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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:
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.
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