What Is OASDI?

The Social Security Act of 1935 and later amendments created the Old-Age, Survivors, and Disability Insurance program. Most people know this federal benefits program as OASDI or Social Security..

The OASDI program has around $940 billion in total income, 89.6% from payroll taxes. It pays out more than that amount, a little over $1 trillion. Ninety-eight percent of payouts go to monthly benefits. The rest goes to other costs, including lump-sum death payments.

There's a lot to learn about OASDI. This article explains various aspects of the program, including payroll tax rates and Social Security credits. It offers considerations for retired workers and others navigating the Social Security system. With more knowledge about Social Security programs, you can make informed choices regarding retirement planning.

Employees, Employers, and Self-Employed Workers Pay Into OASDI

The OASDI tax is mandatory for employees, employers, and the self-employed. An employee contributes to OASDI through payroll taxes under the Federal Insurance Contribution Act (FICA). People who work for themselves contribute through self-employment taxes under the Self-Employment Contributions Act (SECA). Over 183 million people work in employment that is OASDI-covered.

Internal Revenue Service (IRS) statute determines OASI tax rates. In 2023, an employee pays a mandatory FICA Social Security tax of 6.2% and a Medicare tax of 1.45% for a total of 7.65%. The employer's share matches the employee's contribution.

Self-employed taxpayers must pay the total tax for employees and employers under SECA. This amount is 15.3% in 2023. Self-employed individuals receive a tax deduction in exchange for the higher federal income tax rate.

The federal government places a ceiling on earnings subject to OASDI taxation. This maximum amount fluctuates. The OASDI ceiling in 2023 is $160,200. SECA and FICA tax revenue are transferred to the U.S. Treasury for eventual disbursements.

Members of certain groups receive an exemption from paying Social Security taxes. This includes members of religious groups, including the Amish and Mennonites. To apply for a religious exemption, complete IRS Form 4029 and file it with the Social Security Administration (SSA). Nonresident immigrants are generally liable for OASDI and Medicare taxes.

Social Security Credits 101

When you work and pay into the system, you earn up to four quarters of coverage, or credits, per year. Credits are based on an employee's total wages or self-employment income during the year. Employers report their employees' earnings once a calendar year.

You may work year-round to earn four credits or enough for all four credits in a shorter time. In 2023, a worker must earn $1,640 to receive one credit and $6,560 to receive the maximum four credits for the year.

You need "credits" to meet eligibility requirements for Social Security benefits. The number of credits you need for program eligibility depends on the type of benefit:

• Social Security retirement benefits: If you were born in 1929 or later, you'd need 40 credits or 10 years of work for retirement benefit eligibility.
• Disability benefits: You will need between 20 to 40 credits, depending on your age when your disability begins. For example, a person 31 or older must have at least 20 work credits in the decade before the disability began.
• Survivors benefits: The number of credits needed to provide survivors benefits to family members depends on the deceased worker's age. Some people can get benefits if the earner has just six credits in the three years before death.

Credits are not needed for Supplemental Security Income (SSI) eligibility. Instead, the SSI social insurance program eligibility is for a disabled adult or child with low income and resources. SSI benefits are paid from the Disability Insurance Trust Fund (DI trust fund), held in an account separate from the Old-Age and Survivors Insurance Trust Fund (OASI).

Cost-of-Living Adjustment Explained

Social Security benefits increase with cost-of-living adjustments (COLA). COLAs are provided to beneficiaries to offset the higher costs of everyday goods and services caused by inflation. By law, the SSA must calculate COLAs based on an annual increase in the consumer price index. Without an increase, there is no COLA.

In 2023, COLA increased benefits by 8.7%. To illustrate this approximate change in average monthly benefits, OASDI benefits for a retiree who received $1,681 before the 8.7% COLA increase will receive $1,827 after the increase. Disabled workers will go from approximately $1,364 to $1,483 after the 8.7% COLA.

Things to Consider About Retirement

During your life, you'll likely earn more credits than the minimum number needed for eligibility. The extra credits you earn don't increase your benefit amount. Instead, your monthly benefit is determined by your average earnings or average indexed monthly earnings (AIME) over your working years.

Retirement benefits also depend on your age at retirement. You'll receive your full benefit at full retirement age (FRA). You'll receive a reduced benefit if you begin receiving benefits before your standard or FRA.

You may choose early retirement as early as 62, but doing so may reduce benefits by up to 30%. Spousal benefits may also be reduced. On the other hand, you'll receive your largest benefit by delaying retirement until age 70. Don't forget that you'll have to pay your Medicare premiums when you retire.

Many people are concerned about Social Security financing issues. The OASI and DI Social Security trust funds are projected to have a deficit by 2034, paying only 80% of benefits. OASI is scheduled to operate at a deficit a year earlier, in 2023.

Have Questions About Social Security?

Sometimes, setting yourself up for success in retirement requires a little help. Contact a Social Security attorney if you need Social Security retirement planning assistance. A Social Security attorney near you can help you figure how long you have until you can retire with full benefits and how to maximize your retirement income from OASDI.