Definition: OASDI stands for Old-Age, Survivors, and Disability Insurance, which is the official name of the Social Security program in the United States.
What is OASDI?
When people retire, become disabled, or die, their family income decreases. Old-Age, Survivors and Disability Insurance (OASDI) was designed to support families when such situations arise. The program provides monthly benefits to former workers, as well as their spouses and children, to partially replace lost income. OASDI is funded by payroll taxes under the Federal Insurance Contributions Act and the Self-Employment Contributions Act.
Virtually everyone who earns income contributes to the OASDI program through their taxes, and those who qualify by age or disability (or surviving family members) may receive funds from the program. The amount a person contributes to OASDI during their lifetime helps determine how much they can receive in the future.
What are OASDI taxes?
The OASDI program is funded by payroll taxes paid by employees, employers, and the self-employed. The OASDI tax starting in 2022 is 6.2%. The tax only applies to the first $147,000 of your income, which means that the maximum contribution an employee may be required to make will be $9,114.00 in 2022 (in 2023, the tax will apply to the first $160,200 of your income, which means that the maximum contribution will be $9,932.40). Employers are required to match employee contributions. So for every dollar you contribute, your employer also gets a dollar each.
The tax works a little differently for those who are self-employed. These individuals are both the employer and the employee in the equation, so they must pay both parts of the OASDI tax.
How are OASDI benefits calculated?
Old-Age, Survivors and Disability Insurance (OASDI) benefits are calculated based on a person’s 35 highest paying years of service. The Social Security Administration determines how much that amount would be worth in today’s dollars, then uses a formula that takes into account when the person plans to receive benefits and other factors.
There is a limit on how much money a retiree can receive in Social Security benefits. For a person applying for benefits at age 62 in 2022, the maximum monthly benefit is $2,364. For someone who applies for benefits at full retirement age in 2022 (age 66 for those born between 1943 and 1954), the maximum monthly benefit is $3,345. For a claimant at age 70, the maximum monthly benefit is $4,194. Keep in mind that no one guarantees this amount by any means. In fact, the average monthly Social Security benefit for retired workers in 2021 was only $1,555.
Are OASDI taxes mandatory?
Old-Age, Survivors and Disability Insurance (OASDI) taxes are mandatory for all workers, employers and the self-employed. Even if you would prefer to save for your entire pension yourself, you cannot opt out of paying OASDI taxes. There are very few exceptions – about 96% of jobs are covered by OASDI, which means they require you to pay, and one day you can get it.
Some groups are exempt from paying OASDI taxes and, as a result, are not eligible for these benefits in retirement:
- Some religious groups: Some religious groups, including Amish and Mennonites, oppose receiving Social Security benefits, and their members may apply for an OASDI exemption.
- Nonresidents: Some people who live in the United States but are not citizens or residents (meaning they either have a green card or are in the country a certain number of days per year) must still pay OASDI taxes. Others do not, including international students and professors who are temporarily in the country.
- Students: Students who work at the school they attend do not have to pay OASDI taxes on that income.
- Foreign government employees: If a foreign government employee receives income in connection with his or her official duties, that income is exempt from OASDI taxes.
Why it is important
For the younger generation, Old Age, Survivors and Disability Insurance (OASDI) taxes may seem like an unwelcome burden. This can be even more frustrating for those who think they can save for their entire retirement on their own with an individual retirement account or 401(k). So why should you care about OASDI?
First, most people don’t actually save enough for retirement. According to a 2019 Northwestern Mutual study, more than one in five Americans have less than $5,000 saved for retirement. The study found that only one-fifth of Americans have more than $200,000 saved. OASDI provides an important safety net for these people to live out their golden years.
This retirement benefit is especially important for women. According to the Social Security Administration, women live longer than men (by an average of three years), earn less money in their lifetime, and retire with fewer assets. As a result, OASDI is a particularly important safety net for this population.
In addition, although most recipients of Social Security benefits are retirees, others benefit as well. Social Security also extends to people with disabilities and disabled citizens, as well as to children and spouses of disabled, retired, or deceased people.
For example, let’s say a pensioner or disabled person who is receiving welfare benefits dies. Their minor children and surviving spouse will be able to receive a monthly allowance based on a percentage of what the deceased person received. The minor child will receive 75%, while the surviving spouse of retirement age will be able to receive the full amount of the benefit.