared them for higher-level studies.
Many states have cut funding to community colleges.

Forgive more homeowners

More than 28 percent of American homeowners with mortgages owed more than their houses were worth early this year, according to the real estate website Zillow. Former New York governor Eliot Spitzer calls this “a continuing and incendiary crisis” that is “dragging down our economy, creating a downward spiral of foreclosures and abandonment.” Writing for Slate, Spitzer says the administration and the Federal Reserve should insist that banks that have benefited from taxpayer subsidies reduce any mortgage exceeding the value of the house. Homeowners would then have more money to spend, which would boost the economy, Spitzer says. This would also mean that homeowners might be able to move if they wanted to, and the housing market could stabilize at a new level. The banks could benefit long-term by sharing in the profits if owners sell their houses for more than the reduced value. But in the short term, saving underwater homeowners could help the banks because it would mean fewer foreclosures, fewer abandoned houses and blighted neighborhoods, and fewer houses on the market.

Homeowners who bought houses at inflated prices during the boom years.

Homeowners whose homes aren’t underwater but are still struggling to pay their mortgages.

The housing crisis is huge and keeps getting worse. No single fix will solve it.

Give a bigger tax break for child care
Millions of two-career families and single parents rely on child care to maintain a middle-class lifestyle, but the price tag is high. In the past decade, the cost of child care has grown much faster than inflation and twice as fast as the median household income. The annual cost of full-time care in a day-care center ranges from about $4,500 in Mississippi to nearly $16,000 in Massachusetts. Home-based care is less expensive but still a strain on many family budgets. And the strain doesn’t end when children enter school. Before- and after-school care for older children generally costs more than $4,000 a year.

“The cost of child care is largely borne by parents,” says a recent report from the National Association of Child Care Resource & Referral Agencies. “Unlike the cost of higher education, there is no system of public financing to make child care more affordable.” Under current rules, families with incomes below $15,000 can get a 35 percent tax credit, which phases down to 20 percent for families with incomes above $43,000. The White House Task Force on the Middle Class proposes that all families with incomes up to $85,000 get a 35 percent tax credit, which would help many more families. The task force estimates that the maximum credit for a family making $80,000 with two children would increase from $1,200 to $2,100. Under the proposal, most families earning up to $115,000 would also see some increase in their child-care tax credit.

Families with younger children who need two incomes, as well as single-parent households.

Families in communities where child-care options are limited.

A tax break is nice, but there simply isn’t enough good, affordable child care out there. We need to create more of it.

Make it easier to pay for college
The single most effective way to reach or stay in the middle class is to have a postsecondary degree. People with a bachelor’s degree now make 84 percent more over their lifetime than people who have only a high school diploma. But students from middle-income families are half as likely to graduate as students who come from families in the top fifth. Many of those who do graduate have huge loans; more than two thirds of students earning diplomas from four-year colleges and universities graduate with debt, with the average amount in 2008 over $23,000.

In a recent Huffington Post article, Brittany Baker, a 2011 graduate of Allegheny College, wrote about her college debt: “I have so many loans — subsidized and unsubsidized, Perkins and PLUS — at so many different and variable interest rates that I can’t keep them straight or find them all listed online in one clear, concise venue.” For most families, federal aid is the best option, but many families find the application process daunting and don’t get all the money they could. Recent improvements to the notoriously complex Free Application for Federal Student Aid (FAFSA) reduced the number of questions and made it easier to transfer IRS data electronically, but more changes are needed to make securing aid less cumbersome. Another idea that could help: expanding the American Opportunity Credit, a tax benefit that provides up to $2,500 a year for tuition, certain fees, books, and supplies. Congress has extended it to 2012, but many education experts would like to see it become permanent, giving families up to $10,000 in tax relief over four years.

Students and families seeking financial aid for college.

Recent grads, who still carry huge debt.

Improvements in financial aid don’t address the larger issue: the ever-soaring cost of college, public and private.

Make it easier to save for retirement

A generation ago, many workers had employer-provided pension plans to supplement their Social Security. They were also more likely to save than the current generation. Now millions of workers rely on their own financial savvy to plan for retirement, choosing among such options as IRAs and 401(k) plans. It’s a risky business, and many workers freeze — and lose years of savings as a result. One solution that has won support from both conservatives and liberals is automatic enrollment in IRAs or 401(k) plans.

“Automatic enrollment makes saving easier, and it also reduces the chances of people making mistakes in their investments,” says David John, a senior research fellow at the Heritage Foundation. Another way to help people now in their 20s and 30s is to increase the age at which people are eligible to receive Social Security benefits. Because of the recession and generally longer life spans, many baby boomers are already working well into their 60s. John argues that pushing the retirement age up to 70 by 2035 is an excellent way to ensure that future generations will be able to rely on Social Security without massive tax increases. “Social Security has run into cash flow problems, and they are only going to become greater,” says John. “The longer we wait to deal with them, the more expensive they are going to be.”

Younger people who are just beginning their careers.

Older people who haven’t planned for retirement and don’t have enough money put away.

Messing with Social Security is always politically risky.

10 Reform the tax system
Boston University economist Laurence Kotlikoff wants to overhaul the way we finance the federal government to make the system fairer to all, including middle-class taxpayers. “The public is fed up, and they’re waiting for answers,” Kotlikoff says. The first step in what Kotlikoff calls the Purple Tax Plan (to unite red and blue states): reforming the payroll tax to make it less regressive. Kotlikoff advocates levying the employee portion of the tax only on earnings above $40,000 and eliminating the ceiling, which is currently $106,800. He would also replace personal income taxes with a federal sales tax of 17.5 percent. To lessen the blow such a tax would impose on lower-income families, Kotlikoff proposes a monthly payment to every household, based on size and income, which would essentially reimburse poorer families and put most of the burden on richer households. A third prong of his plan would levy a 15 percent tax on all inheritances and gifts above $1 million. Kotlikoff’s plan also calls for eliminating the corporate income tax to make the United States an investment haven.

If all the parts of this plan were enacted, Kotlikoff says everyone would benefit.

The people who exploit current loopholes, who will lose those advantages.

Massive tax reform requires Democrats and Republicans to work together; that seems unlikely at the moment. Dumping the income tax for a federal sales tax is an idea that has failed repeatedly to gain traction.

Popular Videos

Reader's Digest
Originally Published in Reader's Digest