In the United States, various financial thresholds are adjusted for inflation each year to assist households in keeping pace with the rising cost of living. These adjustments impact contribution limits to retirement plans, Social Security benefits, federal income tax brackets, and other critical financial areas. However, not all thresholds are inflation-adjusted, causing significant challenges for American households in certain areas.
One of the most prominent examples of a threshold that remains stagnant without an inflation adjustment is the federal minimum wage. At $7.25 per hour, the federal minimum wage has not seen an increase since 2009. This has led to a significant decline in its value over the years, making it worth less than at any point since February 1956. While only 1.3% of all U.S. hourly workers are paid at or below the federal minimum wage, the lack of adjustment poses a financial problem for many households in times of high inflation.
Another significant area where thresholds are not inflation-adjusted is the taxation of Social Security benefits. The federal government began taxing Social Security benefits in 1984, setting specific dollar thresholds that have never been changed. As a result, an increasing number of beneficiaries have to pay federal income tax on their benefits over time. The lack of adjustment has caused a significant shift in the number of families subject to this taxation, with the Social Security Administration estimating that about 40% of beneficiaries now pay federal income tax on their benefits.
Thresholds for accreditation to invest in private companies and investments like private equity and hedge funds are also not inflation-adjusted. To qualify as an accredited investor, households must meet specific requirements related to net worth or annual income. The thresholds were established in the early 1980s and have not changed since then. While only 1.8% of households qualified as accredited investors in 1983, the number has significantly increased to about 18.5% in 2022, highlighting the need for an adjustment to reflect changing economic conditions.
Certain tax breaks and surtaxes in the U.S. tax system also lack inflation adjustments. For example, the tax deduction for home mortgage interest remains capped at $750,000 of new mortgage debt, a limit set by a 2017 tax law. Similarly, the threshold for the 3.8% surtax on investment income is not inflation-indexed, leading to more taxpayers becoming subject to the tax over time. These examples underscore the importance of regularly adjusting thresholds to align with changing economic realities.
The presence or absence of inflation adjustments in financial thresholds has a significant impact on American households’ financial well-being. While some thresholds are regularly updated to account for inflation, others remain stagnant, posing financial challenges for individuals and families. Lawmakers and policymakers need to consider the importance of adjusting critical thresholds to ensure they remain relevant and effective in a dynamic economic environment. Failure to do so could exacerbate income inequality and financial hardship for many Americans.
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