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Policy Basics: The Importance of Paying Your OASDI Tax

Some workers and employees would complain when they see the 6.2% payroll or Social Security tax deducted from their monthly wages.

What they’re referring to is the Old-Age Survivors and Disability Insurance (OASDI) tax which is automatically withheld by their employer from their payroll salaries.

But the OASDI tax isn’t just helping today’s retirees. It’s also a way of making sure that today’s workers would be covered. If you want to know more information about why you’re paying for the OASDI tax, you might want to check out this and other similar articles. 

Here’s a brief discussion about the importance of paying the OASDI tax.

1. Brief History Of OASDI

The OASDI program was created through the Social Security Act (SSA). This act was signed into law in 1935 by President Franklin D. Roosevelt. The purpose of the program was to provide a safety net and minimum guaranteed benefits for those who retired from work and reached old age.

It’s quite remarkable that the U.S. was in the midst of the despair and hopelessness brought about by the Great Depression when the Social Security Act was signed into law.

In 1940, there were only around 222,000 Americans who received their monthly OASDI benefits. Back in the day, the average payout was only USD$22.60 per month. Since then, the OASDI has grown in step with the growth of the American economy and population. 

In 2021, there were already almost 70 million Americans who were receiving a monthly paycheck from the OASDI program for their living expenses. The average monthly paycheck in 2021 was already set at USD$1,543. For this new year 2022, estimates of the monthly paycheck put the average at USD$1,657.

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2. OASDI Benefits 

One of the most important reasons why you should pay your OASDI tax is that they’re used to pay the social security benefits of qualified people who meet a certain set of criteria. The revenues collected from the OASDI tax go to two trust funds: 

  • The Old-Age and Survivors Insurance (OASI) Trust Fund, which is the source of funds to pay out monthly benefits to qualified retirees
  • The Disability Insurance (DI) Trust Fund, which is the source of funds to pay out benefits for persons with disability who qualify under the program

The money in the two trust funds is invested in earning assets to further grow the funds. The payout for the benefits is also drawn from the portion of the funds which weren’t invested.

The retirement benefits are paid out only to those who meet the criteria of the OASDI program. Workers can retire as early as they reach 62 years of age and start receiving benefits.

But they’ll be receiving significantly lower monthly payouts. Sometimes the deductions from the payouts could be as much as 30% compared to what they would’ve received if they waited a little bit more. 

Those who want to receive full retirement benefits should wait until they reach the age of full retirement. This is 67 years of age for those who were born after 1960.

Those who can wait until the age of 70 before they claim their monthly payout will receive the higher, maximum benefits. The reason for this is that the delay in their retirement credits pushes up the rate of their expected monthly retirement payout

3. Maintaining Sustainability Of Social Security Fund

Another reason why it’s highly important for Americans to pay their OASDI tax is to maintain the stability and sustainability of the Social Security program. Their contributions to the Social Security program through regular funding are what will keep the fund sustainable. 

The basic idea of the OASDI program is for the present workforce or labor force will pay for the monthly benefits of all those who are already receiving or will start to receive their monthly retirement payout.

The Social Security funds are sustained when a portion of a worker’s monthly salary is taken as Social Security or OASDI tax. This tax contribution then replenishes the monthly payout that was remitted to a person’s retirement benefits.

The Social Security tax rate withheld from the wages of workers is 6.2% of their compensation. The employer is also required to contribute, out of its own funds, another 6.2% of the employee’s compensation.

Together, this works out to a total Social Security or OASDI tax rate of 12.4% percentage points. This goes to the social security fund, which pays out the monthly benefits of retirees. This was the rate last year 2021, and will still be the rate this year 2022.

The social security fund helps keep society stable and orderly by making sure that those who can no longer work have money to spend for their essential needs. If all those who can’t work anymore don’t have retirement or disability benefits, then they’d all be out begging in the streets.

That would be a huge problem for everybody. Giving them retirement benefits helps ensure that they’d be able to look after their own affairs even in their old age. 

4. When Your Turn Comes

Perhaps one of the most important reasons why you should pay your OASDI tax is that it’s in your best interest to keep the Social Security fund healthy and growing. You won’t be working for the rest of your life.

At some point, you’re going to stop working and retire from whatever profession, occupation, vocation, or career you’ve been able to carve out for yourself for the good part of your working years.

When your turn comes for retirement, it would be in your interest that the social security fund is at a healthy level, with growing earnings from its investment placements, and continuous regular funding from the contributions of the workers and employees of their day.

That may serve as an assurance that you’ll be able to receive your monthly paycheck of retirement benefits. 

Conclusion

The social security or OASDI tax is one of the mandatory tax deductions that all workers and employees see on their payroll wages. Even the self-employed and freelancers have to set aside money for it.

They’ll even have to pay double since they also pay for the employer’s share. But paying your OASDI tax is highly important to maintain the financial viability and stability of the Social Security fund.

This is what can ensure that retirees will receive their benefits. And that includes you when it’s your turn to retire. 

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