The year Australians will finally get a decent pay rise

Most Aussies are running at a loss with high inflation and wage stagnation leaving them broke. Now we know when we should finally get a pay bump.

Today’s challenging economic times have exacerbated generational fault lines to a degree arguably not seen since the 1970s.

In economic cycles now long passed, economic prosperity generally lifted the overwhelming majority of people. But since 2008, that has not been the case for younger demographics, as wages growth for older workers significantly outstripped those seen by young people.

Over most of the past 16 years this issue has largely been quietly simmering away in the background, despite the extremely weak wages growth outcomes being experienced by younger workers. But as inflation took hold and interest rates rose, the divide between younger and older demographics has become more stark.

Elements of the ‘Boomer economy’ are working

In fairness to older demographics, their spending was supposed to continue to grow, that is part of the government’s plan. As time passes, as too does the amount of time a newly minted retiree enjoyed the benefits of compulsory superannuation.

For a couple who retired at the current average retirement age of 64 back in 2014, they enjoyed 22 years of compulsory superannuation contributions. For a similar couple retiring this year, they enjoyed 32 years of compulsory super contributions.

The rate of compulsory super contributions has also shifted dramatically over time. Upon the introduction of compulsory super in 1992, the rate was 3 per cent (4 per cent for employers with payroll over $1 million). It would rise to 9 per cent in 2002 and to 11 per cent as of the current financial year.

According to data from financial regulator APRA, Australians withdrew over $111 billion from their superannuation in the form of lump sum withdrawals and private pension payments over the course of 2023. This was up from $91.4 billion over the course of the calendar year 2022.

Rising housing prices and by extension household net worths has also played a role in supporting the spending of over 55s.

As of the latest figures from the Commonwealth Bank, customers over 65 are seeing the highest level of spending growth on essentials and discretionary purchases, up 4.0 per cent and 3.7 per cent respectively. The younger the customer base in question gets, the lower their aggregate spending growth becomes. For customers aged 20-24, essential spending has seen 0.0 per cent growth and spending on essentials is down 1.5 per cent.

The rest of the economy, not so much

For Australians outside of the insulated environment of affluent generally older demographics, including a sizeable proportion of less well-off older Australians, things are significantly more challenging.

Between the pre-Covid peak in inflation adjusted wages growth in September 2019 and the lows seen in March 2023, the wage packets of workers lost 5.4 per cent of their purchasing power based on the ABS Wage Price Index and the Consumer Price Index.

Since then, real wages have slowly been clawing back the hard-won gains of the past, rising by 0.60 per cent in the nine months to December 2023. Based on this trend continuing to repeat for years to come, workers will have recovered the purchasing power their wages have lost by around the first quarter of 2030.

However, relative to pre-Covid levels of real wages growth this would actually be a significant improvement. At an annualised rate, the above scenario assumes real wages growth at roughly 0.8 per year. In the four calendar years prior to the pandemic, real wages growth averaged just 0.4 per cent per year.

This is perhaps one of the main takeaways of all the issues currently facing the economy. Interest rates can be cut at the stroke of the RBA board’s pen and monetary policy cycles can come and go relatively swiftly. But even if the economy manages to maintain above pre-Covid average real wages growth for years to come, the damage that has been done by inflation and inadequate wage growth may still take into the 2030s to repair.

The balance

While its true that the spending of affluent older demographics has been and remains a driver of the nation’s inflationary pressures, this spending was all part of the government’s plan and over the long term will only continue to grow as new retirees in aggregate get wealthier and have greater streams of income.

How well that plan was thought out when assessed with the luxury of hindsight is likely to be a source of debate for years if not decades to come.

This ultimately leaves Australian society in a challenging position. On one hand a boom in outcomes for affluent older demographics and on the other households led by wage earners who face potentially over a decade just to regain the purchasing power their wages have lost since the resurgence in inflation.

With productivity growth still structurally weak and business investment (ex-mining) near 1990s recession levels as a proportion of GDP, the outlook is not an especially rosy one.

Unless resolved by returning the economy to strong growth with broad based benefit going forward this issue may become an increasingly challenging one for the Albanese government and its successors. Australia already has significant generational fault lines.

Tarric Brooker is a freelance journalist and social commentator | @AvidCommentator