Editorial
Future shock
What’s the real reason taxpayers are being landed with massive ACC increases?
Prime Minister John Key is promising an “honest conversation” about the future of the Accident Compensation Corporation. Last Wednesday the Government unveiled proposals for winding back a number of Labour’s extensions to the scheme, in tandem with hefty levy rises.
The scene for the cutbacks was tidily set the week before when new chairman John Judge revealed ACC’s deficit was running at $4.8 billion for the 2009 year. He and ACC Minister Nick Smith, amid gnashing of teeth and general wailing, forecast levy rises of 50%, saying we were lucky not to be walloped by 100% rises from next year. “This thing has got so out of control,” Smith told Radio New Zealand.
The trouble is, it would be a lot easier to have an honest conversation if Smith and Judge were a little more open about why the ACC liability has blown out. The major driver is not, as Smith and Judge are claiming, a blowout in costs. Although costs are rising, the major reason for the change is assumptions Smith’s new board is making about what future costs and investment returns will be. There is a difference.
When it comes to simple costs and revenues, ACC is in healthy shape. It collected $4.2 billion in levies – more than expected – and paid out $3.1 billion in claims – less than expected. Where the books went pear-shaped is in the allowance for the long-term costs of those already in the ACC system.
The board Smith appointed has radically changed the assumptions for forecasting these costs. Overall, ACC’s liabilities rose $5.8 billion in the 2009 year. Of that, $1.3 billion was expected. The remaining almost $4.5 billion was because of changes in assumptions: $1.3 billion for claims experience and modelling changes; $1.3 billion for revised economic assumptions; $500 million for adding more safety to the risk margin. A curious new speculative item also appeared – $1.3 billion for the cost of “future Cabinet and regulated rate increases”. ACC has told the Listener this is to allow for changes in regulation that future Cabinets might make to ACC’s rates of payments to suppliers such as GPs and carers. ACC has also assumed that pay rates for carers will rise faster than the Labour Cost Index, which the lowly paid carers will be pleased to hear.
The changes in assumptions were the overwhelming driver in the overall ACC deficit of $4.8 billion. An ACC spokesman told the Listener “if it does turn out that they are over-estimating the cost, there’s no harm done” and that “in a sense that’s fine, we can lower the levies”. But there’s a huge cost – to cash-strapped households and businesses that will be hit up for more levies.
It is quite possible the board has simply made a more accurate assessment of what ACC’s future liabilities will be. But it is equally possible it is under instruction to leave no stone unturned in estimating future costs, because the new figures are helpful for a Government that came into office pledging to explore competition for ACC’s work account. Hiking ACC levies to painful levels will make it easier for any future ACC competitors to offer competitive prices.
If Key does want a frank conversation, it should include the cause of all this anxiety – pre-funding of ACC costs due in the future. Do we really need to pre-fund ACC at all? The wild variations in the projected ACC liability demonstrate how difficult it is to set present-day levies by crystal-ball gazing on future costs. Small changes in assumptions could send your car registration shooting up by another $100.
Michael Littlewood, of the Retirement Policy and Research Centre, suggests we throw out pre-funding because it is driven by an arbitrary accounting standard designed for private insurers. He argues that as an arm of government, ACC can never really go bust, and therefore does not need to put in reserve funds to cover future costs.
Instead, he suggests we fund ACC on a pay-as-you-go basis, as we do pensions. On that basis, more than enough is already being raised in levies. Sir Owen Woodhouse didn’t design ACC to be pre-funded. At present, ACC has enough reserves to pay for about 3.5 years of claims, the highest reserves it has ever had. But if it was to be fully pre-funded, it would need the equivalent of 8.3 years of claims in reserves, a costly exercise indeed. Smith argues that without pre-funding, we could face rising costs as the scheme matures. But no evidence has been produced to support that claim. After 30 years, the ACC scheme must be pretty close to being mature as it is.
Some of the Government’s proposed ACC cutbacks seem sensible. But before levies are massively levered up, we need an honest debate.
