We’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?”
– A Standard reader.