Achieving at Grade Level

So, I was recently checking out some info on the site The 74 Million, an education-reform organization from former journalist Campbell Brown, and I noted a comment and raison d'etre from their About page:  " ... less than half of our students can read or do math at grade level." A comment and statistic like that would lead most people to conclude America's education system is a disastrous failure, which is a position and statement that I regularly scrutinize and challenge. Today we have access to more data on student achievement and schools than at any time in history, but it's important to "unpack the data," as the lingo goes. 

With the "less than half" comment in mind, I'm pondering what exactly we mean and think we know by the term "grade level." How does that term and association align with our understanding of statistics and averages? Is the term and the assessment tool used to determine it based on how the "average student" would achieve at that age/grade? Or is it the bare minimum that a student could achieve. The distinction between these terms would seem to be an integral and indispensable bit information in drawing conclusions about individual kids, school systems, and the entire idea of education and education reform. And I'm not sure we're all on the same page. 

Clearly, in most measuring situations, half of the data is above average (or the mean or the median ...) and half of the data is below average. Right? That is certainly true for cognitive tests. And obviously not all students are the same, with some performing below, some at, and some above average. In terms of grade level, which again is arbitrarily linked to age and assumptions about standards of development, the goal would seem to be that every student at a certain age must perform "at or above" grade level. Thus, there is no place for below average. 

So, how do we reconcile this? And how do we address shortcomings without falling into the whimsical description and expectation from Garrison Keillor's Lake Wobegon, where "all the children are above average"?