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First, manufacture a crisis…

Written By: - Date published: 9:00 am, October 12th, 2009 - 49 comments
Categories: ACC, privatisation - Tags:

acc-undermine-200The first thing you need to understand is ACC is not spending more money than it is taking in through levies. It is not going bust. It is not ‘making a loss’ despite what Nick Smith writes and the media faithfully repeats, but, then, they got taken in by this same trick six months ago.

What is happening is that ACC is building up a huge amount of assets, savings. These savings are to pay for the entire future cost of claims that are being made now and that is turning out to be a more difficult process than expected. Here’s ACC’s very good explanation:

Until 1999, ACC operated under a ‘pay-as-you-go’ basis, collecting only enough levies each year to cover the cost of claims for that particular year. In 1999 the Government decided to change ACC from ‘pay-as-you-go’ to a ‘fully funded’ way of operating. That means we now collect enough money during each levy year to cover the full lifetime costs of every claim that occurs in that year.

Some people who are injured need ACC’s help for 30 years or more, so significant reserves must be built up to fund these future costs. This money is invested and earns interest that helps pay the cost of claims.

This fully funded model is fairer for levy payers. Future generations of levy payers won’t be paying for injuries that happened years before as the cost of those claims will already have been collected.

In the future, being fully-funded will mean ACC levies will be lower than they otherwise would be. For now, they are higher because as ACC is transitioning from ‘pay as you go’ to fully funded’ it needs to build up a pool of billions to cover the future costs of current claims and its assets are less at the moment, as ACC explains:

The Scheme’s claim liability (the future cost of existing claims) now stands at $23.8 billion against current net assets (the money ACC has ‘in the bank’ to cover those future costs) of $11 billion.

But that’s basically just a book-keeping/cost-spreading exercise (most of ACC’s assets are actually government bonds, so the government (Treasury) owes itself (ACC) money).

ACC isn’t losing money. Its revenues were $4.5 billion – $1.5 billion more than it spent on claims this year. $500 million of that extra is operating costs, the other $1 billion was added to ACC’s investments but changes to predictions of the future costs of current claims pushed out that target even further – by $5.7 billion. So, getting to being fully funded is $4.8 billion further away than it was before.

There’s no actual crisis. Despite Nick Smith’s hysterics over ‘increased costs’, the cost of new claims isn’t rising (steady at $1.7 billion for the last 2 years). ACC is making enough money. The ‘crisis’ is just modelling changes for a bookkeeping exercise that has no effect other than to make levies higher now so they won’t have to be as high later.

It’s not the end of the world. ACC isn’t broken.

Now, it is going to be harder to complete the move to being fully funded by 2014, which is the Government’s target, without increases to levies. Pretty simple solution to that, push back the date. Labour was going to move the date back to 2019 and the Government has just announced it will adopt that idea. Take ten years to move to fully funded rather than doing it in five. It makes no real difference except there’s no need for big levy hikes.

That hasn’t stopped all the amateur dramatics from Nick Smith. He was on RNZ this morning still confusing the issue by claiming that the rising target to being fully funded is due to entitlements. He made no attempt to explain to people that ACC is safe and functioning perfectly well, fully funded or not. But, if he did that he wouldn’t get to paint ACC as mired in crisis. And, if he couldn’t create a false air of crisis, how would he soften the public up for privatisation?

49 comments on “First, manufacture a crisis… ”

  1. Why is it that left Governments are cautious, financially prudent and take a long term view and the right are reckless, short sighted and either unbelievably stupid or cynical in the extreme in the way they seek to undermine public institutions.

    Their hatred of anything collective borders on the psychopathic.

    Interesting that the Nats refused leave to David Parker to introduce Parker’s member’s bill titled Injury Prevention, Rehabilitation and Compensation (Change of Date for Full Funding) Amendment Bill earlier in the year.

    This bill would have extended the time required for full funding of ACC liabilities to 2019, just as Smith is proposing today to do.

  2. toad 2

    micky, if they had allowed Parker’s bill to be introduced and passed, they wouldn’t have a crisis.

    I’ve never really got the bit about fully funding future entitlements on current claims anyway. What was wrong with pay-as-you-go?

    I guess full funding gives predictability over levies, but I wouldn’t have thought levies would fluctuate wildly from year to year in any case.

  3. ghostwhowalksnz 3

    Yet when Labour introduced a measure of ‘pre funding ‘ for super National called a halt to that within months of coming into office. This means that super too will face a funding ‘crisis’ . I can imagine the answer to that will be cut the entitlements as well

  4. ben 4

    Marty, precisely because you are saying there is no crisis, and because it is in your interest to do so (Labour is wearing the political cost of this fiasco) I will proceed by assuming there is a major problem. I agree the $4.8 billion is the product of accounting decisions about timing of expenses – but that doesa not mean there is no problem.

    It would be nice if you would explain what allows you to tell the difference bewteen a $4.8 billion deficit that is not a product of fundamental problems, and a $4.8 billion deficit that is. Based on the level of argument at the The Standard, I believe the main criteria for that decision would be the colour of the logo of the political party most responsible. Which, I have to say, does not give me confidence.

    ACC’s fundamentals look dodgy. Nobody disputes entitlements under ACC have increased very substantially over the last few years. Nobody disputes those entitlements have increased faster than inflation and that they have increased faster than increases in fees collected. So the question is why shouldn’t we think that $4.8 billion – rougly 3% of GDP, an enormous number for one organisation to inflict on people – isn’t something to be worried about?

    What is truly absurd about all this is that the main effect of this deficit will be to substantially increase the cost of driving a motor vehicle and to hire a worker. Which has almost nothing to do with the cause of the deficit in the first place.

    • snoozer 4.1

      Whoo, someone got up on the wrong side of bed.

      ACC is taking in more money than it is spending. It accumulated a further billion dollars of assets this past year. The only problem is that revisions to the predicted futures costs of existing claims have risen faster. So what? Just take longer to go to fully funded.

      The whole idea of going to fully funded is to spread the cost of claims fairly over generations. If in doing that we need to put an unfair amount of cost on people right now as we both fully fund and pay past costs, well that’s not fair. Let’s just take our time instead and spread the transition cost over a longer time frame.

      • ieuan 4.1.1

        snoozer, such well balanced common sense has no place in politics.

        I do think Labour probably went too far in the entitlements ACC covers and some of this could be pulled back to help reduce the cost.

        However there is too much political capital to be made here by National by scaremongering about increases in levies for them not to milk this for all it is worth. Sad really.

        • Daveo 4.1.1.1

          What makes you think Labour went ‘too far’ in entitlements? That argument is reliant on accepting Nick Smith’s figures, which we all know are based on lies.

          • ieuan 4.1.1.1.1

            Well there was the free provision of physio that resulted in an explosion of physio providers.

            ACC is a good scheme but there is a fine balance between providing free medical care for those that need it and providing free care and the system being abused.

            I think there should be no such thing as ‘free’ with even small charges to remind people that there is a cost and someone has to pay.

            • Sean 4.1.1.1.1.1

              Exactly right ieuan. Most people who read up a little on the ACC situation will know that the scheme is not insolvent, nor any other extreme claims that are being made. However, there is an unbelievable rorting of the system going on and that is because people think that using the system is free. Bring in small charges for some of the services and you might bring some balance back into the system.

            • Pascal's bookie 4.1.1.1.1.2

              So who’s rorting? Providers or consumers? I’d say the former primarily, so targetting the latter is a mugs game. Make the charge high enough to deter, and some people won’t get treated when they should.

              Why not random audits with providers caught rorting being done for fraud?

  5. tsmithfield 5

    Remember Labour promised to cut ACC levies prior to the last election.

    What was that all about?

    • snoozer 5.1

      they were going to push out the fully-funded date so, under the costings at the time, they would have been able to cut levies.

  6. Victor 6

    The problem is our inability as a country to have a reasoned conversation about these long-term issues. The hsyteria over ACC is pathetic.

    The ACC Annual Report is interesting reading. Their 17 year return is 9.97%, their NZ equity return is 12.45%. Much better than the Super Fund. There is no crisis, just provide a capital injection, which the government could do by injecting government bonds into ACC. No big deal. Their returns will cover the cost (clearly they have an impressive investment management team). And the amounts we are talking about are trivial relative to the global financial crisis, and what the UK or US governments have injected into banks and insurance companies.

    Nick Smith is hysterical about ACC. Well, what is the fully funded cost of the guarantees on the finance companies, including South Canterbury Finance? But hang on, those are the National Party’s mates aren’t they?

  7. Lew 7

    Marty, this is an excellent analysis. Thank you.

    What interests me is how ACC and the minister are trying to pass off two separate things as one: the changes to sexual abuse claim criteria and the overall restriction of entitlements. The SCU changes are framed as clinical best practice — the argument that they’re a cost-cutting measure has been strenuously denied — and yet they’re encapsulated within an overall ‘we must cut costs and this is how’ narrative by redefining ‘clinical best practice’ to a standard which just happens to substantially cut patient entitlements. Rationally, it’s a matter of figuring out which of these imperatives is the stronger: improve the standard of care and adhere to clinical best practice, or save money.

    Given that the strategy is to undermine public confidence in the ACC system to build public support for a (gradual) privatisation endgame, I don’t think it’s rocket science to figure out.

    L

    • George D 7.1

      This is beyond depressing.

      The only consolation is that National are making themselves a lot of enemies very quickly, so they might not get away with what they want.

      • Lew 7.1.1

        George,

        Well, yes and no. Depends on what you consider that they want. They want to privatise ACC in order to get it off the books and shore up the insurance industry, but I think electoral success is going to be the priority, and any programme of privatisation only get underway once a second term is in the bag, and a new and stronger mandate for change has been achieved.

        As far as I see, the prime danger for them is in moving too quickly or too soon, resulting in an abortive privatisation attempt, as last time. This is why the building of public intolerance of the ACC system is critical to the strategy. Deny enough patients cover, starve the bureaucracy to depress standards of service, and massage the books to make it look like they’re dysfunctional and insolvent as well as stingy and incompetent, get the electorate hating ACC hard enough, and they’ll beg the government to sell it to insurers for a song.

        For this to work for the government, it’s critical that the impetus for these changes comes from within the operational hierarchy of ACC, rather than the ministerial level. This puts opponents to the changes — such as the NZAP — in an invidious position of having to support ACC in the abstract, while attacking its operational decisions. ACC’s opponents need to fight the changes at the political and ministerial level, because by criticising ACC they may end up winning battles while endangering the war. Nick Smith’s ability to stand up in the house and say ‘it’s an operational matter’ is a powerful tool in turning privatisation’s opponents against their own cause. All criticism of ACC must be crystal clear: we do not oppose the system, we oppose the government who has set it up to fail.

        L

  8. Brett 8

    I will be a happy man when reintroduce competition.
    Acc levies ups my tax rate by around 10%

    • Daveo 8.1

      Brett, all the independent evidence says introducing private competitors would make accident compensation more expensive.

    • Draco T Bastard 8.2

      Right, so you think that introducing competition to replace the best and cheapest form of accident compensation in the world will make you better off?

      Just another delusional RWNJ.

      Clue: Competition is inherently more expensive.

  9. randal 9

    so its okay for geeks to do themselves in on the rugby field and have a few months off but not for the workers. also I was not impressed by red hootons support of lax safety standards in industry as a tradeoff for no tort law on rnz this morning.

  10. HitchensFan 10

    Let’s pray you don’t need accident insurance cover in your future then. Do you think private insurance companies have any incentive to pay out on your claim? Good luck in fighting them in the Courts, hope you’ve got lots of spare cash for paying your lawyer……

    • Craig Glen Eden 10.1

      Exactly HF I can tell you as a business owner there is no way I would go with the private insurer.For one when the private insurer decides that they are not going to pay out they create huge barriers which leaves the employee stranded and the employer not being able to do anything or risk a court case with the Insurer.

      While ACC is not perfect it actually works very well. If you wondered who funded Nationals campaign out side of the trucking lobby and Closed Brethern take a good look who would benefit out of this hysteria that Key and Smith are creating.

  11. Brett 11

    Daveo

    Back in 1990’s,when the introduced the option of getting private cover the cost compared to ACC was about 60% cheaper.
    I remember the Sallies begging Clarke and Cullen not to change it back to a government monopoly as they were saving so much money on their premiums.
    No offence Daveo, but I struggle to believe this independent evidence.

    • IrishBill 11.1

      And I remember BP oil pointing out during the inquiry in ’99 that nobody but the insurance companies would win unless it was changed back. I also remember HIH collapsing not long after the scheme was renationalised. Before that they had something like 40% of workplace cover in NZ. If we hadn’t changed by then that would have been a disaster for hundred if not thousands of workers and their employers.

    • ghostwhowalksnz 11.2

      They didnt have a chance to find out what their claims service would be like.
      Tell your wife you have found the cheapest home and contents around and see the reaction
      Plus that system only lasted a year so once you signed up they would hit you with big increases . Sound familiar

    • Craig Glen Eden 11.3

      So you don’t believe the independent advice but you believe Key and Smith?

      Ok Brett, good on ya mate!

    • snoozer 11.4

      Brett – ACC is 10% of your tax?

      I just did the formula, if 10% of your tax is the ACC levy (1.511 cents in the dollar) it means your income is $16K a year and you’re only paying $240 a year on your ACC, not too shabby for a no-fault insurance policy covering medical costs and income.

  12. jen 12

    Brett, not only would privatising increase the cost but there is a risk that if/when things get tough for them, such insurance companies just up and leave, go into liquidation or whatever leaving the insured person without cover. I heard of at least one instance of this relating to the National Govts previous experiment with private providers. Even if there was a remedy for this person, he certainly didn’t know what it was, had no claim against ACC for that period and was left permanently injured and without compensation.

  13. Mach1 13

    My ACC levy, Utility network construction and maintenance services $2.01.

    Now, if Brett can point me to a cheaper option I’m all ears.

  14. George D 14

    National takes money from the insurance industry, and promises them results. They’re engaged in corruption of a far worse type than Field ever was involved in.

  15. HitchensFan 15

    I went to a conference on the future of ACC earlier in the year, thinking it would be a celebration of the Woodhouse principles and a discussion of where things could be improved, without compromising the fundamental social contract underlying the scheme. I left after half a day in disgust because it was filled with representatives of the insurance industry drooling about how much money privatisation was going to make their companies. It was just downright sickening.

  16. Brett 16

    Sorry must have got that wrong.
    One year which wasn’t particularly good, I paid $2000 dollars in ACC premiums on a gross income of $20k.
    You are obviously more of a maths whiz than me, so I will let you work that one out.
    I can tell you know getting hit with that sort of premium really hurts especially when you don’t get a choice also getting threatened with debt collection if you can’t pay really sucks.

  17. Which planet are you currently residing on?

  18. Swampy 18

    You claim “the media got taken in by the same trick six months ago”. The only reference I can find dated back six months is this one:

    http://www.nzherald.co.nz/politics/news/article.cfm?c_id=280&objectid=10559739

    The facts are plain: the shortfall in the earners’ account is not some sort of creative accounting invention as you seem to imply. That shortfall actually does exist.

    • BLiP 18.1

      In that case the same applies to anyone who has a mortgage. Your logic is flawed. So is National Ltd®’s

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