What is the Old-Age, Survivors, and Disability Insurance (OASDI) Program?

Old-Age, Survivors, and Disability Insurance is kind of like a savings account…

Over the years, you contribute money to OASDI through your taxes. Then, your money is there waiting for you when you’re ready to take it out. But unlike a savings account, you can only take out funds once you’re at least 67 or become disabled, and you can’t get them all at once. Also, unlike a savings account, you are not accessing your own pot of money, but rather benefiting from the payroll tax contributions of current workers.

The Old-Age, Survivors, and Disability Insurance program was signed into law in 1935 by President Franklin D. Roosevelt, and the government began collecting taxes to fund the program in 1937. The program was designed to partially replace the income of individuals who were retired or disabled, or their surviving family members. The program initially applied only to elderly people. Dependents and survivors were added by an amendment in 1939, and disabled people were added in 1956.

The OASDI program is funded through payroll taxes that employees, employers, and self-employed people pay. The OASDI tax is 6.2% as of 2022. The tax only applies to the first $147,000 of your income, meaning the most an employee can be required to contribute is $9,114.00 in 2022 (in 2023, the tax will apply to the first $160,200 of your income, meaning the max contribution will be $9,932.40). Employers are required to match employees’ contributions. So for every dollar you put in, your employer is also chipping in a dollar.

The tax works a little differently for those who are self-employed. These individuals are both the employer and employee in the equation, so they have to pay both portions of the OASDI tax. This wasn’t always the case. Self-employed workers didn’t pay OASDI taxes until 1951, and it wasn’t until 1984 that they were paying twice as much as traditionally employed workers.

Old-Age, Survivors, and Disability Insurance (OASDI) benefits are calculated using an individual’s 35 highest-paid years in the workforce. The Social Security Administration determines what 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 cap on how much money a retired person can receive in Social Security benefits. For someone filing to receive benefits at the age of 62 in 2022, the maximum monthly benefit is $2,364. For someone applying for benefits at the full retirement age in 2022 (66 for those born between 1943 and 1954), the maximum monthly benefit is $3,345. For an applicant who is 70 years old, the maximum monthly benefit is $4,194. Keep in mind, by no means is anyone guaranteed that amount. In fact, the average monthly Social Security benefit for retired workers in 2021 was just $1,555.

As you can see, there is a benefit to waiting to retire. By holding out for an additional seven years, someone may have the potential to nearly double their monthly benefits. Over a decade or more of retirement, the difference between those figures can add up.

Old-Age, Survivors, and Disability Insurance (OASDI) taxes are mandatory for all employees, employers, and self-employed people. Even if you’d rather save for your entire retirement yourself, you can’t opt out of paying OASDI taxes. There are very few exceptions — About 96% of jobs are covered by OASDI, meaning they require you to pay in, and one day you’ll be able to collect.

A few groups are exempt from paying OASDI taxes and therefore aren’t eligible to receive those benefits in retirement:

• Certain religious groups: Some religious groups, including the Amish and the Mennonites, are opposed to accepting Social Security benefits, and members can apply for an exemption from paying OASDI taxes.
• Some nonresident aliens: Some people who live in the United States, but aren’t citizens or residents (meaning they either have a green card or are in the country for a certain number of days per year), still have to pay OASDI taxes. Others don’t, including international students and professors who are in the country temporarily.
• Students: Students working at the school they attend are not required to pay OASDI taxes on that income.
• Foreign government employees: If an employee of a foreign government is earning income through their official duties, that income is exempt from OASDI taxes.

For younger generations, Old-Age, Survivors, and Disability Insurance (OASDI) taxes might seem like an unwelcome burden. After all, retirement is years away. It might feel even more frustrating for those who believe they can save for their entire retirement on their own through an Individual Retirement Account or a 401(k). So why should you care about OASDI?

First of all, most people really aren’t saving enough for retirement. More than one in every five Americans has less than $5,000 saved for retirement, according to a 2019 study from Northwestern Mutual. Only one-fifth of Americans have more than $200,000 saved, the study found. OASDI provides an important safety net for those individuals to survive in their golden years.

This retirement benefit is particularly important for women. According to the Social Security Administration, women live longer than men (by three years on average), make less money over their lifetimes, and retire with fewer assets. As a result, OASDI is an especially important safety net for this demographic.

Additionally, while most Social Security beneficiaries are retirees, others benefit too. Social Security also covers people who are disabled and unable to work, as well as the children and spouses of disabled, retired, or deceased people.

For example, let’s say a retired or disabled person who is receiving Social Social Benefits dies. Their minor children and surviving spouse would be able to collect a monthly benefit based on a percentage of what the deceased individual was receiving. A minor child would get 75%, while a surviving spouse of retirement age could collect the entire benefit amount.

In the case of a disability, an individual can receive benefits if he or she meets the Social Security Administration’s definition of disability (“the inability to engage in any substantial gainful activity by reason of any medically determinable physical or mental impairment(s)”) and is unable to work for a year or more as a result. The individual continues to receive benefits until he or she can work again or reaches retirement age, at which point the benefits convert to retirement benefits in the same amount.

Old-Age, Survivors, and Disability Insurance (OASDI) benefits are not the only ones available to older Americans. Created 30 years later, Medicare is designed to provide health insurance to people over 65. Like Social Security, Medicare is funded through payroll taxes. The current Medicare tax rate is 1.45%. As with the OASDI tax, self-employed people pay both the employer and employee portion of the tax, totaling 2.9%. Anyone who has paid this tax for at least 10 years by the time he or she reaches 65 is eligible for health insurance through Medicare. Those who haven’t worked for long enough can buy coverage.

Medicare plays a vital role for people who have retired and no longer receive health insurance coverage from an employer. Since health care costs tend to rise with age, this program plays an important role in society.

There are a couple of different plans under Medicare. Medicare Part A is available to anyone who has met the tax requirements for no premium. This is the part of Medicare that covers hospital costs, skilled nursing facilities, lab tests, and home health care. There is also Medicare Part B, which covers doctor visits and medical equipment, and Medicare Part D, which covers prescription drugs. Both of those require monthly premiums.

The future of the Old-Age, Survivors, and Disability Insurance (OASDI) program is a subject of debate. Americans are living longer and having fewer children, meaning there aren’t as many people paying into the program relative to the number of people drawing benefits. Some worry that the program will disappear altogether and won’t be around to benefit younger generations.

According to the Social Security Administration, by 2035, taxes will only be enough to cover 75% of benefits. Over the next decade, the country will presumably have to decide to increase the OASDI tax to continue to fund the program fully.