Premium conversion may slightly reduce the Social Security benefit you will receive upon retirement.  The extent of the impact depends upon several factors:

• the retirement system that you participate in;
• whether your salary exceeds the Social Security wage base; and
• the number of years left until your retirement.

You are generally better off with premium conversion.  Your tax savings are slightly less, since you don't pay Social Security taxes.  However, a reduction in Social Security benefits is not an issue for you since Social Security is not a component of your Civil Service Retirement.

Even if you have Social Security coverage as a result of a non-Federal job, premium conversion would not change your Social Security benefit.

Under CSRS offset, your Social Security benefits would be slightly reduced, but your CSRS Offset benefits would be increased by almost the same amount.  Participating in premium conversion is most likely a benefit to you.

Your Social Security benefits are calculated on your taxable earnings, so any reduction in your taxable income will affect your Social Security calculations.  

The small reduction in Social Security benefits is greatly outweighed by the much larger tax savings.   In each case we tested, the increase in take-home pay far exceeded the minor loss in monthly Social Security benefits.

Here is a simple formula you can use to estimate the difference in your Social Security benefit:

1. Take the number of years you will participate in premium conversion (from now until your estimated retirement) and divide by 35.

2. Multiply this by your current annual FEHB premium

3. Multiply the result of Step 2 by the marginal SSA rate  (15% for most Federal employees)

The result is the annual loss of Social Security benefits. 

(# of Years of Premium Conversion /35) X Annual FEHB Premium X marginal SSA rate = Annual Loss

You participate in FERS.  We assume that you've had a full career of FICA contributions, with an ending salary (today) of $50,000 and projected retirement at age 66 in January 2016.  Your estimated Social Security benefit equals $1,414 per month.  

You begin participating in premium conversion and reduce your taxable income by $2,000, the amount of your FEHB premium.  By changing your salary to $48,000, your monthly Social Security benefit is now $1,403, an $11.00 per month difference in today's dollars.

15/35= .4286 X 2000 = 857 X .15 = 128/12 = 10.71 or 11

Compare that to the estimated $67 increase in take home pay per month.

For more specific information on how the Social Security benefit is calculated, refer to www.ssa.gov.

Probably not.  Premium conversion affects only your Federal salary, and Social Security is based on total taxable earnings.  The earnings from your non-Federal job will be added to your Federal taxable earnings.

No, since your Social Security covered income does not change.

If you are receiving the maximum Social Security benefit, premium conversion will have no impact.  You cannot receive any more than the maximum benefit, and you will not lose any benefit.    If you are not receiving the maximum Social Security benefit, your benefit will be recalculated as you continue to earn.  Your benefit may increase as a result of those recalculations, but it will not be reduced.

The Office of Personnel Management  (OPM) did some calculations comparing the increase in take home pay to the loss of SS benefits at various income and Federal income tax levels.  The results presented below show how many years of additional SS benefits it would take to make up for the take home pay you will lose by not participating in premium conversion.   The calculations were simplified; they don’t account for the fact that your take home pay will increase now, but you probably won’t be receiving your Social Security benefits until many years from now.

The amount of your FEHB premium does not affect the calculations.

Salary	Income Tax Rate*	Years of SS Benefits To Recover Lost Pay
To $6,400	0%	p
	15%	11
	28%	17
$6,401 to $32,100	0%	10
	15%	31
	28%	49
$32,100+	0%	22
	15%	66
	28%	104

*Marginal Federal rate.  If you don’t know yours call your Payroll Office.

As you can see if you don’t have to pay any Federal income tax, you lose the primary benefit of premium conversion.

But some individuals might still want to participate because their Social Security and Medicare taxes will be lower.  You also can see that at very low earnings levels ($6,400 or less) the decision is less clear cut.  OPM’s statistics indicate there are less than 100 employees in this category.