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Cutting through the spin on ACC

Written By: - Date published: 6:30 am, March 13th, 2009 - 35 comments
Categories: ACC, economy, national/act government, privatisation, spin - Tags:

acc-undermine-200We’ve heard a lot of panicky comments in the last few weeks about a ‘cost blowout’ at ACC. We’re told there is $22 billion in liabilities with $12 billion unfunded. That sounds bad, but what does it actually mean and what’s really happened?

ACC used to be a ‘pay-as-you-go’ scheme. No money was put aside for the future costs of existing claims. The costs were paid out of levies as they were incurred. The problem with this system is the babyboomers. Just like with superannuation, their aging increases the cost of ACC and leaves a smaller portion of the population working to pay for it. Instead, it was decided ACC should become fully-funded, putting aside all the future costs of existing claims now (that’s the $22 billion in liabilities). Once all those liabilities are funded ACC will only need to charge levies to cover the total costs of new claims, not old ones too. It has been gradually building up its assets to reach this point in 2014. When Labour came to power in 1999, about 60% of the liabilities were unfunded, that had shrunk to 40% under Labour. Both an increase in liabilities and poorer growth in assets means that currently ACC’s assets equal just under half its liabilities. That reversal is the ‘blow-out’ we’ve been hearing so much about.

Here’s the important part. 70% of the increase in ACC’s liabilities has been due to the economic crisis. The liabilities of ACC have to be estimated by forecasting economic growth, wage growth, and by using interest rates to work out how much money needs to be invested now to have a given sum at a future date. It’s this last part, the discount rate, that’s the kicker. Interest rates are now at historic lows. So to get the same amount of money in the future more would need to be invested now. When interest rates start going back up again, ACC’s liabilities will shrink and the “blowout” will disappear. It’s an accounting quirk that has been spun by National to resemble a crisis.

But what about the other 30% of the increase? The accident rate has been rising in the last few years. That’s due to an aging population and health problems like obesity. Also, people are taking longer to return to work. That’s also down to an aging population, older people take longer to recover from injury. The other part of the increase is higher health costs, mainly because doctors and nurses are being paid more.

All of these except obesity are pretty much unavoidable. ACC can’t stop the population aging and it can’t cut medical costs (and we wouldn’t want to reduce pay for health professionals if it could). But it can offset these extra costs. The year for ACC to be fully funded could be pushed back from 2014 to 2019. That would give ACC twice the time to close the gap between assets and liabilities meaning it wouldn’t have to increase levies so much. In fact, Labour argues ACC levies could be reduced if the fully funding date were pushed to 2019.

So you see there is no crisis at ACC. There’s a problem on paper that will disappear when interest rates rise and the economy recovers, and there’s a smaller issue of growing costs that can be dealt with easily. ACC is not unaffordable. Even if there are small increases in levies, it’s still cheap by world standards.

It doesn’t take a conspiracy theorist to wonder why National, a party with a history of privatising ACC, is trying to make a mountain out of this molehill. As Brian Fallow puts it:

“ACC is a civilised and cost-effective approach to dealing with the injured. Why undermine confidence in the scheme, unless you plan to undermine the scheme itself?”

Why indeed.

– A Standard reader.

35 comments on “Cutting through the spin on ACC”

  1. BLiP 1

    Thank you. Again its the blogshpere that provides an easy-to-understand explanation of the actual situation in relation to ACC. Meanwhile, the MSM spouts National Party bollocks in an effort to provide covering fire while it sends in the privatisation shock troops to loot the public purse – again!

  2. lprent 2

    It has been interesting watching the NACT goverment and especially nick smith winding this up. I knew that most of the issue was to do with thy changing economic situation. But I hadn’t considered the discount rate.

    That is the problem when you have ministers who are lying now to set things up for changes next election. They destroy things to get to what they want. Rather than doing their job – fixing and running the system. Nick has shown himself to be ideologically driven and obsessional, he should get removed from this portfolio

    • Tane 2.1

      I don’t want to get into the frankly offensive ‘pills’ debate, but his behaviour does seem incredibly unstable. After yesterday’s performance at Select Committee I’m not sure he’s fit to be a minister.

      http://www.nzherald.co.nz/politics/news/article.cfm?c_id=280&objectid=10561412

      He’s also still using discredited lines from days ago. Someone needs to get Crosby Textor on a plane for some urgent damage control.

      • Inventory2 2.1.1

        Tane – if you “don’t want to get imto the frankly offensive ‘pills’ debate”, why do you mention it?

        It seems to me that you’re actually quite happy to try and discredit Smith on that basis.

        • Pascal's bookie 2.1.1.1

          I thought he was discrediting him on the basis of his behaviour, whatever it’s cause. Do you think Smith’s actions have been appropriate?

        • Tane 2.1.1.2

          No IV2, I’m criticising his behaviour, and making it clear I don’t want it to turn into a debate about his alleged mental health issues. I think it’s important that the Left doesn’t sink to the level of the Kiwiblog Right.

          • Tigger 2.1.1.2.1

            No, Tane’s remark is entirely appropriate. He’s attacking the behaviour – not the man. I could learn a lesson about that… 🙂

            Smith’s actions here are totally inappropriate and, frankly, rather bizarre. He’s a public figure with a huge amount of responsibility. We have every right to know that he’s stable. If I acted like this for my boss at a public event I’d most likely be reprimanded at the very least, at the worst I’d be getting a formal warning or sent for a medical test.

  3. stan 3

    I think that it was in 1995, that some NZ Insurance Companies were given the nod to seriously look at taking over ACC. I am almost sure it was Vero, ( or that present companies predecessor)
    The Actuaries looked at the figures they could deliver the service for and the figures the Government were needing to deliver the service and it was a green light in favour of privatisation. Clark stepped in and stopped it.
    Does anyone remember the TV series ,glidetime?
    This was a satirical paraody of a typical state Government department.
    It was very funny but sadly very true.
    New Zealand Railways suffered the same syndrome.Many years ago when my father started his manufacturing company , he tells the story of having to wait 30 minutes at Avondale railway station with full trailer of product that was going to Palmerston North whilst 15 fat and lazy NZR employees sat and all ate their lunch.
    Not a single one of them were prepared to accept the consignment.
    Today we still have people like Andrew Little,Council of trade unions,Steve Pierson , The Standard, Labours newspaper,and other folk who still live in another century in their minds trying to promote this ethos and work ethic.
    Well sadly the news for them is all bad.
    This recession has hit Kiwi workers very hard, they see no succor and solution from the Leftie wing of politics which is why Labour has dropped to its lowest ever polling figure of 24%. With voluntary unionism in NZ and the current employment climate I can see droves of workers seeing no benefit in paying union fees and I will predict lay offs amongst Union workers as their funds dwindle away.
    Just my view
    Bet you dont print it.
    Stan Blanch

    [lprent: You’re in auto-moderation/auto-spam because you link-whore in the comments, and seldom say anything that is on the point of the posts or comments. We’re not here to provide free advertising.

    In this case you actually wrote something readable and on point (ignoring all of the gratuitous and rather pointless insults). You can put your little website in the URL section of your post. People who are interested will look at it (most won’t). Just don’t plug it in the comment itself.

    Learn to follow the rules of site and don’t treat them like a sewer and write comments on point rather than acting like a spam agent. If you do then eventually I’ll remove the restrictions that of on your website.]

    • stanb13 3.1

      To Steve Person chief Prorpagandist and disisnformation peddlar of the Standad

      [deleted]

      [lprent: Read the policy. I don’t tolerate direct attacks on writers or the site on our site. If you want to do that, then find another site and whine with the rest of the idiot wingnuts that I’ve booted off here for the same reason. Essentially being impolite while in someones else’s space is just stupid.

      Link-whoring doesn’t depend on commercial/non-commercial. It is you using the relative popularity of our site to boost your own. If the content on your site was sufficient to draw people to it, then you wouldn’t have to put ads on our site. This is the equivalent of scratching your phone number on our wall and saying “Great servicing”. BTW: The level of your cartoons is much the same as your spelling – piss-poor.

      For that matter, so is your attitude. It is designed to get a self-inflicted martyrdom. There should be a special category on the Darwin awards for being moronically thick and attacking people on their own site. For instance the content of this comment was a cut and paste from another post. That is also not allowed on this site. I have a suspicion that it was a cut and paste from someone else’s comment on another site. We don’t allow that type of unattributed plagiarism either

      How about improving your spelling, cartoons, and attitude. However that would involve thinking…. not really your forte I know. In short if you want to saty around the net in any sensible forum, then I’d suggest that you grow up and learn the rules. BTW: This is your final warning]

  4. Harpoon 4

    Fault. Nobody should forget fault. Fault is the key issue at the centre of the insurance business model. Neither the Nats nor the insurance companies are talking about the return of fault, but both know and (I’m sure) accept that fault has to be in the system if the insurance companies are to be able to operate a privatised scheme. They are lobbying now only for the ‘opening up’ of the scheme, but they will have trouble making money out of a simple opening up. What they need is FAULT.

    ‘Opening up’ is a stalking horse for the hunters who shoot with fault.

    A goodly number of New Zealanders are probably sanguine about ‘opening up’ (sounds nice, doesn’t it?), but they will hate the idea of lawyers making millions out of a returnof the litigiousness that comes with fault.

  5. Felix 5

    Great guest post, thank you.

    “Even if there are small increases in levies, it’s still cheap by world standards.”

    That’s really important to remember. Those advocating privatisation have never been able to describe a cheaper model.

  6. Concerned of Tawa 6

    What form will privatisation take?
    Earners? Non-earners? Motor-vehicle/fuel?

  7. TomSe 7

    Tane: Trutherseeker makes the point that Nick Smith has a known record of increasingly erratic behaviour when he is put under pressure. As a holder of high public office, his behavioural record is a legitimate matter of public interest, especially given that the man has form. It is for his own long term health as much as anything else.

  8. BLiP 8

    Bloody hell! The Herald’s Brian Fallow has managed to get it right. Probably old news to youse but, still, wonder of wonders and full credit. http://www.nzherald.co.nz/business/news/article.cfm?c_id=3&objectid=10561167

  9. Phillips 9

    ”Also, people are taking longer to return to work. That?s also down to an aging population, older people take longer to recover from injury.”

    I don’t quite believe it is as simple as that. To put in bluntly, people are ripping the system off. I’m sure there are thousands of people out their who could have returned to work a lot sooner than they have done, and they do this because they know that ACC will continue to pay them out. Who decides that it is time to go back to work?? If we lived in a perfect society, where people didn’t continually try to beat the system, then ACC would work, but this isn’t the case so the ACC system does not work. What are the solutions? F*cked if I know, although is suspect privatisation will solve nothing.

    • SteveR 9.1

      In my experience, the doctor or whoever is treating you gets to say how long you need off (based on clinical, surgical etc. knowledge) and ACC keep you to that schedule. If there are complications, again the medic will vary the regime with ACC.

      It isn’t on the personal whim of the claimant!!

      • Phillips 9.1.1

        You obviously have never been to the doctor when you have been faking an illness. I did it all the time as a kid and guaranteed the doctor would prescribe me a whole lot of shit. If you go to the doctor and say ‘my back is still sore’ he is not going to send you back to work!

        • SteveR 9.1.1.1

          Yes, it is hard for any system to deal with dishonest people.

          • Phillips 9.1.1.1.1

            That is true. I was chatting amongst a few the other night and suggested this: Why could the government not impose a compulsory ACC deduction from your wages/salary/benefit and put it into an ACC account under your own name. If a serious injury arises, and your own personal ACC account balance cannot cover the amount required then this is when the government steps in an covers the excess needed.
            I would think that if people were reminded of the balance in their own ACC account, they would feel less inclined to rip off the system. It would create more of a feeling that you are spending your own money every time you visit a physio, doctor etc.

  10. out of bed 10

    Living in Nelson and following the exploits of Smith over the years, his latest behavior comes as no surprise whatsoever. His is I think, mad as a hatter but saying that, very clever and he has the local newspaper (loose description) Nelson Mail eating out of the palm of his hand..
    Campaigning during the election I had at least a dozen people say that they were PV Green and EV “Nick” I didn’t know whether to laugh or cry.but it serves as an example of his savvy “local” media skills..and how popular he is in Nelson
    But however ‘clever” Smith is, he has to go. His track record of being ‘economical with the truth” is not something we want to see from our politicians from any hue.

  11. deemac 11

    yes, great post. Nick Smith’s sock puppet moment yesterday was a disgrace – and shame on the media for letting him off so lightly

  12. BLiP: “the MSM spouts National Party bollocks in an effort to provide covering fire while it sends in the privatisation shock troops to loot the public purse – again!”

    Well said. The msm aren’t exactly the public’s watchdog over big business interests, the msm ARE big business interests.

  13. Maia 13

    The accident rate has been rising in the last few years. That’s due to an aging population and health problems like obesity.

    Will you please stop posting this nonsense about fat bodies.

    • Bill 13.1

      This is going off at a tangent somewhat, but if obesity is to taken seriously, then we really need to look at the orthodoxy surrounding it’s causes.

      Apparently, consuming fat is a major factor. This conclusion arises from two studies in the 50s. Both very questionable. In one, rabbits were fed cholesterol, which is not present in their natural diet, and detrimental health effects were observed (furry arteries).

      In the second, very selective examples were used to demonstrate that high fat diets correlated with heart disease.

      Pause for thought. Carbohydrates are present in just about everything we eat. They are slow burning. ( How do sumo wrestlers pack on the pounds? By eating copious amounts of rice…no fat there.)

      Obesity has risen, not fallen under the low fat mantra. Here’s a msm link that echoes the above for anyone interested. http://www.independent.co.uk/life-style/food-and-drink/features/fat-is-back-rediscover-the-delights-of-lard-dripping-and-suet-1642912.html

      I notice too that the pro low fat line is now being pushed by so called independent lobby groups such as The Fat Panel ( funded by the Margarine and Spreads Association!)

      So okay. Surplus weight will stress our physiology. Obesity related deaths are on the rise, and the official solution? Eat weight inducing foods!

  14. SHG 14

    There’s a problem on paper that will disappear when interest rates rise and the economy recovers

    That’s it? That’s the conclusion?

  15. Rich 15

    Why does ACC need to have an investment fund?

    I understand why commercial life insurers need one, because it’s possible that their premiums would drop and they’d still have ongoing liabilities.

    But ACC could just operate on a current basis – the accident rate isn’t going to change substantially, nor is the income base (if people can’t afford to drive, they won’t have car accidents).

    • @ work 15.1

      Para 1: Because thats how insurance companies operate.

      Para 2: ACC isnt life insurance, thats different again, it’s not about ongoing liabilities, it’s that most of the premiums on life insurance go back as payouts in the end eventually, and its not like they are going to expect you to pay a lifetimes worth of premiums up front after someone dies, in order to collect the pay out. Investing the money is a better way to keep the money rather than puitting in a bank account.

      Para 3. ACC basically have been operating on a current basis (they are moving away from this now though going to fully funded). The problem here is exactly that the accident rate is changing.

      • Phillips 15.1.1

        I struggle to believe that all of a sudden we are having a lot more accidents than we used to? We are not all that useless are we?

        • @ work 15.1.1.1

          No, we’re getting old and fat.

        • BLiP 15.1.1.2

          Also, employers’ commitment to safety is largely rhetoric.

          • Rich 15.1.1.2.1

            I still don’t see why the ACC costs should cycle up and down, given that it’s averaged over the whole country. Sure, as the population ages, incomes decrease relative to costs, but they could just compensate by adjusting rates.

            An equity fund just seems to substitute one uncertainty for another.

  16. @ work 16

    Yes. Alternatively one might discribe the problem as: “The situation cannot be explained on a bumper sticker, this means things must be turning to hell in a hand basket”

    The situation ACC faces is not a huge problem, anyone who works in insurance can see this, any one who knows even a bit about insurance can see it. The problem is the general public’s eyes seem to gloss over once numbers start being thrown around, all they really seem to want to know is: is it + or -, and is it millions or billions.

    The current fuss being made about ACC is the definition of making a mountain out of a mole hill.

  17. @ work 17

    “Rich
    I still don’t see why the ACC costs should cycle up and down, given that it’s averaged over the whole country.”

    Needs to be averaged over time too, good years and bad years ect

    “Sure, as the population ages, incomes decrease relative to costs, but they could just compensate by adjusting rates.”

    As the population ages not only do they require more expensive treatments, but also the increase in the costs of those treatments is well above inflation (do you realise how many hip replacements some of that stuff could pay for?!?! [sorry- couldn’t resist]). And essentially what they are seeking to do now is adjust the rates, its being presented as the end of the world though.

    “An equity fund just seems to substitute one uncertainty for another.”
    At the moment yes, in more stable economic times no

  18. barry 18

    The other point to note is that we are effectively paying twice now, until we reach the point that future liabilities are covered. We are paying for our current insurance, plus we are paying to fund the future payments to past accident victims who will require ongoing treatment that they didn’t pay for in the past.

    If they allow private operators to enter the market it is unlikely that they will be made to pay their share of these costs, so the competition will not be fair.

    Pay as you go schemes are fair, as are fully funded schemes. However moving from one to the other is expensive.

    The problem with putting money aside to cover for baby boomers (the same as with the super fund) is that everyone else in the world has the same idea. When we baby boomers require the money, it won’t have the same spending power as when we saved it. There will still be a smaller number of productive workers trying to provide for a larger number of older people requiring services (in this case, treatment for conditions resulting from an accident in the past). We would be better to invest that money in infrastructure and future proofing the economy (ie making it more sustainable), than save it and hope that we can still buy what we need when we get old.

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