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What Is OASDI? - Definition & Benefits

Instructor: Ian Lord

Ian is a real estate investor, MBA, former health professions educator, and Air Force veteran.

Have you ever seen the letters OASDI on a paycheck? It's better known as Social Security. Let's take a look at what this program is and what benefits it offers.

What Is OASDI?

Odds are, any pay stub for a job you've ever had includes a deduction for something called OASDI, which stands for old age, survivor and disability insurance. You probably know it by it's more common name, Social Security.

Social security was created as part of the Social Security Act of 1934, and participation is mandatory for workers. Only a few exempted jobs in certain industries or local governments are exempt, but people in these positions are not eligible for benefits since they don't contribute to the program. As the Federal Insurance Contributions Act (FICA) states, employers must withhold a portion of each employee paycheck and make an additional payment to the Social Security fund. The Social Security Administration (SSA) then distributes benefits to the elderly and disabled as well as children and dependents of deceased workers.

Social Security Benefits

Sarah has been working as a nurse for about 5 years now, and she's become curious about the OASDI line on her paycheck--what exactly does the Social Security program offer her in exchange for taking part of her pay? Her employer withholds a percentage of her income set by law and, along with an equal contribution from the business, sends it to the SSA. In 2015, the rate was 6.2%. So, her employer withheld 6.2% of her income and sent an additional 6.2% to the SSA.

It should be clear that Social Security benefits are subject to change each year. Factors such as the amount of money withheld or given as well as retirement age can--and have--changed since the program began. This is mainly due to the need to keep the program funded despite longer life expectancy and a shrinking workforce.

But how does the SSA distribute the money in its fund? Let's explore some of the ways Social Security benefits the public:

Retirement Benefits

Sarah is already familiar with the general idea that Social Security gives retirees a source of income after they stop working. So how does the SSA choose when you can stop working? Let's work through the process. Each year, the SSA determines the amount of income needed to earn a credit for each quarter-year. As of 2015, Sarah will earn a quarter-year credit for each $1,220 she makes. Each year, Sarah can earn up to four a quarter-year credits. Once Sarah earns 40 quarters, she has worked the required minimum 10 years to be eligible for benefits.

When Sarah reaches retirement age, Social Security will start paying her an amount based on the average of her highest-earning 35 years of work. If she works past 35 years, her lowest-earning years will be removed from the calculation. An early retirement would mean that if she works less than 35 years, zeros would be added for each year with no income up to the 35-year point. She will receive a portion of that average, with annual adjustment for inflation, for the rest of her life.

If Sarah is married, either spouse can use the other's work record to get the greatest benefit out of Social Security. A married spouse can receive 50% of their spouse's earned benefit. If she earned less money than her spouse over their lifetimes, she may receive more money using her spouse's work history.

The current full retirement age is either 66 or 67, depending on when the retiree was born. Sarah could retire and collect benefits at as early as 62 but would received a reduced benefit. If she waits until after the full retirement age to 70, she could receive an additional bonus on top of her regular benefits calculation.

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