Please, Tell Us the Real Inflation Rate

Categories : Financial, News
September 14, 2022

Inflation is on everyone’s mind these days, and with good reason. While the technical definition of inflation is “excess growth of the money supply,” everyday price increases constitute the most in-your-face indicator of inflation’s presence. We Americans deserve an accurate assessment of annual inflation, due to its impact on our lives.

Within the vast Federal Government, inflation determination is relegated to the Department of Labor (DOL), because Cost-of-Living Adjustments (COLAs) are pegged to inflation data. In an ideal world, that same annual inflation adjustment would apply to Social Security payments, indexed tax brackets, contributions to Qualified Retirement Plans, etc.

Let’s examine what actually happens in the (un)real world of Washington, D.C. In October 2021, Social Security announced a COLA for 2022 of 5.9%. Was that the universal COLA for the year? Hardly.

Prior to Ronald Reagan becoming President, personal income tax brackets were set by Congress, remaining stable until changed by legislation. This led to the phenomenon known as “bracket creep,” whereby receiving a COLA-indexed pay raise might boost a taxpayer into a higher tax bracket. In addition to higher taxes, this can negatively affect other payments, including Medicare Part B.

Last year, IRS should have indexed each 2022 tax bracket by exactly 5.9%, right? It seems IRS didn’t get the memo, because tax brackets were increased much less than the Social Security COLA. Worse yet, brackets were not all treated the same. Lower tax brackets were increased by a little over 3.1%, but the top 2 brackets were raised by a mere 2.86%. These adjustments amount to about ½ of the increase we received from SS, and the difference creates higher taxes, and perhaps bracket creep.

How about Retirement Account contributions? In 2021, limits on employee deferrals to 401(k) Plans, catch-up contributions for participants ages 50 and up, and IRA contributions, all were left unchanged. Maximum annual contributions were raised by a pathetic 1.75%. Although the government tells us that we need to become financially independent, they limit our ability to do so.

In 2022, most contribution limits were again left alone, though maximum 401(k) contributions were raised 5.1%.

Important to any discussion of inflation is the difficulty of keeping up financially, especially so because we all know that government significantly understates the actual changes in our cost of living. For instance, Social Security benefits have lost 40% of their purchasing power since 2000.

Please, tell us the real rate of inflation.

Van Wie Financial is fee-only. For a reason.