As they plan for retirement, American workers often grapple with various concerns about whether they will be financially secure when the time arrives.
Many are concerned with the cost of health care and the long-term survival of the federal Social Security program.
While Medicare becomes available to Americans at age 65, the federal program does not cover all medical expenses, leaving retirees to account for additional costs.
Author and New York University professor Scott Galloway offers some compelling thoughts about the role Medicare and Social Security play in Americans’ retirement future.
💵💰Don’t miss the move: Subscribe to TheStreet’s free daily newsletter💰💵
A report from the Social Security Administration (SSA) describes Social Security as a social insurance program designed to provide retirees with a lifetime annuity that adjusts for inflation.
Scott Galloway argues that the system has a fundamental flaw in how benefits are distributed.
He contends that a portion of current recipients may not actually need the financial assistance but continue to receive it regardless. Senior citizens represent the wealthiest generation in history, Galloway asserts.
During the SXSW Conference & Festivals on March 10, at the “‘Prof G Markets’ Live with Scott Galloway and Ed Elson” event, he emphasized concerns about wealth redistribution.
He pointed out that approximately $1.2 trillion is transferred annually from younger generations — who are facing greater financial challenges than previous ones — to older individuals, reinforcing what he sees as a systemic issue with Social Security.
Also important is that Social Security faces the possibility of reduced benefits by 2033 if no legislative action is taken to fix the fact that the federal program will run out of money in its trust funds that year.
Related: Shark Tank’s Kevin O’Leary sends strong message on 401(k)s, recession
Traditional Medicare provides hospital insurance through Part A, though beneficiaries must pay deductibles. Part B covers outpatient and preventive care, requiring a monthly premium of $185 in 2025.
Another choice for seniors is Medicare Advantage, or Part C, which is administered by private insurance companies. It typically includes the same benefits as Parts A and B, along with additional coverage.
Medicare Part D focuses on prescription medications, with costs varying significantly based on an individual’s specific health care needs.
A retired couple is seen holding hands and walking on a beach. New York University professor and author Scott Galloway explains the two federal payroll taxes for Social Security and Medicare.
Shutterstock
Scott Galloway describes Medicare, Social Security taxes
In his book The Algebra of Wealth, Galloway explains that Medicare and Social Security are funded by the only two federal payroll taxes.
Social Security tax is set at 12.4%, with half of that — 6.2% — deducted directly from your paycheck. Employers cover the other half.
Social Security taxes are subject to a wage cap, meaning that in 2023, earnings above $160,200 are exempt from further taxation under this program for the remainder of the year.
Medicare tax is 2.9% and follows a similar split between employers and employees. However, unlike Social Security, Medicare taxes have no income cap, and higher earners pay an increased rate.
More on retirement:
Shark Tank’s Kevin O’Leary sends strong message on 401(k)s, recessionDave Ramsey cautions U.S. workers about Social SecurityJean Chatzky warns Americans on Social Security, retirement money
Most states also impose payroll taxes, though they tend to be relatively low and have set limits. Regardless of income level, payroll taxes are unavoidable — they apply even to wages contributed to a 401(k).
For the self-employed, these taxes can feel particularly burdensome, as they must cover both the employer and employee share, amounting to over 15% on the first $160,000 of earnings.
“If you have wages, there’s no escaping payroll taxes,” Galloway wrote.
Related: Dave Ramsey bluntly warns Americans about Social Security
Beyond Social Security and Medicare, high earners convert income to capital
Galloway also writes that higher earners convert much more income to capital during their working years to live a high quality of life during employment and retirement.
A household with $2 million in assets and an annual spending of $500,000 enjoys a luxurious lifestyle, far beyond what a household earning $500,000 per year can afford, as only $250,000 remains after taxes for expenses, Galloway explains.
Even with substantial monthly expenditures exceeding $40,000, they manage to set aside $500,000 in savings annually.
If this amount is invested at an 8% return for a decade, it could grow into an investment portfolio worth nearly $8 million, generating over $600,000 in annual income, taxed at capital gains rates.
While top earners do face high income tax rates, the impact on their lifestyle is minimal, and their ability to build wealth remains largely unaffected, as they can channel significant portions of their earnings into investments.
“It’s called ‘capitalism’ and not ‘laborism’ for a reason,” Galloway wrote. “Wealth comes from capital investment, not labor wages. Once you are able to convert significant amounts of your wages to investment capital, you make the jump to light speed.”
Related: Veteran fund manager unveils eye-popping S&P 500 forecast
