In the United States, there are several financial thresholds that are adjusted for inflation annually to help households keep pace with the rising cost of living. However, not all thresholds receive this inflation adjustment, and the decision on whether or not to adjust for inflation largely depends on lawmakers’ discretion at the time the legislation was drafted. As Bill Hoagland, the senior vice president at the Bipartisan Policy Center, notes, this process can be quite erratic and inconsistent.
One of the most prominent examples of a financial threshold that lacks an inflation adjustment is the federal minimum wage, which has remained stagnant at $7.25 per hour since 2009. This prolonged period without an increase has led to a significant decrease in the real value of the minimum wage, making it worth less than it has been in decades. While only a small percentage of hourly workers in the US are currently paid at or below the federal minimum wage, the lack of adjustment raises concerns about the financial well-being of low-income households.
Another critical threshold that is not inflation-adjusted is the taxation of Social Security benefits, which was implemented in 1984. The thresholds for taxing benefits have never been altered, leading to an increasing number of beneficiaries paying federal income tax on their benefits over the years. The lack of adjustment has resulted in a significant rise in the proportion of Social Security recipients subjected to taxation, highlighting the impact of inflation on fixed thresholds.
Financial thresholds also play a role in determining who can invest in private companies and ventures like private equity and hedge funds. Accreditation requirements, such as minimum income or net worth thresholds, aim to protect consumers by ensuring they have the financial acumen to handle the risks associated with such investments. However, these thresholds have remained unchanged since the early 1980s, raising concerns about their relevance in today’s economic landscape.
While many tax breaks receive annual inflation adjustments, there are exceptions such as the deduction for home mortgage interest. Similarly, certain taxpayers are subject to a surtax on investment income, but the thresholds for this tax remain static, leading to an increase in the number of individuals affected over time. As inflation erodes the real value of these thresholds, more taxpayers are inadvertently impacted by these measures.
The lack of inflation adjustments for critical financial thresholds in the US has significant implications for households and individuals across the country. From the erosion of the minimum wage to the increasing taxation of Social Security benefits, these fixed thresholds can exacerbate financial challenges for vulnerable populations. As policymakers consider future economic reforms, it is essential to assess the impact of inflation on these thresholds and the need for regular adjustments to ensure financial stability and equity for all Americans.