OASDI is a tax term that stands for “Old Age Survivors, and Disability Insurance,” which is the legal name for the Social Security system in the United States. OASDI is a federal benefit program aimed at providing benefits to retired or disabled people and their survivors. Working taxpayers make payments into the OASDI program, and those payments are then issued to retirees, their surviving spouses, and their children. These Social Security funds are also issued to disabled workers. To explore this concept, consider the following OASDI definition.
Definition of OASDI
- A tax term that stands for “Old Age Survivors and Disability Insurance,” which is the federal Social Security benefit program.
1935 The Social Security Act of 1935
History of OASDI and Social Security
The concept of providing a type of insurance that would provide an income for people after they reach an age where they are unable to work to support themselves is referred to as “social insurance.” As the Industrial Revolution moved into full swing, around the beginning of the 19th century, people began living to a greater age than in pre-industrial America. When combined with the new lifestyle in which extended families no longer lived together to work the land in their own support, the need for social insurance became serious.
The dawn of the 20th century brought the first attempt to establish a governmental old-age pension program, with the goal of persuading legislatures to adopt need-based pensions for older Americans. Large civic organizations, including the Fraternal Order of Eagles, lobbied for the pension, and by 1935, 30 states had some type of old age pension in place, though they were found to be fairly ineffective as only around 3% of the elderly received any benefits under the plans.
Recovery from the Great Depression
Franklin Roosevelt’s First New Deal era (1933-1934) was a period of establishing relief from the Great Depression. The Second New Deal era (1935-1937) took things a step further, bringing about long lasting changes to the nation’s economy. The defining change of the Second New Deal was the Social Security Act of 1935. The Act created seven distinct plans to aid the American people:
|Old-Age Assistance||Federal financial support and oversight of state-based welfare programs for the elderly|
|Federal Old-Age Benefits||The Social Security program|
|Unemployment Insurance||National unemployment insurance, with federal funding and state administration|
|Aid to Dependent Children||State-based welfare for needy children (what would come to be called AFDC)|
|Grants to States for Maternal and Child Welfare||Federal funding of state programs for expectant mothers and newborns|
|Public Health Work||Federal funding of state public health programs|
|Aid to the Blind||Federal funding of state programs to aid the blind|
The first Social Security payments began being withheld in the form of payroll taxes in 1937. Monthly benefits began being issued five years later, in 1942, the first recipient being a Cleveland, Ohio man, Ernest Ackerman. Through the years, the Social Security Act has been amended to reflect the changing needs of society and the country’s economy.
The Social Security program is the largest social insurance program in the world, accounting for the biggest expenditure in the federal budget. It is estimated that 1 in 7 Americans receive social security benefits, and almost all workers are covered by it. The Social Security Act of 1935 instituted the OASDI tax as a means for wage earners to pay into the program, setting aside money to be paid out after retirement age.
The amount any wage earner pays to OASDI tax is dependent on his or her gross income. According to the Internal Revenue Service website, as of 2015 employers are required to withhold 6.2% of each employee’s wages for Social Security insurance. The employer is then required to pay a matching amount, for a total of 12.4% of the gross amount of each employee’s wages going toward Social Security. Only the employee’s share, currently 6.2%, is deducted from the employee’s actual wages. Social Security withholding is listed as “Fed OASDI/EE” on the employee’s pay stub.
Though it may sound confusing, OASDI tax is not the same thing as federal income tax. Federal income tax is the amount of a person’s income that is taxable, and those tax funds go into the nation’s general fund to be spent on a wide variety of necessary expenses. OASDI is a tax paid directly from a person’s wages into the Social Security program.
Social insurance in America requires employers to withhold money from employees’ paychecks for more than Social Security. Because medical insurance is an integral part of the Social Security Act, Medicare is funded by employee/employer contributions as well. The Federal Insurance Contributions Act (“FICA”) defines three separate taxes employers must withhold from employees’ wages, as well as the amount of the employer’s contributions. These taxes, referred to as FICA OASDI withholdings, include:
- Social Security tax
- Medicare Tax
- Medicare surtax (for employees earning over $200,000 per year)
Employers are required to make matching contributions for both Social Security and Medicare regular tax, but not for Medicare surtax.
Example of OASDI and Medicare Taxes Withholding
If John earns $5,000 per week ($260,000 per year) in gross income, his employer is required to withhold FICA OASDI taxes as follows:
|Social Security (OASDI)||6.2% = $310||6.2% = $310|
|Medicare Regular Tax||1.45% = $72.50||1.45% = $72.50|
|Medicare Surtax||0.9% = $45.00||0|
In this example of OASDI and Medicare withholdings, John pays a Medicare surtax because his annual gross earnings exceed $200,000.
The OASDI withholding on a paycheck is labeled FED OASDI/EE, which stands for Federal Old Age Survivors and Disability Insurance Employee share. The OASDI withholding is legally required to appear on every paycheck stub so that the taxpayer is aware of the amount of being withheld. The federal government places a limit on income that is eligible for OASDI withholding. In 2015, FICA OASDI can be withheld only up to a maximum wage of $118,500.
OASDI withholding amounts are subject to change each new tax year. This information may be found on the official Social Security website.
Social Security Credits
The Social Security system relies on a system of employee-earned credits for time worked in determining whether an individual qualifies for Social Security benefits upon retirement. For people born after 1929, a total of 40 Social Security credits, or 10 years of employment, are needed to qualify for benefits. Employees earn up to 4 Social Security credits per year of employment.
The system is set up so that any worker who maintains even relatively steady employment earns enough credits to be eligible for Social Security retirement benefits. If a person stops working before earning enough credits, those credits remain on his Social Security file, and credits begin accruing again when he returns to work. Earning more than the required 40 credits has no effect on his retirement benefit amount, as this is based on the average earnings over the worker’s life, and the person’s age at retirement.
Supreme Court Ruling on Entitlement to OASDI
In 1918, Ephram Nestor, a Bulgarian immigrant, came to the United States. He began working and paying taxes, including OASDI taxes when they began in 1936, once the system was in place. Nestor retired in 1955, and began receiving his Social Security benefits. A year after he retired, Nestor was deported for having had ties with the Communist Party in the 1930s.
A year before Nestor retired, Congress had passed a law specifying that any person deported from the country would lose his Social Security benefits. Nestor’s $55.60 Social Security payments were stopped. Assuming that, because he had paid into the Social Security system, he had earned his right to receive those payments, Nestor filed a lawsuit against the federal government.
The trial court ruled that there is no contractual right for any person to receive Social Security benefits. Nestor appealed the decision, and the case eventually made its way to the U.S. Supreme Court. Upon review, the Supreme Court agreed with the lower court, reinforcing the nature of the Social Security OASDI system.
The Court concluded:
“To engraft upon the Social Security system a concept of ‘accrued property rights’ would deprive it of the flexibility and boldness in adjustment to ever changing conditions which it demands.”
In basic terms, the Supreme Court determined that workers do not have a binding or earned right to receive Social Security benefits. OASDI is not an insurance program, in which there is a contractual obligation by the insurance company to pay out benefits when a specified event occurs. Though the concept of Social Security benefits was originally referred to as “social insurance,” the modern OASDI system is, in truth, a tax on one side, and a welfare-like benefit program on the other side.
Related Legal Terms and Issues
- Gross Income – The total amount of income before taking taxes or deductions into account.
- Pension – A type of retirement plan in which an employee and/or employer make regular contributions into a pool of funds for the employee’s future benefit.
- Wage Earner – A person who works for a wage or salary.
- Withholding – A portion of an employee’s wages that is not included on his or her paycheck because it is sent directly to the federal, state, or local tax authority.