What Is OASDI Tax and How Can It Help You?

OASDI tax is part of the money taken from your income to support Social Security’s Old Age, Survivors and Disability insurance program. The U.S. Government deducts a tax of 12.4 percent on each wage earner’s income and tips.

More than six percent is taken from the paycheck to fund current benefit recipients, including retired persons, survivors (spouses and children of deceased wage earners, such as widows and orphans) and disability payments to those in need. It is important to pay into OASDI for the common good. In the event you need OASDI benefits at some point in life, you are guaranteed the right to apply for them.

About 1.45 percent is taken from each worker’s paycheck per month to pay for the Medicare program. The employer pays half of the OASDI tax and then matches the Medicare tax portion. Self-employed persons pay both employer and employee OASDI and Medicare contributions. OASDI helps to fund those programs that support all Americans in the event they need these important Social Security benefits.

OASDI Tax
Most workers, including the President of the United States, pay OASDI tax. Non-resident employees or non-immigrants with certain types of visas, including A, D, or F visas, or people who work for an educational institution at which they are enrolled as a student, do not pay OASDI tax.

To understand some of the challenges facing OASDI today, let’s review the Social Security basics:

Social Security
President Franklin D. Roosevelt signed the Social Security Act in the 1930s Great Depression era. The federal government started collecting taxes from all Americans to fund Social Security in 1937. Monthly benefits were first provided by 1940.

Although Social Security was envisioned to support retired Americans, survivors payments were included in 1939 and disability benefits followed by 1956.

President Lyndon B. Johnson advocated for Medicare. The program began in 1965. Congress passed cost of living adjustments (COLA) in the 1970s. Social Security recipients receive adjusted benefits when inflation increases the cost of certain basics.

Recipient Benefits
OASDI pays part of the qualified retiree’s previous income. Benefits are calculated by considering how much the individual contributed and the age at which he or she began taking monthly Social Security benefits. The government applies the OASDI tax to the first $118,500 of earnings (2016). OASDI tax is not levied on earnings above this level.

Aging Population
The Social Security program is challenged by an aging population. When Social Security was designed in the Roosevelt administration, an average worker lived only five to 10 years after retirement. He or she collected Social Security benefits for a short period of time. More workers contributed to Social Security and the program ran at a surplus.

As the demographic bulge of Baby Boomers reaches retirement age and begins collecting Social Security benefits, staying in the black will challenge Social Security. Gen X and Y generations, sometimes referred to as baby bust generations, are entering peak earning years.

There are simply fewer current adult workers than there are older adults who desire benefits. About three adult workers are currently required to support the needs of OASDI recipients. According to the Urban Institute, this number will decrease to just two workers per recipient in the next 15 years unless changes are implemented today.

The Future
For many years, Social Security insurance taxes collected allowed the program to pay current recipients and plan for the future financial needs of American workers. Congress will be asked to make challenging decisions in the near future as Social Security begins to operate in the red. According to the New York Times, the Social Security Supplemental Income fund (SSI) will run out of money by July 2016 without government intercession.

Government will be required to increase tax burdens, decrease benefits and/or raise retirement age, or achieve higher returns on the Social Security trust fund.

Understanding the reasons for OASDI tax and how it can help you can make it a little easier to accept why you must pay this tax. Social Security benefits are there for millions of workers who need financial benefits. Unlike welfare, each American worker pays Social Security during his or her working life. Currently, about 60 million workers or their families receive Social Security benefits.