The Old Age, Survivor, and Disability Insurance Tax, also known as the Social Security Tax, is one of two taxes that make up the federal Insurance Contributions Act taxes, along with the Medicare tax. These are usually referred to as FICA taxes. Both employees and employers pay a portion of the OASDI tax, but this does not apply to all types of income.
Fixed interest
The OASDI tax applies a flat tax rate to both the employer and employee based on the income for the year. As of 2012, the employee pays 4.2 percent of all earnings subject to OASDI and the employer pays 6.2 percent. For example, if you earn $50,000 a year from your job, you’ll pay $2,100 out of your paycheck, and your employer will pay an additional $3,100 in OASDI taxes on your behalf.
Earned Income Only
The OASDI tax only applies to income, not income without income. Earned income refers to money you receive for performing work, such as wages from your job or bonus income. For example, if you have $40,000 in wages and $10,000 in investment income, you only have to pay the OASDI tax on the $40,000 in wages; the $10,000 in investment income is exempt.
OASDI Tax Limits
The OASDI tax only applies to professional income up to the annual limit. After your earned income for the year exceeds the limit, you will not have to pay the OASDI tax on any additional income. For example, in 2012, the income limit is $110,100, for a maximum OASDI tax of $4,624.20. As a result, whether your earned income is $110,100 or $1 million, you pay the same amount in OASDI tax.
Restrictions Separately for spouses
If you are married, the limits on your income depend on the OASDI tax applicable to each spouse, even if you file a joint return. For example, using the 2012 tax rates and income limits, and each spouse has $110,100 in employment income, each spouse would pay $4,624.20 in OASDI taxes for a total of $9,248.40. However, if one spouse had $220,200 in employment income and the other spouse had none, the first spouse would pay $4,624.20 in OASDI taxes and the second spouse would pay none.
System financing
Social Security payments to beneficiaries, which totaled $1.05 trillion in 2019, are generally funded by payroll taxes on employees in Social Security-covered employment, trust fund reserves, and some income tax on Social Security benefits. The payroll tax rate is 12.4 percent of wages up to the taxable maximum (the rate is 6.2 percent for employees and 6.2 percent for employers and 12.4 percent for the self-employed).
The OASI Trust Fund and the DI Trust Fund are legally separate. For employees and employers together, the OASI payroll taxes amount to 10.6 percent and the DI payroll taxes 1.8 percent. In 2019, trust fund reserves for the OASI and DI programs were $2.8 trillion and $93 billion, respectively. Income tax from some Social Security benefits brought in $34.9 billion for OASI and $1.6 billion for DI in 2019.
Systemic funding assessments often focus on the combined programs (OASI and DI) together and focus on key measures such as trust fund depletion date, 75-year actuarial balance sheet, and comparisons of program costs to US GDP.
As for the depletion of trust funds, based on technical work by the Social Security Administration actuaries, the Social Security Trustees predict that the combined OASDI trust fund will be exhausted by the year 2035. The Penn Wharton Budget Model (University of Pennsylvania) projects depletion in 2032-2034, depending on the shape of the US economic recovery after the COVID-19 pandemic.
With regard to the actuarial balance, the social security administrators estimate a 75-year actuarial deficit at 3.21 percent of the payroll. This is roughly the total payroll tax increase that would be needed to keep the system solvent for 75 years. The figure is intended to illustrate the size of the deficit. Legislation could close the deficit in ways other than raising the payroll tax rate.
Because taxable income is a fraction of GDP, sometimes the system’s finances are put into context by using GDP. The cost of Social Security is currently 5.0 percent of US GDP. Program costs will rise to 5.9 percent of GDP by 2038 and will remain at that level approximately until 2094.
Legislation has been passed in the past to prevent the depletion of trust funds. Should the trust funds run out, Social Security would still have payroll tax revenue in the system. Social Security administrators estimate that the revenue would be enough to pay for 79 percent of the program’s benefits. However, there has been discussion of a trust fund depletion scenario as to whether monthly distributions would be reduced or full amounts paid, but not on time.
