Average earner £10,000 worse off in 2024 due to stagnant wages and inflation
There has been a stark decline in real wage growth in the UK since the financial crisis hit the global economy in 2008. Coupled with inflation – now at a 40-year high – it has left Brits poorer.
While the average income has recovered to its pre-crisis level (£28,o00), the Scottish Widows annual retirement report found the median salary would have been £36,500 had wage inflation remained at its 2007 level, 28% higher than it currently is.
Cumulatively, it means the median earner has ‘lost’ almost £78,800 of income since the financial crisis, the report revealed.
The report stated: “There is evidence that wages are rising relatively fast at the moment, but still not as fast as inflation.
“The net effect is that real wages are forecast to decline over the next several years. For the average earner it means they will be around £1,000 a year worse off as a result of inflation. Added to the more general stagnation of real wages since the financial crisis, it means that the average earner could be over £10,000 worse off in 2024 than we might have expected in 2007.”
Were the UK to see real wage growth of 1% a year in future, Scottish Widows’ calculations suggest it would take at least four years to restore the spending power lost due to rising living costs.
The value of pension savings has also declined in real terms. A median earner first auto-enrolled into a pension scheme in 2012 has saved around £15,700 into their pot, according to Scottish Widows.
With the additional income growth they would have seen had wage inflation continued its pre-crisis growth rate, average pension savings would have been around £21,300, £5,500 more than today’s reality.
The report noted that this loss will grow over time as individuals lose out on investment returns and the valuable effect of compounding returns.
“Given this backdrop, it is going to be more difficult than ever to address shortfalls in the level of retirement savings,” the report read.
“Our survey of 5,000 people across the UK revealed that many people are cutting back on spending and dipping into short-term savings, with one in 10 telling us they already cut back on pension savings.”
Inflation in May was running at 9.1% and is set to rise further by the autumn. The Bank of England has forecast a peak of over 11% in October, after which price rises should start to slow, though not by much.
Pete Glancy, head of policy at Scottish Widows, said: “The monthly cost of essentials is set to increase by £200 over two years, representing a serious and sustained financial challenge. This also means that real wages are set to decline again, limiting people’s ability to save.
“Rising energy prices are perhaps the most worrying aspect of inflation for many households. Energy-specific inflation was at least 20% in every month between October 2021 and May 2022. The energy price cap was raised in April and led to a roughly £700 rise in the average bill, bringing it to about £2,000 – a whopping 50% increase.
“What’s more, prices are expected to increase further in October, taking the average annual bill up to £2,800.”
Over the past year households’ median monthly spending on necessities such as energy, transport, food and rent increased by over £100, according to the report.
Current inflation forecasts suggest a further £100 increase in monthly spending on essentials in the next year.
Glancy said: “This could easily turn out to be even higher. A £200 increase over two years would be unprecedented. After the financial crisis of 2008, it took over four years for living costs to increase by as much. And all of this comes on top of the cost of non-essentials such as clothing also rising by more than £100 in monthly terms since last year.”
Wealthier savers pay a stealth ‘inflation tax’
While high inflation and stagnant wage growth are already eating significantly into the value of pension savings, Scottish Widows said freezing the pension lifetime allowance equated to a £200,000 drop in the amount wealthier individuals could save in real terms.
Glancy added: “A wealthier individual might have a pension pot of £91,000. If they hold half of this in cash like assets, they could be exposed to losses of about £3,400 in a single year, and over £5,400 in two years, on top of £3,100 lost over the previous 10 years, as a result of inflation.”
The report also found that 1.2 million self-employed people aged between 30 and 64 are not saving at all for retirement.