The Comeback: Defining the American Middle Class in Recession

March 15, 2010— -- The American middle class, long the backbone of this country and the envy of the rest of the world, is dispirited. It is feeling financially threatened and may be in danger of losing its sense of upward mobility, the mojo that underpins the U.S. economy and America's famously optimistic attitude.

A new ABC News poll shows that while nearly 50 percent of Americans see themselves as middle class, four in 10 say they're struggling to hold on.

The numbers give a sense of Americans feeling stalled. Only 6 percent of those in the middle class see themselves moving up beyond their current status, according to the poll results.

In the last 20 years, family income has increased by only 20 percent, according to the U.S. Census Bureau, compared to almost 100 percent growth in the 30 years prior. Meanwhile the cost of basic needs like housing and health insurance have continued to rise.

Watch "The Comeback: Saving America's Middle Class" all week on "World News with Diane Sawyer" and at ABCNews.com/wn

Those grinding numbers threaten to replace the country's sunny outlook with a sense of unease and it could redefine the middle class.

Harvard University law professor Elizabeth Warren has studied the American middle class for 20 years. She says the designation of middle class has been more a state of mind than a tax bracket. It comes down to people's actions, and she believes those actions are what makes this country great.

"Middle class people are people who mow the lawn, who pick up litter on the streets. They go to PTA meetings and invest not just in themselves, but in their children and communities," she says.

"It's about aspiration, it's about how we see our family and what hopes we have for our children that's middle class," added Warren, who is also chair of the Congressional Oversight Panel.

"It's the work done by the middle class, it's the consumption of the middle class that keeps the economy turning," she says.

But now, Warren says, "Millions of Americans and families are living one pink slip, one bad diagnosis away from complete economic collapse."

Since the recession began more than 5.2 million Americans have lost their homes in the financial crisis, according to Moody's Economy.com.

Ten years ago, health insurance cost American families $979.1 billion, per year. Today America is spending $1.88 trillion dollars, according to Health Affairs, a leading journal of health policy in the United States.

And when it comes to planning for the future, 33 percent of American families say they have decreased the amount they are saving for college, while 15 percent say they are not saving at all, according to a Sallie Mae/Gallup poll.

"They've seen their own lives as stretched and strained, and barely able to make it from month to month. And then they look at the lives their children will have; they recognize their children must have a college education to make it in the middle class, and yet the cost of college rises as the family's ability to save keeps going down," said Warren.

The same trend is being seeing when it comes to saving for retirement. A study done by Employee Benefit Research Institute found that only 69 percent of American workers now say they save anything for retirement. And the amount they are saving continues to shrink. Americans now save just one penny for every dollar earned, according to Matthew Slaughter at the Tuck School of Business at Dartmouth.

The Comeback: America's Middle Class Suffers in Tough Economy

That's where the roads in America today seem to diverge. Millions of jobs have been lost and millions more homes are under water, with 25 percent of their value lost, on average. All that bad economic news has hit middle class families hard, even as the banks that caused the financial crisis took $204 billion in bailout money to generate $6 billion in profits in just 3 months.

Warren's, Oversight Panel, the group in charge of overseeing and examining the financial bailout, says it's time for the banks to demonstrate that we're all in this together in America. If not, consumers will have to find their way out on their own.

"The notion of a solid middle class that can withstand some really hard blows, it's just not there anymore. If we lose the middle class, we are a different country," Warren said. "I don't know what country that is, but it's a country with a large, rich population and then just a long, gray line of people who are constantly turning over, living job-to-job, paycheck-to-paycheck, illness-to-illness, moving up and down that line."

That country, she says, is not America.