What's the impact of premium conversion on my Social Security benefits?
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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.
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What if I am covered under CSRS?
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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.
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What if I am covered under CSRS Offset?
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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.
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What if I am covered under FERS?
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Your Social Security benefits are calculated on your taxable earnings, so any reduction in your taxable income will affect your Social Security
calculations.
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How
much smaller will my Social Security benefit be?
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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:
- Take the number of years you will participate in premium conversion (from now until your estimated retirement) and divide by 35.
- Multiply this by your current annual FEHB premium
- 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
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Example
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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.
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I am covered under FERS, and have a part-time job in the private sector. Will I lose any Social Security Benefits?
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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.
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I am covered under CSRS, but worked for 15 years in the private sector prior to my Federal employment. Will my Social Security benefits be
impacted?
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No, since your Social Security covered income does not change.
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I am over 65 and already collecting my Social Security benefit. If I participate in premium conversion, what happens to my Social Security benefit?
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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.
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What's the payback period if I decide to waive premium conversion solely on the
basis of my Social Security benefit?
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The
Office of Personnel Management (OPM) did some calculations comparing the increase in take home pay to the loss of
Social Security benefits at various income and Federal income tax levels. The results presented below show how many
years of additional Social Security 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 Social Security 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.
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