Emily Peck writes that “inflation adjustments are kind of sexy again.” I’m not sure I agree with that specific characterization, but I definitely get her point.
After decades of underwhelming relevance, cost of living adjustments (aka COLAs) for 2023 will likely be higher than they've been in many years and could actually lower the income taxes many Americans owe in 2023.
As Peck observes, COLAs on certain taxes, social security payments and wages have hardly been noticed since the late 1970s and early 80s.
For example, social security COLAs from 1979-1982 were 9.9%, 14.3%, 11.2% and 7.4%, respectively (an average of 10.7% – reflecting that high CPI).
But they’re critical now, especially for less well-off Americans coping with the effect of the highest inflation in over 40 years.
Take social security again. Over the 20-year period of 2000-2019, the average annual COLA was about 2.2% (including no COLA adjustment in 2010, 2011 and 2016 and a 0.3% increase in 2017).
Granted, not all salaries – particularly in the private sector – are subject to COLAs; those workers have to depend on promotions, bonuses or new, higher-paying jobs at other companies to keep up with rising prices.
And many taxes and deductions aren’t adjusted for inflation at all (the U.S. tax code is a bit of a hodgepodge).
In fact, the Wall St. Journal recently remarked, "These inflation adjustments can hardly be called a silver lining, as Americans are paying more for everything from housing to food and energy.”