Last week, David Parker asked Nick Smith what the “whole-of-life cost to ACC of all new claims” for the last year were.
Smith’s answer surprised everyone because it made no sense. He told us that claims made last year alone would cost $7 billion over their lifes. If that were really so, ACC’s liablities would be increasing by $6 billion a year ($7b – $1b spent on new claims in the last year) due just to new claims, and that’s just not the case.
I took a look at the table Nick Smith is getting his $7 billion from (ACC annual report, p123) and discovered the trick he had used.
The $23.8 billion in future liabilities we’ve heard so much about is the present value of the future cost of all current and past ACC claims. Because money now is worth more than money in the future or, to put that another way, money you have now can be turned into more money in the future by saving it and earning interest on it, to work out the present value of a future cost you have to apply a ‘discount rate’, which is basically the interest rate.
The $23.8 billion number is present value but Smith’s $7 billion number isn’t. Apply the discount rate (5.86% – see p124) over the weighted average life of claims, and it turns out that Smith’s answer to Parker’s question should really be $3.5 billion (see p122), not $7 billion – that’s less than the government took in levies last year.
Has Smith ‘misled’ the House? No. He set out to trick us but Parker basically handed him the opportunity on a plate by not specifically asking for the present value of the whole of life cost of new claims. But this is just one more example of how we can’t trust a word that comes out of this minister’s mouth.
It can be assumed that everything Smith says is a distortion and a lie, and it all needs to be checked.
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