Understanding the Old Age, Survivors and Disability Insurance (OASDI) program
The United States Social Security program is the largest such system in the world, as well as the single largest expenditure in the federal budget, with an estimated cost of $1.2 trillion in 2021.
According to the Social Security Administration, nearly nine out of ten people age 65 and older receive Social Security benefits (SSA). Social Security calculates your AIME (Average Indexed Monthly Earnings) for the 35 years in which you earned the most.
The Social Security Act, signed by President Franklin D. Roosevelt on August 14, 1935, when the United States was at the throat of the Great Depression, inaugurated the program.
The program has grown significantly over the years as the population and economy of the United States have grown. In 1940, about 222,000 people received a monthly benefit of $2020 on average. By the end of 1970, this figure would have risen to around 2021 million. The average monthly benefit for $1,543 is $1,543.
Payroll tax on OASDI
Payments to qualified individuals are paid for by OASDI taxes, which are government-collected payroll taxes called FICA taxes (short for Federal Insurance Contributions Act) and SECA taxes (short for Self-Employed Contributions Act). In 2021, the social security contribution rate for employees is 6.2%, while the self-employed pay 12.4%.
These revenues are held in two trust funds:
- The Trust Fund for Old Age and Retirement Survivors’ Insurance (ASI)
- The Disability Insurance (DI) Trust Fund is a trust fund for disability insurance.
These trust funds distribute benefits and invest the remaining income.
The amount of annual income for which you must pay social security tax is limited. In 2021, the maximum taxable income is $142,800.
OASDI Program Criteria
Individuals who meet the specified criteria are eligible for benefits under the OASDI program. The money is paid to eligible people from the age of 62 for old-age benefits. The full retirement age varies according to the year of birth and is set at 67 for anyone born in 1960 or later. Because of deferred pension credits, qualified individuals who wait until age 70 (but not later) to start receiving benefits can get higher maximum payments.
Payments are calculated using people’s earnings when they were of working age. Survivor benefits are paid to eligible surviving spouses or children of deceased or retired employees. Disability benefits are paid to eligible persons who are no longer able to engage in substantially gainful employment and who meet other conditions.
A worker must be fully insured to qualify for retirement benefits. By accumulating credits (also called quarters) of coverage, a worker can become fully covered. Credits or quarters are earned based on the number of covered salaries earned during a certain period. In 2021, a worker will receive a quarter of the coverage for every $1,470 earned. The monetary value is indexed to inflation every few years. A worker can earn up to four credits or quarters of coverage each year, with a total of 4 credits required to qualify for benefits.
What is the future of OASDI?
Some policymakers have suggested that the 6.2% OASDI tax may not be enough to usher us into the 21st century. According to the 2019 Social Security Trustees Report, an increase in the OASDI tax to approximately 7.55% would be enough to keep the Social Security program viable for the next 75 years. Otherwise, benefit reductions will be necessary to maintain the financial stability of the program.
Nevertheless, the 6.2% rate has been in place since the 1990s, and few are keen to change it. With most forecasts giving the government until the mid-2030s to resolve the Social Security budget crisis before benefit changes are needed, the OASDI tax is expected to remain unchanged for the foreseeable future. This is expected to continue until lawmakers in Washington gain the momentum needed to address the politically charged topic in the future.