Social Security: What It Is, How OASDI Works
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Social Security is an American federal insurance program that provides monthly income to qualifying recipients. Social Security is part of retirement for many, but Social Security benefits may also go to dependents of retired workers, people with disabilities and family members of workers who have died .
What is Social Security?
Social Security is a federal insurance program that replaces lost income for workers and their families. It’s funded primarily by payroll taxes, and a person must contribute to the program to qualify for benefits. Social Security pays beneficiaries monthly and is adjusted annually for inflation.
What is OASDI?
OASDI stands for Old-Age, Survivors and Disability Insurance, which is another term for Social Security. Its purpose is to provide financial security for aging workers, people who can no longer work because of a disability and workers’ children .
OASDI offers three major benefits:
Retirement benefits, which supplement a portion of someone’s income after they retire so they don’t have to rely solely on savings or nongovernment retirement accounts.
Survivors benefits, which replace part of the income that was previously earned by a worker who has died. Their qualifying family members can receive benefits as a monthly check.
Disability benefits, which replace some of the income that individuals with total disabilities lose when they are unable to work due to their conditions .
The Social Security Administration (SSA) also offers Supplemental Security Income benefits, but this program is not included in OASDI .
How does Social Security work?
The Social Security Administration (SSA) runs the Social Security program. OASDI payroll tax contributions from people currently in the workforce fund the majority of the benefits — their taxes cover the cost of benefits that others are currently receiving. As each generation of workers begins drawing benefits, a new generation enters the workforce to help pay for the cost. So it’s important that the ratio of workers to beneficiaries stays high enough to provide full benefits.
» Learn more: Will Social Security run out?
Employees and employers each pay a 6.2% OASDI payroll tax on employee earnings up to a certain limit, called the taxable maximum . Together, the employee and employer contributions equal 12.4% of the worker’s pay. Self-employed workers pay the fully combined 12.4% Social Security OASDI payroll tax themselves.
In 2023, the Social Security taxable maximum is $160,200. That means no one pays the OASDI payroll tax on any money earned over that amount regardless of their total annual earnings.
If you have multiple jobs in a year where you’ll earn more than the taxable maximum, you’ll likely pay too much in OASDI tax. You can get a refund for your overpayment when you file your federal income taxes.
Who qualifies for Social Security benefits?
Workers qualify for Social Security benefits when they’ve earned enough credits for the program. Workers earn a credit, known in Social Security lingo as a “quarter of coverage,” for every $1,640 on which they pay Social Security taxes. The SSA limits credits to four per year regardless of annual income.
How many credits you need depends on the type of benefits you are seeking. For retirement benefits, workers who turn 62 after 1990 must have at least 40 credits — equal to 10 years of covered work. Workers who die or develop a disability before turning 62 will qualify for benefits with fewer credits, but how many credits they need will depend on their age when they die or become disabled.
How are Social Security benefits calculated?
Two factors have a big influence on how the SSA calculates Social Security benefits:
How old you are when you begin receiving Social Security benefits .
How much you earned and contributed to Social Security during your 35 highest-earning years .
Because the calculations rely on a person's highest 35 years of earnings, workers with higher earnings and contributions will likely receive higher Social Security retirement benefits than workers with low earnings and contributions or years spent out of the workforce . However, additional benefits such as spousal benefits may help supplement income for lower earners.
Other factors can affect your monthly benefit, including if you:
Enroll in Medicare, which is deducted from your Social Security payment.
Have to pay income taxes on your Social Security benefits because your combined income is above a certain amount.
Keep working and go beyond the earnings limit while drawing Social Security early.
Estimate your Social Security retirement benefits
Your actual benefit may be lower or higher than estimate made with this calculator, because it does not take into account your actual earnings history.
We assume you have earnings every year until you begin receiving Social Security benefits. If you had several years of noncovered employment or your earnings changed significantly from year to year, this calculator will overestimate or underestimate your benefit.
When can I collect Social Security?
In general, people can claim Social Security benefits as early as age 62 . But the longer you remain in the workforce, the larger your monthly Social Security retirement benefit may be.
If you retire before reaching full retirement age, the Social Security Administration permanently reduces your benefit .
If you wait until your full retirement age to start collecting Social Security retirement benefits, you can receive 100% of your monthly retirement benefit.
If you wait until after full retirement age to retire, the Social Security Administration increases your benefit for every year you wait (up to age 70) .
People receiving survivors' benefits on behalf of a deceased spouse can qualify for retirement benefits as early as age 60, or 50 if they have a qualifying disability .
What is the maximum Social Security benefit?
Here are the highest monthly Social Security benefits an individual retiring in 2023 can receive, based on when they retire and start collecting benefits.
Retirement age | Maximum benefit per month |
|---|---|
62 | $2,572 |
65 | $3,279 |
66 | $3,506 |
67 | $3,808 |
70 | $4,555 |
To qualify for the maximum Social Security retirement benefit, you'd have to earn the maximum taxable wage per year (that is, make the maximum contribution to Social Security) for at least 35 years.
Maximum benefit amounts often change annually to reflect inflation . The SSA announces a cost-of-living adjustment, referred to as a COLA, every October. The amount depends on the rate of inflation.
Are Social Security benefits taxable?
Yes, Social Security retirement and disability benefits are taxable in some situations. You may pay federal taxes on your Social Security benefits if you fit in one of these categories :
You are a single filer with a combined income of more than $25,000.
You file a joint tax return with a combined income of more than $32,000.
You file a separate tax return despite being married.
No beneficiary is taxed on more than 85% of their benefits.
» Learn more: How to apply for Social Security
