What is OASDI? Understanding the Old-Age, Survivors, and Disability Insurance Program

The Old-Age, Survivors, and Disability Insurance (OASDI) program, commonly known as Social Security in the United States, stands as a cornerstone of economic security for millions. This comprehensive federal program provides crucial monthly benefits to workers who have retired, become disabled, or to their families upon their death. Eligibility for OASDI benefits and the amount received are directly linked to a worker’s contributions to Social Security throughout their working life. Importantly, OASDI operates without a means test for qualification, although there are income limitations from working for beneficiaries who are under the full retirement age.

In December 2012, OASDI was providing benefits to nearly 57 million individuals, with monthly payouts reaching approximately $65 billion. The total expenditure for the calendar year 2012 amounted to around $775 billion. According to the Social Security Trustees Report, these expenditures represented 4.8 percent of the United States’ Gross Domestic Product (GDP) in 2012. During the same period, approximately 161 million employees and self-employed individuals, along with their employers, contributed $590 billion to the OASDI trust funds, the financial mechanism through which contributions are collected and benefits are disbursed. An additional $114 billion was transferred from the U.S. Treasury’s general fund to compensate for a temporary reduction in the payroll tax rate in 2011 and 2012.

Social Security benefits are not just a safety net; they are a vital source of income for a significant portion of the older population. In 2011, Social Security provided benefits to 87 percent of married couples and 85 percent of unmarried individuals aged 65 and older. It serves as the primary income source (constituting at least 50 percent of total income) for 52 percent of married couples and 74 percent of unmarried individuals in the same age group. For a substantial segment, Social Security is even more critical, contributing 90 percent or more of income for 22 percent of married couples and 45 percent of unmarried individuals aged 65 and older. It is important to note that “total income” as defined here excludes savings withdrawals, non-annuitized retirement accounts, and in-kind support like food stamps or housing assistance.

How OASDI is Funded: Contributions and Trust Funds

Funding for OASDI comes primarily from taxes levied under the Federal Insurance Contributions Act (FICA) and the Self-Employment Contributions Act (SECA). These taxes are essentially contributions made by workers, their employers, and self-employed individuals. Employers are required to match the contributions made by their employees, while self-employed individuals pay the equivalent of both employer and employee portions. To alleviate the burden of the higher rate for self-employed individuals, they are eligible for a special tax deduction. It’s important to note that there is an annual limit on the amount of earnings subject to OASDI taxes, which was set at $113,700 in 2013. However, there is no such limit for Medicare Hospital Insurance taxes. Employees who exceed the taxable earnings limit due to working for multiple employers may receive refunds for excess FICA payments when they file their income tax returns.

The taxes collected are allocated to three distinct trust funds:

Old-Age and Survivors Insurance (OASI) Trust Fund: Primarily for retirement and survivors benefits.
Disability Insurance (DI) Trust Fund: Specifically for disability benefits.
Medicare Hospital Insurance (HI) Trust Fund: For Medicare Part A expenses.

In addition to payroll and self-employment taxes, the OASI and DI trust funds also receive revenue from interest earned on trust fund investments, income from the taxation of Social Security benefits, certain technical transfers, and even gifts or bequests. By law, disbursements from the OASI and DI trust funds are strictly limited to:

Monthly benefits for eligible workers and their families.
Vocational rehabilitation services for disabled beneficiaries to help them return to work.
Administrative costs associated with running the program (which are currently less than 1% of total expenditures).
A one-time lump-sum death payment to eligible survivors of deceased workers.

Revenues from FICA and SECA taxes are deposited into the U.S. Treasury. Any funds exceeding immediate benefit payouts are used to purchase special interest-bearing Treasury bonds. These bonds are held as assets of the trust funds until needed to cover future Social Security obligations, ensuring the program’s long-term financial stability.

The Structure and Organization of OASDI Administration

The Social Security Administration (SSA) is the agency responsible for administering the OASDI program. It gained independence in 1995, becoming its own federal agency. The SSA is headed by a commissioner of Social Security, appointed by the U.S. President and confirmed by the Senate, serving a 6-year term. To provide oversight and guidance, a bipartisan Social Security Advisory Board exists. This board reviews existing laws and policies, commissions relevant studies, and offers recommendations to anticipate and address evolving circumstances impacting Social Security. The President appoints three of the seven board members, while Congress appoints the remaining four, ensuring balanced perspectives in its advisory role.

The SSA operates with a centralized management structure and a widespread network of over 1,500 offices across the nation. This network includes:

Field Offices: Local offices providing direct services to the public.
Regional Offices: Overseeing operations within specific geographic areas.
Teleservice (800-Number) Centers: National call centers providing phone-based assistance.
Processing Centers: Handling specialized workloads like disability claims and earnings records.
Hearings Offices: Adjudicating appeals related to benefit claims.
State Disability Determination Services: Partnering with states to evaluate disability claims.

This organizational structure is designed to ensure efficient, accurate, and responsive service delivery to the public. By integrating support services across all Social Security programs, the SSA aims to enhance efficiency, reduce redundancy, and create opportunities for “one-stop” service access for individuals interacting with the agency.

The SSA’s headquarters are located in Baltimore, Maryland. Key components at the headquarters include:

National Computer Center: Housing the mainframe computers that power SSA’s vast systems and data processing capabilities.
Executive Staff: Leadership responsible for policy development, program management, operations, and technology.
Field Support Components: Units providing support and guidance to the nationwide network of field offices.

The SSA’s field operations are divided into 10 geographic regions, encompassing approximately 1,300 field offices in communities throughout the United States. Field offices are the primary point of in-person contact for the public. These offices range in size from large urban centers with 50+ employees to smaller, remote resident stations with just one or two staff members. Each region is led by a regional commissioner and staffed with specialists to handle regional administrative tasks and support field offices in addressing operational issues.

In addition to field offices, teleservice centers provide a national toll-free service (1-800-772-1213). Though physically located within specific regions, these centers utilize advanced communication systems to manage Social Security inquiries and transactions from across the entire nation, offering convenient access regardless of location.

Six processing centers handle specialized workloads, including disability cases, claims from international claimants, maintenance of earnings records, and ongoing eligibility reviews for Supplemental Security Income (SSI) payments. These centers also provide crucial service and support to field offices and assist in answering calls to the toll-free number, contributing to the overall efficiency of SSA operations. Hearings Offices and the Appeals Council are responsible for making decisions on appeals related to Social Security benefit claim determinations, ensuring a process for individuals to challenge decisions.

Program Evolution: Changes and Adaptations

The OASDI program is not static; it evolves over time through legislative changes enacted by Congress and, in areas where authority is delegated, through regulations issued by the Social Security Commissioner. These changes are often implemented gradually, sometimes with annual adjustments or phased implementations extending beyond the initial enactment date. This adaptability ensures the program remains responsive to societal changes and evolving needs.

Broad Coverage and Robust Financing

In 2013, approximately 161 million individuals were employed or self-employed in jobs covered under the OASDI program. Over the years, coverage has expanded to become nearly universal for work performed within the United States, including territories like American Samoa, Guam, the Northern Mariana Islands, Puerto Rico, and the U.S. Virgin Islands. Currently, about 94 percent of the U.S. workforce is covered by OASDI, demonstrating its extensive reach.

However, some categories of workers are excluded from OASDI coverage. These major categories include:

Civilian federal employees hired before January 1, 1984: These employees are typically covered under a different federal retirement system.
Railroad workers: Covered under the Railroad Retirement system, which is coordinated with Social Security but has its own structure.
Certain state and local government employees: Those covered under their employers’ own retirement systems may be excluded from OASDI.
Domestic workers and farm workers with low earnings: Those whose earnings do not meet certain minimum thresholds are not covered. (Note: Workers in industry and commerce are covered regardless of earnings amount.)
Individuals with very low self-employment income: Generally, those earning less than $400 net annually from self-employment are not covered.

For most employees, OASDI taxes are withheld from the very first dollar of earnings. Exceptions apply to specific categories like domestic employees, election workers, and agricultural workers, who have slightly different earnings thresholds before FICA taxes are withheld. For example, in 2013, a domestic employee needed to earn $1,800 from a single employer in a calendar year before FICA withholding began.

Employees, employers, and the self-employed pay taxes on earnings up to an annual maximum taxable amount for OASDI. As mentioned, this limit was $113,700 in 2013 and is adjusted annually based on national average wage increases. It’s crucial to reiterate that there is no upper limit on taxable earnings for Medicare Hospital Insurance (HI). The current FICA tax rate for both employees and employers is 6.2 percent for OASDI (further broken down as 5.3 percent for OASI and 0.9 percent for DI) and 1.45 percent for HI. Self-employed individuals pay the combined employee-employer rate of 12.4 percent for OASDI and 2.9 percent for HI under SECA.

Insured Status: Earning Credits for Eligibility

To become eligible for Social Security benefits, workers must attain “insured status.” This status is earned by accumulating a minimum number of “credits” through their covered earnings. Insured status is also necessary for family members or survivors to qualify for benefits based on a worker’s record. The specific requirements for insured status vary depending on the type of benefit being sought.

Social Security uses “quarters of coverage” (QCs) to measure a worker’s insured status. In 2013, a worker earned one QC for each $1,160 in covered annual earnings, up to a maximum of four QCs per year. Therefore, earning $4,640 or more in 2013 would grant the maximum of four QCs, regardless of when the earnings were received during the year. The earnings amount required for a QC is automatically adjusted each year to keep pace with average wage level increases.

Fully Insured Status

For most types of Social Security benefits, a worker must be “fully insured.” To achieve fully insured status, an individual needs to have accumulated a certain number of QCs, at least equal to the number of calendar years between the year they turned 21 (or 1950, if later) and the year they reach age 62, become disabled, or die—whichever comes first. The calculation of “elapsed” years excludes the year the worker turns 21 (or 1950) and the year they reach age 62, become disabled, or die. If the resulting number of elapsed years is less than 6, it is increased to 6. Essentially, all workers need at least 6 QCs to be fully insured. Workers reaching age 62 in 1991 or later generally need 40 QCs to be fully insured throughout their working lives. Special rules may apply if a worker has had a prior period of disability. For those who become disabled or die before age 62, the number of QCs required for fully insured status depends on their age at the time of disability or death.

Currently Insured Status

In situations where a worker dies before achieving fully insured status, survivors’ benefits may still be payable to certain family members if the worker was “currently insured” at the time of death. Currently insured status primarily allows for benefits to be paid to a deceased worker’s children and to a surviving spouse who is caring for the deceased’s child who is under age 16 or disabled and receiving Social Security benefits. To be currently insured, the worker must have earned 6 QCs within the 13-quarter period ending with the quarter of their death. This is a less stringent requirement than fully insured status.

Additional Insured Status Requirements for Non-Citizens

The Social Security Protection Act of 2004 introduced additional requirements for determining insured status specifically for non-citizen workers who were not assigned a Social Security number (SSN) before January 1, 2004. Under this law, for anyone to qualify for OASDI benefits based on the earnings record of such a non-citizen worker, the worker must meet one of two additional criteria:

The non-citizen worker must have been assigned an SSN for work purposes at any point on or after January 1, 2004.
The non-citizen worker must have been admitted to the United States at any time as a nonimmigrant visitor for business (B-1 visa) or as an alien crewman (D-1 or D-2 visa).

If a non-citizen worker who was not assigned an SSN before January 1, 2004, does not meet either of these additional requirements, they cannot achieve fully or currently insured status. Consequently, no one would be eligible for OASDI benefits based on that non-citizen worker’s earnings, even if they appear to have accumulated the required number of quarters of coverage under the standard insured status rules. This provision aims to address specific situations related to non-citizen workers and Social Security eligibility.

Disability Insured Status

Qualifying for disability benefits has specific insured status requirements. A non-blind worker seeking disability benefits must not only be fully insured but also meet a “recent work” requirement. For non-blind workers aged 31 or older, this means having earned at least 20 QCs during the 40-calendar-quarter period ending with the quarter in which their disability began. For those disabled between ages 24 and 30, they generally need to have earned QCs in one-half of the calendar quarters between the quarter after they turned 21 and the quarter their disability began. Workers under age 24 have a less demanding recent work requirement, needing 6 QCs in the 12-quarter period ending when their disability began. Workers applying for disability benefits based on blindness have a simpler requirement: they only need to be fully insured, the recent work test does not apply. As with other insured status rules, special provisions may exist for individuals with prior periods of disability.

International Social Security Agreements

To address situations where individuals work in multiple countries, the U.S. President is authorized to enter into international Social Security agreements, often called “totalization agreements.” These agreements coordinate the U.S. OASDI program with comparable social security programs in other countries. The United States currently has agreements in effect with 24 countries, facilitating international social security coordination.

These agreements serve two primary purposes:

Eliminate Dual Social Security Coverage: They prevent situations where a person working temporarily in another country would be required to pay Social Security taxes to both their home country and the host country on the same earnings. Agreements contain rules that assign a worker’s social security coverage to only one country at a time, simplifying tax obligations for international workers.
Bridge Benefit Protection Gaps: They help workers who have divided their careers between the U.S. and another country qualify for benefits. Without agreements, these workers might not meet the minimum work duration requirements in either country to qualify for benefits. Under a totalization agreement, workers and their families may qualify for partial U.S. benefits based on “totalized” credits—credits earned in both the U.S. and the foreign country are combined to meet eligibility thresholds. Similarly, they may also qualify for partial benefits from the foreign country based on totalized credits.

Benefit Calculation and Automatic Adjustments

Primary Insurance Amount (PIA) Computation

The Primary Insurance Amount (PIA) is a fundamental figure in Social Security. It represents the monthly benefit amount a worker would receive upon initial entitlement at their full retirement age (FRA) or when entitled to unreduced disability benefits. The FRA is the age at which a person can receive full, unreduced retirement benefits. The PIA also serves as the base amount from which other benefit amounts are derived, such as benefits for early retirement, delayed retirement, and benefits for family members and survivors.

The PIA is calculated based on a worker’s lifetime earnings in jobs covered by Social Security. These earnings are averaged over a period encompassing most of their adult working years. Prior to the late 1970s, the average monthly wage (AMW) was the primary earnings measure used. However, for workers who became eligible for benefits after 1978, the average indexed monthly earnings (AIME) replaced the AMW as the standard earnings measure for PIA calculation. The AIME-based PIA calculation involves a multi-step formula that considers different percentages of a worker’s AIME at different earnings levels.

The dollar amounts that define the AIME brackets in the PIA formula are known as “bend points.” These bend points are automatically updated each year in proportion to increases in the national average wage level. This automatic adjustment mechanism ensures that benefit levels for successive generations of eligible workers maintain pace with rising earnings levels in the economy, preserving consistent rates of earnings replacement across generations.

The specific PIA formula applied to a worker depends on their year of eligibility (or death), not necessarily the year they first start receiving benefits. For retirement benefits, the year of eligibility is the year the worker turns 62. For example, for workers born in 1947, the PIA formula from 2009 is used, and their PIA is then increased by cost-of-living adjustments (COLAs) starting with the COLA effective in December 2009. Subsequent recalculations of a worker’s benefit, such as those due to additional earnings, delayed retirement credits, or further COLAs, all build upon this initial PIA calculation based on the year of eligibility. The FRA for individuals born in 1947 is 66 years old.

Since June 1982, Social Security benefits are rounded down to the next lower 10 cents during intermediate calculations, and the final benefit payment is rounded down to the nearest whole dollar amount (if it’s not already a whole dollar amount). Before June 1982, benefits were paid in 10-cent increments after rounding up to the nearest dime.

A cost-of-living adjustment (COLA) to benefits is generally determined each year if the Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W), published by the Department of Labor, indicates an increase of at least 0.1 percent (after rounding) between specific measurement periods. The average CPI-W for July, August, and September of the determination year is compared to the average CPI-W for the later of (a) July, August, and September of the year in which the last COLA was established or (b) the 3 months of the calendar quarter in which the last general benefit increase took effect. The percentage increase in the CPI-W, rounded to the nearest 0.1 percent, becomes the percentage increase in Social Security benefits, effective in December of the determination year.

Under certain conditions, if the combined OASDI trust fund reserves are low relative to projected disbursements, an alternative method, known as the “stabilizer provision,” might be used to determine the applicability and size of a COLA. However, even under the stabilizer provision, benefits can never be reduced below the level of benefits in the year of determination. Historically, this stabilizer provision has never been triggered.

Alternative PIA Computation Provisions

Special Minimum PIA: Workers with a history of low earnings but a long and consistent work history over their adult lives may qualify for benefits based on a “special minimum PIA” calculation. This calculation doesn’t rely on average earnings but instead is based on the number of “coverage years”—years in which the worker’s earnings reached or exceeded a specified amount. The special minimum PIA level is the same for all workers with the same number of coverage years, irrespective of their age or year of first eligibility. Increases to the special minimum PIA are linked to cost-of-living adjustments.

Windfall Elimination Provision (WEP): The Windfall Elimination Provision (WEP) can affect workers who are entitled to Social Security benefits based on their own work record and also receive a pension from non-covered employment (work where they did not pay Social Security taxes) after 1956. For WEP to apply, both first eligibility for the non-covered pension and for Social Security benefits must be after December 31, 1985. WEP reduces the Social Security PIA used to calculate OASDI benefits, affecting all benefits paid on that record except for survivor benefits. The WEP reduction stops when entitlement to the non-covered pension ends, the wage earner dies, or the wage earner accumulates 30 years of substantial earnings under Social Security. The maximum WEP reduction is capped at no more than one-half of the non-covered pension amount.

Under WEP, the PIA calculation typically uses 40 percent of the first bend point in the PIA formula, instead of the standard 90 percent used in the regular AIME-based PIA calculation. The maximum possible WEP reduction is half of the first bend point for the relevant eligibility year. For the 2013 eligibility year, the maximum WEP reduction was $395.50 (and cannot exceed half of the pension from non-covered employment).

However, if a worker has more than 20 years of substantial earnings covered by Social Security, the WEP reduction gradually decreases. Starting with the 21st year of substantial covered earnings, the percentage applied to the first bend point increases by 5 percentage points for each additional year of substantial covered earnings, up to 30 years. At 30 years of substantial covered earnings, WEP no longer applies, and the standard 90 percent factor is used for the first bend point. For example, with 23 years of substantial coverage, the first bend point percentage would be 55 percent.

Examples of pensions potentially subject to WEP include U.S. Civil Service Retirement System annuities, retirement benefits based on work in foreign countries, and state and local government pensions based on earnings from non-covered employment.

Family Maximum Provisions: There are limits on the total monthly benefits payable to a worker and their family members or to a worker’s survivors, known as “family maximum benefit” amounts. For retired-worker families or survivor families, the family maximum benefit usually ranges from 150 percent to 188 percent of the worker’s PIA. For disabled-worker families, the maximum family benefit is the lesser of (1) 85 percent of the worker’s AIME (or 100 percent of the PIA, if larger) or (2) 150 percent of the PIA.

Similar to the PIA calculation, the specific family maximum benefit formula that applies to a worker depends on their year of first eligibility (year of attaining age 62, disability onset, or death). Once the family maximum benefit amount is determined for the year of first eligibility, it is then updated in line with cost-of-living adjustments (COLAs) in subsequent years.

Types and Levels of OASDI Benefits

Benefits for Retired and Disabled Workers

The Full Retirement Age (FRA) is the age at which a person can receive their full, unreduced retirement benefit (sometimes referred to as “normal retirement age”). The FRA is gradually increasing from age 65 to age 67. This increase began with workers who turned 62 in the year 2000. For individuals who reached age 62 between 2005 and 2016, the FRA is 66 years old.

Reduced retirement benefits can be elected as early as age 62. However, electing to receive benefits before FRA results in a permanent reduction in the monthly benefit amount. The monthly reduction rate is approximately 5/9 of 1 percent per month for the first 36 months before FRA, and 5/12 of 1 percent per month for any additional months beyond 36. The maximum overall reduction for early retirement will eventually reach 30 percent for workers who reach age 62 in 2022 and later, when the FRA becomes age 67. For those who reached age 62 between 2005 and 2016, the maximum reduction is 25 percent.

If a worker initially receives reduced retirement benefits and later becomes entitled to disability benefits, the disability benefit amount will be reduced to account for the months they already received reduced retirement benefits.

For insured workers who choose to postpone their retirement beyond their FRA, Social Security offers delayed retirement credits. These credits increase their eventual retirement benefit for each month they delay receiving benefits past their FRA, up to age 70. The total credit earned per year for delaying retirement is 8 percent for workers who reach age 62 in 2005 or later.

Benefits for Spouses and Children of Workers

Spouses of retired or disabled workers may also be eligible for Social Security benefits. A spouse who has reached their FRA is generally eligible to receive 50 percent of the worker’s PIA, regardless of the worker’s actual benefit amount. Spouses can elect to receive benefits as early as age 62, but like retired workers, benefits are reduced if claimed before the spouse’s FRA. The reduction rate for spouses is approximately 25/36 of 1 percent per month for the first 36 months before FRA, and 5/12 of 1 percent for each additional month. The maximum reduction for spouses retiring early will also increase to 35 percent by 2022, when the FRA for spouses reaching age 62 in that year becomes age 67.

Children of retired or disabled workers may also be eligible for monthly benefits. The definition of “child” for this purpose includes unmarried individuals under age 18, those aged 18-19 who are still in elementary or secondary school full-time, or adult children aged 18 or older who became disabled before age 22. Additionally, young spouses (under age 62) who are caring for a worker’s entitled child may also qualify for benefits. For young spouse benefits, “child” refers to a worker’s entitled child who is under age 16 or disabled before age 22. Children and young spouses of retired or disabled workers can each receive up to 50 percent of the worker’s PIA, subject to family maximum benefit limits. (Young spouses’ benefits are not reduced for age.)

Divorced spouses may also be eligible for benefits based on their former spouse’s work record, even if the former spouse has remarried. Unmarried divorced spouses of retirement age who were married to the worker for at least 10 years can receive benefits. A divorced spouse’s benefit does not count towards the family maximum benefit limits applicable to the worker and their current family. Divorced spouses aged 62 or older, who have been divorced for at least 2 years (after a marriage of 10+ years), can be independently entitled on the record of their ex-spouse, even if the ex-spouse is not yet receiving benefits themselves, as long as the ex-spouse could be eligible for retirement benefits if they applied.

Survivors Benefits

Widows and widowers of fully insured workers are eligible for unreduced survivor benefits at their FRA. Similar to retirement benefits, the FRA for widow(er)s is also gradually increasing to age 67, but on a different schedule than for retirement benefits. Widows and widowers can elect to receive reduced monthly benefits as early as age 60, or even as early as age 50 if they are disabled. Surviving divorced spouses are also eligible for survivor benefits if they were married to the worker for at least 10 years and have not remarried before age 60 (or age 50 if disabled).

For survivors whose FRA is age 65, the monthly benefit reduction for claiming benefits before FRA is approximately 19/40 of 1 percent of the worker’s PIA for each of the first 60 months before FRA, resulting in a maximum reduction of 28.5 percent at age 60. For survivors with an FRA later than age 65, the reduction rate is adjusted to ensure that the maximum reduction at age 60 remains at 28.5 percent of the worker’s PIA.

Survivor benefits for widows and widowers are increased if the deceased worker had delayed receiving their retirement benefits past their FRA. In these cases, the survivor benefits include any delayed retirement credits the deceased worker had earned. Conversely, if the worker had elected to receive early retirement benefits, widow(er)s’ benefits may be limited, especially for those first becoming entitled to survivor benefits at age 62 or later. For these beneficiaries, the benefit is the higher of 82.5 percent of the worker’s PIA or the amount the worker would have been receiving if they were still alive. Disabled widow(er)s aged 50 to 60 receive the same reduced benefit rate as widow(er)s claiming at age 60 (71.5 percent of PIA), regardless of their actual age at entitlement.

Children of deceased workers and mother or father beneficiaries (surviving spouses or divorced parents caring for the worker’s child) under FRA are also eligible for monthly benefits. They can receive up to 75 percent of the worker’s PIA if the worker dies either fully or currently insured. Mother and father beneficiaries must be caring for the worker’s entitled child who is under age 16 or disabled. Dependent parents of a deceased worker, aged 62 or older, are also eligible for monthly benefits equal to 82.5 percent of the worker’s PIA. If two dependent parents qualify, each receives 75 percent of the deceased worker’s PIA. Monthly benefits payable to survivors are subject to family maximum benefit limits on the deceased worker’s account. However, benefits for a surviving divorced spouse do not count towards the family maximum.

Provisions for Railroad Retirement Board Beneficiaries

It’s important to note that OASDI statistics do not include individuals receiving Railroad Retirement benefits who might otherwise be eligible for Social Security benefits. This is because, in many cases, receiving a Social Security benefit would result in a corresponding reduction in their Railroad Retirement benefit, making it financially neutral.

The Railroad Retirement Act of 1974, effective January 1, 1975, structured regular annuities for railroad employees with 10 or more years of service who retired after December 31, 1974, into two tiers:

Tier 1: A Social Security equivalent component, mirroring what would be paid under Social Security based on combined railroad and non-railroad service, but reduced by any OASDI benefits actually received based on non-railroad work.
Tier 2: A separate “private pension” component, over and above the Social Security equivalent, calculated based on years of railroad service.

The 2001 amendments to the Railroad Retirement Act (Public Law 107-90), effective January 1, 2002, revised the railroad service work requirement. Currently, the requirement is 10 or more years of railroad service, or at least 5 years of railroad service after December 31, 1995. The two-tier benefit structure remains unchanged.

The Effect of Current Earnings on OASDI Benefits

Annual Earnings Test

Individuals receiving Social Security retirement, dependent, or survivor benefits are permitted to work while receiving benefits. However, there are earnings limits that, if exceeded, can result in a reduction of benefits for those below full retirement age. This is known as the annual earnings test.

Under the earnings test, beneficiaries younger than their full retirement age who have earnings above certain exempt amounts may have some or all of their benefits withheld. The exempt amounts are adjusted annually based on average wage increases. Different earnings rules apply to those receiving disability benefits.

For beneficiaries who are younger than FRA for the entire year (2013 figures):

The annual earnings test exempt amount was $15,120.
Benefits are reduced by $1 for every $2 of earnings above the exempt amount.

For beneficiaries who reach FRA in 2013, a higher earnings test exempt amount applied:

The exempt amount was $40,080 in 2013. Importantly, only earnings before the month of reaching FRA are counted towards this limit.
Benefits are reduced by $1 for every $3 of earnings above this exempt amount.

Beneficiaries also have the option to use a monthly earnings test if it’s more advantageous in their particular situation, especially in their first year of benefit entitlement. The monthly test can allow benefit payments for some months even if annual earnings significantly exceed the annual limit. Under the monthly test, beneficiaries receive their full monthly benefit for any month in which their earnings are not greater than 1/12th of the annual earnings test limit. For self-employed individuals, the monthly test is based on hours worked rather than monthly earnings. Generally, the monthly earnings test option is available only in the first year of entitlement.

A foreign work test applies to work performed outside the United States that is not subject to U.S. Social Security taxes. Benefits are withheld for each month a beneficiary younger than FRA works more than 45 hours in such foreign employment or self-employment.

Crucially, the earnings test no longer applies starting in the month a beneficiary reaches their full retirement age. This elimination of the earnings test at FRA has been in effect for taxable years ending after December 31, 1999. Once FRA is reached, there is no limit on earnings, and benefits are not reduced regardless of how much a beneficiary earns.

Automatic Adjustments for Additional Earnings

When a Social Security beneficiary continues to work and earn income after starting benefits, these additional earnings are automatically credited to their Social Security earnings record. This can lead to adjustments in their benefit amount.

Adjusted Reduction Factor: The reduction factor applied for claiming retirement benefits early is based on the total number of months of benefit entitlement prior to reaching FRA. If benefits are withheld for any month due to the earnings test, the reduction factor is automatically adjusted at FRA. For widows and widowers, these adjustments occur at age 62 and again at FRA. This adjustment results in a higher ongoing monthly benefit. For example, if retirement benefits are claimed 36 months before FRA, and the earnings test results in benefits being withheld for 6 of those months, at FRA the reduction factor is adjusted to 30 months, and the ongoing benefit is increased retroactively to the month of FRA.

Recomputation: Additional earnings can also increase a beneficiary’s PIA. Social Security automatically considers a recomputation of the PIA each year when new earnings are credited to a worker’s record. A recomputation is processed if the new earnings result in a PIA increase of at least $1.00. The increase is retroactive to January of the year following the year in which the new earnings were received.

Earnings and Disability Benefits

Beneficiaries receiving disability benefits (disabled workers, disabled adult children, and disabled widow(er)s) are not subject to the annual earnings test that applies to retirement benefits. However, substantial earnings by disability beneficiaries may indicate that they are no longer considered disabled and capable of engaging in substantial gainful activity (SGA). SGA is a key concept in disability benefit eligibility. While other factors are considered, numerical earnings thresholds are used to evaluate SGA. Disability beneficiaries are required to report all earnings to the SSA so that SGA can be assessed in a timely manner.

Prior to 2001, the SGA earnings amount for non-blind disabled individuals was periodically changed by the SSA. Since January 1, 2001, SGA amounts are automatically adjusted annually based on increases in the national average wage index. In 2013, the SGA amount for non-blind individuals was $1,040 per month.

A different, higher SGA definition applies to blind individuals receiving Social Security disability benefits. Increases in the SGA amount for blind individuals have been linked to the national average wage index since 1978. The SGA level for blind individuals in 2013 was $1,740 per month.

To encourage and support return to work efforts, Social Security provides a 9-month trial work period for disability beneficiaries who are attempting to return to work but are still considered disabled. During this 9-month period, beneficiaries can earn any amount and still continue to receive their full disability benefits. After completing 9 trial work months, the SGA level then becomes the determining factor for whether their earnings are considered substantial and could affect their continued disability benefit eligibility.

Government Pension Offset

A Government Pension Offset (GPO) can reduce Social Security spouse’s, widow’s, or widower’s benefits if they also receive a pension from a federal, state, or local government based on work that was not covered by Social Security. The Social Security benefit is reduced by two-thirds of the amount of the government pension if the pension is based on this non-covered work. For instance, if someone receives a monthly civil service pension of $600 based on non-covered employment, two-thirds of that amount, or $400, would offset their potential Social Security spousal benefit. If they were eligible for a $500 Social Security spousal benefit, they would receive only $100 per month from Social Security ($500 – $400 = $100).

The purpose of the GPO is to ensure that government employees who do not pay Social Security taxes on their government earnings are treated similarly to those in the private sector who do pay Social Security taxes when it comes to spousal benefits. Social Security law also requires that Social Security spousal benefits are offset dollar-for-dollar by the amount of a spouse’s own Social Security retirement benefit. For example, if a woman earned her own $600 monthly Social Security retirement benefit but was also eligible for a $500 spousal benefit on her husband’s Social Security record, the spousal benefit would not be paid because it is fully offset by her own retirement benefit.

Exceptions to the GPO may apply if some of the government work on which the pension is based was actually in Social Security-covered employment. Specific rules apply depending on the employer and the dates of employment. There are also exemptions for individuals who were eligible for their government pension before December 1982 or before July 1983, provided they meet specific criteria.

Taxation of Social Security Benefits

A portion of Social Security benefits may be subject to federal income tax, depending on a beneficiary’s overall income, marital status, and tax filing status. Up to 85 percent of Social Security benefits can potentially be taxed. The “income” used to determine taxability is defined as: adjusted gross income (before considering Social Security or Railroad Retirement benefits), plus tax-exempt interest income, plus half of the Social Security and Tier 1 Railroad Retirement benefits received. Some adjustments to adjusted gross income may also apply in specific situations.

For married beneficiaries filing jointly, if their adjusted gross income (as defined above) is $32,000 or less per year, no Social Security benefits are subject to taxation. If their income is between $32,000 and $44,000, up to 50 percent of their Social Security benefit may be taxable. If their income exceeds $44,000, up to 85 percent of their Social Security benefit may be subject to income tax. For married beneficiaries filing separately who lived together at any point during the tax year, there is no minimum income threshold, and up to 85 percent of their Social Security benefit may be taxable.

For individuals in all other filing categories (single, head of household, qualifying widow(er), and married filing separately but who lived apart from their spouse for the entire year), the income threshold is $25,000. Generally, up to 50 percent of benefits are taxable if income is between $25,001 and $34,000, and up to 85 percent of benefits are taxable for income exceeding $34,000.

Taxation of Social Security benefits is under the jurisdiction of the Internal Revenue Service (IRS). For detailed guidance on tax rules, individuals should consult IRS publications or a tax professional.

This overview provides a comprehensive explanation of the OASDI program, its benefits, funding mechanisms, eligibility rules, and key provisions. For further information, you can contact the Social Security Administration directly at (410) 965-0090 or via email at [email protected].