A generation locked in the British austerity crisis

A generation locked in the British austerity crisis

Keiran Daly recalls the days when his colleagues at a Manchester restaurant cried when they opened their paychecks. “Colleagues cried because they did all the work and the paycheck didn’t give them enough to cover their bills.”

After graduating in 2021, this 22-year-old graduate in film and television production left his job in the hospitality industry and began working in the business administration and living with his partner in Manchester.

He has a stable salary, including holidays, sickness benefits and other benefits, and “he never had to double-check his bank account” before he bought something he wanted.

But like many other young Britons, there is a looming financial turmoil – the fear that the deepening cost-of-living crisis is making it difficult to manage money month after month or to plan spending, let alone save for the future. .

The goals that previous generations of people in solid jobs like him took for granted – their own home and a secured pension – seem unattainable.

“How are we expected to have any milestones in mind as the goals move slowly?” Daly asks. “I stopped saving because what would it cost in five years? I don’t hope to own anything or have those big milestones. “

Daly is not nearly alone. The difficulties that the millennials had faced before the pandemic have since been exacerbated by the largest rise in consumer prices since the 1970s.

Inflation is hitting young tenants hard

Inflation in the United Kingdom, which reached 9 per cent in April, has a particular impact on young people – not only those who do not have a job or work part-time, but also those who have permanent jobs such as Daly.

They are more likely to rent, have lower savings and less financial resilience than their parents, while changes in student loan limits for graduates put further pressure on their bank balances.

Research by Royal London, a supplementary pension provider, shows that people under the age of 35 are almost as concerned about the cost of living as all adults, but that their concerns are focused on a variety of factors.

Young people are most concerned about rising energy prices and household spending, as well as other age groups, with many cutting back on spending. Daly has changed from shopping in Asda to Aldi, a cost-cutting measure that will save him and his partner about £ 40 every two weeks.

But people under the age of 34 are also more likely to be afraid of rents. About 69 percent of people aged 18 to 24 and 64 percent of people aged 25 to 34 feared rising rental costs compared to a total of 44 percent, Royal London found.

Rental costs are rising not only because of inflation, but also because of renewed demand, as workers flock back to the cities as the pandemic eases. Private rents are growing at the fastest rate since 2016, up 2.7 percent year on April 2022, according to the ONS. The rises are spread across the country, with the steepest rises in the East Midlands, East of England and the South West.

In addition, there is an energy shock. According to the ONS opinion and lifestyle survey, almost 40 percent of tenants had difficulty paying gas and electricity bills in March, compared with 23 percent of mortgage borrowers.

Maria Masullo, a 30-year-old teacher living in London with her 10-month-old daughter and partner, says her gas and electricity bills have more than doubled. “We are very worried about further growth,” he says. “Everything else has also increased – including food.”

Energy costs can hit tenants harder because “landlords usually pay energy bills, but they don’t have much control over whether their home is properly insulated or heating systems are up to date,” said Dan Wilson Craw, deputy director. Generation Rent, the representative body for private tenants in the United Kingdom.

About 60 percent of private tenants live in homes with a D rating or lower in energy efficiency, he added, meaning many live in drafts and poorly insulated properties. Tenants also face uncertainty that can increase costs. After Masullo discovered that the rented property had been covered with extensive moisture and requested temporary accommodation during the construction work, her owner issued a warning to the young family.

Bar chart of the private rental price index (% change over 12 months) showing the cost of private rents in the United Kingdom

What about salaries and real incomes?

In the last decade, young people’s wages have kept pace with prices. The median gross earnings for people aged 22 to 29 were GBP 26,019 in 2021, compared to GBP 20,600 in 2011, which is slightly above inflation according to the Bank of England’s analysis.

In top earning positions such as finance and law, graduates have enjoyed large salary increases as companies struggle for talent. Clifford Chance, a leading law firm, now offers newly qualified lawyers with an initial salary of £ 125,000 a year.

Despite the expansion of the concert economy, young people are still gaining certain long-term jobs several years after graduating from university. While about 10 percent of people aged 16 to 24 have contracts for zero working hours, people aged 25 to 34 have better job security, compared to only 2.5 percent in 2020.

At the moment, wages are still rising – but not in real terms for most people, including young people. Growth is not keeping pace with inflation, according to the ONS, which says wages, including bonuses, grew 5.4 percent annually over the three months to the end of February, or 4.0 percent excluding bonuses. Taking into account inflation, the corresponding values ​​were 0.4 percent and minus 1 percent.

And this was before the war in Ukraine further increased energy and food prices. Andrew Bailey, the governor of the Bank of England, urged workers to “think and think” before demanding a large wage increase. Economists predict that the pace of price growth should slow next year. However, whether wage increases will be reduced is not clear, especially when employers report record vacancies.

According to the Graduate Recruitment Bureau, a recruiter who connects employers with graduates, average entry salaries rose from GBP 26,241 in 2021 to GBP 28,587 this year – an increase of 9%. “It’s a combination of inflation that helps with living costs and competes for talent,” says one consultant.

Gifted graduates gain talent from the war, but in some fields, especially in the public sector, pay may be withheld. This could encourage some to change jobs in search of higher salaries. Those who changed employers earned an average of 6.6 percent more than those who stayed in place in April 2021, the last month for which ONS data is available.

Student loans increase hidden tax

In addition to rising living costs and turbulent labor markets, young people are also facing increasing student loan repayments in the coming years. A recent graduate of Manchester Metropolitan University, Daly, is among those who are likely to repay more in student loans than his predecessors.

In January, the government froze the student loan repayment threshold, the level at which students begin to repay, to £ 27,295 for those starting between 2012 and 2022, instead of rising with inflation, a move the Institute for Fiscal Affairs calls a secret taxes. Studies.

The decision to lower the threshold to GBP 25,000 for beginners and to extend the repayment period from 30 to 40 years ensures that more future graduates will repay their loans in full. However, the interest rate on loans will be reduced so that graduates do not repay more than they actually borrow.

The highest-income people will benefit most from this rate cut, as they are already repaying their loans in full at higher rates. Intermediate earners will be hit hardest because their loans will no longer be canceled after 30 years.

In the immediate horizon, the freezing of the repayment threshold is the change that is most likely to affect graduates’ wallets: those who earn £ 30,000 will pay £ 10 more per month. “It’s basically a tax increase,” says Ben Waltmann, an IFS researcher. “These young graduates do not necessarily have a lot of money, many will save on housing or starting a family. That adds to the move, ”he says.

Buying a house is harder than ever

Repaying student loans makes it even more difficult to save for the final desire of future generations after 1945 – to buy a house. The average house in the UK now costs more than eight times its annual average earnings, following recent sharp increases in housing prices.

This is comparable to a multiple of four during much of the 1980s, when the parents of today’s young people, according to official figures, often bought their first home. Owning a house is “absolutely unrealistic,” says Daly.

For those betting on falling prices, the past offers one glimmer of hope – the only time home / earnings prices exceeded eight in more than a century was in 2007 – just before the global financial crisis hit and real estate prices fell.

Saving and investing

To some people, including many under the age of 40, cryptocurrencies seemed to offer a tempting path to wealth. However, recent market turmoil has tarnished the asset class, bitcoin, the world’s largest cryptocurrency, losing more than half of its value from its November peak, which recently dropped below $ 30,000.

While crypto enthusiasts insist that the market has not lost its appeal, investors have experienced serious losses. Dan, 34, who works in finance in London, saw that the value of his cryptocurrency investment, which peaked at around £ 11,000, had dropped to £ 3,600. He told the Financial Times Money Clinic podcast. “I wouldn’t call it investing, [I’d] maybe [call it] cryptocurrency gambling. ”

In the meantime, other young people are cutting back on ordinary savings and investment because inflation is hitting budgets.

Sarah Pennells, a consumer finance specialist at Royal London, says many are making “obvious cuts” in household spending by eating less, canceling subscriptions and delaying holidays.

Royal London has found that about a quarter of people between the ages of 25 and 34 will stop paying for savings, while 35 percent will pay less.

Fewer young people are reducing their pension contributions, with only 8 percent of people aged 25-34 saying they would reduce their payments and stopping the same number. This is in contrast to the early stages of a pandemic, when 40 percent of young workers stopped paying or reduced their pension contributions.

“Given the scale of the cost-of-living crisis, in some ways you can imagine more younger people considering reducing their pensions. I think it’s encouraging that the numbers are relatively low, “says Pennells.

Those who reduce pension payments lose employer contributions as well as taxpayer relief, while deferring payments gives savings less time to grow. A smaller pot will bring lower retirement income, especially since most young people outside the public sector now save on defined-benefit schemes, which are less generous than defined-benefit schemes used by their parents’ generation.

“Once you stop doing something, it can be harder to start over,” Pennells said. “A personal finance crisis may be immediate for young people, but you don’t want to trade one life crisis for another later in life.”

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What financial advice would you give to a young person in 2022? How does their experience compare to what you encountered in adulthood? Share your thoughts in the comments section below – a selection of them can be posted at ft.com

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