When it comes to financial thresholds that are not adjusted for inflation, the federal minimum wage is a significant example. It has remained stagnant at $7.25 an hour since 2009, marking the longest period in history without an increase from Congress. This lack of adjustment has resulted in a substantial loss in value over the years, with the minimum wage currently worth less than it has been in decades. While only a small percentage of hourly workers are paid at or below the federal minimum wage, the fact remains that this essential wage threshold has not kept up with the rising cost of living. It is worth noting that many states and localities have taken it upon themselves to establish higher minimum wages to address this issue.
On the other hand, Social Security benefits are another financial threshold that does not receive an annual inflation adjustment. The federal government began taxing Social Security benefits in 1984, but the dollar thresholds for taxation have never been adjusted for inflation. As a result, the share of beneficiaries who must pay federal income tax on their benefits has increased significantly over time. This lack of adjustment puts a financial burden on many Social Security recipients, especially as their benefits and other income sources increase. The specific income formula used by the federal government to determine the taxable portion of benefits remains fixed, leading to more individuals falling into tax brackets they may not have anticipated.
Households looking to invest in private companies and assets like private equity and hedge funds must meet certain accreditation requirements, such as a minimum net worth or annual income. These thresholds have remained unchanged since the early 1980s, despite significant shifts in the economy and financial landscape over the years. The lack of adjustment in these requirements raises questions about whether they still serve their intended purpose of protecting consumers and ensuring financial sophistication among investors. With a significant increase in the number of households qualifying as accredited investors since the 1980s, it may be time to reassess these thresholds to reflect the changing financial realities of today.
Tax Breaks and Deductions
While many common tax breaks receive annual inflation adjustments, others, such as the deduction for home mortgage interest, do not. The recent cap imposed on the deduction for home mortgage interest by President Donald Trump in 2017 highlights the impact of non-adjusted thresholds on taxpayers. As home prices continue to rise, more taxpayers may find themselves affected by these non-indexed thresholds. Similarly, the 3.8% surtax on investment income, designed to target high-income households, is another example of a financial threshold that is not inflation-indexed. As the cost of living and incomes change over time, failing to adjust these thresholds can result in more taxpayers becoming subject to additional taxes, regardless of their real income growth.
The lack of inflation adjustments for important financial thresholds like the federal minimum wage, Social Security benefits, investment accreditation requirements, and tax deductions raises concerns about their continued relevance and effectiveness in today’s economy. Lawmakers and policymakers must consider the implications of non-adjusted thresholds on individuals and households, especially in light of changing economic conditions and financial realities. By revisiting these thresholds and ensuring they are responsive to inflation and economic changes, we can create a more equitable and sustainable financial system for all.