You see “OASDI” deductions every other month on your paycheck. And you wonder what this strange acronym is. At least, you’re sure it’s not another camouflaged financial scam. But, what exactly are you paying for in the name of OASDI?
Keep reading to get clarified.
Old Age, Survivors, and Disability Insurance is OASDI spelled out. Therefore, you pay OASDI tax to the federal government to help fund the social security program. You understand that this program provides protection against the loss of earnings as a result of retirement, death, or disability.
As everyone has a likelihood of experiencing any of these three predicaments, paying OASDI tax is mostly compulsory. The program is a brainchild of the Social Security Act of 1935. This was the same year that the Federal Insurance Contributions Act (FICA) was passed.
These two acts are intertwined. Actually, the OASDI tax is part of the FICA tax, and Medicare tax is the other component of FICA tax.
How Much Are OASDI Deductions?
If you’re employed, you need to pay 6.2% of your earnings as OASDI tax. In addition to that, employers also required by law to pay 6.2% of their income to the same cause. The total for both the employer and employee contributions is therefore 12.4 %.
Then, it follows that you have to pay 12.4% if you’re self-employed. Sounds great? Or is it discriminative?
If you feel as if you’re being punished for being self-employed, the government has a provision for you. They allow you to reclaim the employer portion of 6.2%. Now, that sincerely sounds great!
Is There A Cap On Deductions?
Sure, there is. However, there’s no fixed maximum. The figure changes from year to year. For instance, in 2015, the OASDI tax ceiling was set at USD$118,500. That means that the social security tax was only applicable to the first USD$118,500 you earned that year. Any earnings above that figure wouldn’t be subject to deductions.
In 2020, the ceiling was USD137,700. In 2021, the ceiling was increased to USD$142,800. You really don’t know how long that ceiling will hold. President Joe Biden has intentions to raise the cap to USD$400,000. You only have to wait and see.
What Are The Benefits Of Paying OASDI Tax?
Looking at it closely, OASDI taxes are for your good. Taxes, when expertly designed, are meant to help the State in providing proper services to the general public. Here are a few reasons to say that paying OASDI tax is beneficial:
- Provided you’ve contributed OASDI taxes for 10 or more years, you’re entitled to retirement benefits. Time really flies. Old age is inevitable. Every passing year, you draw closer to retirement yet your personal finances still don’t seem to be in order. The social security program will come to your rescue when you no longer have the physical and mental strength to actively work.
- According to the Social Security Administration, every person above the age of 20 has 30% chance of becoming disabled at some point in life. If fate leads you to disability, the social security program will see to it that all your basic needs are met, instead of begging left, right, and center.
- In case you prematurely die (i.e., before your kids get to be independent), your family will be supported by funds from the social security program. Who wants to see their children suffer? No one!
Can You Opt Out Of OASDI Tax?
It’s quite difficult to legally get exempted from paying OASDI taxes. But, sometimes you never know! Your individual case may be heard by the Internal Revenue Service (IRS). Fill out Form 4029, titled Application for Exemption from Social Security and Medicare Taxes and Waiver of Benefits. Honestly detail your reasons for opting out, and see if IRS will grant your request.
If you’re an immigrant to the US, you can also opt out of paying the social security tax. The same is true for foreign government employees.
Another qualifier is when both you and your employer are part of a qualifying religious group that has been in operation since 31st December 1950 or earlier.
Any Hopes For Reduction In the Future?
The above-mentioned 6.2% rate has been there since the 1990s. While the collections were enough at the start, the current economy has rendered the contributions non-sustainable in the long run.
In actual fact, the social security program will allegedly run out of money in the next 30 years or so if nothing is done.
Either the tax rates have to be increased or the benefits reduced so as to keep the institution afloat. What is your preference between increased rates and reduced benefits?