The rationale for funding ACC? Part 2 Susan St John Co-director, - - PowerPoint PPT Presentation

The rationale for funding

ACC? Part 2

Susan St John Co-director, Retirement Policy and Research Centre University of Auckland Business School

History matters

 “When you are peering into the future to see where you are going it is not at all a bad idea to remember where you have been”

Owen Woodhouse 1999

Workers Compensation Origins

• Differential levy system
• Insurance principles
• Funding
• Limited benefits for workers

“...the dividing line between a man hurt on his way to work and the one injured within the factory gates has at times been so thin as to be almost imperceptible” Young,1964

Was 24/7 ACC to be an insurance scheme?

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ACC was to be Social insurance

“As the scheme will be a government-scheme of social insurance it must in the final resort receive the backing of the state.”

Woodhouse, p 175

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“It is for this reason THAT A FORMAL SYSTEM OF FUNDING CANNOT BE REGARDED AS ESSENTIAL TO THE STABILITY OF THE WHOLE SCHEME”

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Woodhouse asked: How much would it cost?

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Periodic payments capitalised Scheme‟s income would be greater than outgoings for first years Surplus invested Not an actuarial basis

1972 ACC Act

Sets up the funded basis. Actuarial reports required In 1977 G Palmer noted fund expected to plateau at $200m “This basis of funding is likely to prove no more successful than it did for general accident insurance under the old scheme.”

Palmer 1977, p 201

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Why was he so sceptical ?

Rapid inflation - long tail of claims “… makes the estimate of contingent liabilities very much a matter of guesswork” Worth “preserving the pretence of a funded scheme until plateau reached” End result a “curious mixture” Provides “useful insulation and flexibility”

Palmer 1977, p201

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Funding and the 1980s

By 1980 Fund = 20 months of claims’ expenditure (over $220m) Pressure for run down 1980 Quigley committee (National) Accident Compensation Act 1982 adopts PAYG basis By 1985 levies reduced 30%

Mid 1980s

Cost pressures mounted in times of unemployment and high inflation 1987 Reserves down to 2 months – claims

• f cost blow-out – demands for review

Levies increased 238% on average 1990 reserves back to 13 months

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Funding and the 1990s

1990 National bows to employer pressure and reduces levies Accident Rehabilitation and Compensation Insurance Act 1992 PAYG basis in the meantime By 1995 reserves down to 3 months

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Pressure for funding and private insurance

By 1997- improved reserves = 6 months ACC suggests big levy reductions Bolger eventually resists pressure to reduce levies Increased earner’s premium to offset inadvisable tax cuts

• f 1998?

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Accident Insurance Act 1998

Full funding by 2014 Clear connection to insurance e.g. MV account debate

“Full funding will allow the Government to differentiate risks in the future and address current cross-subsidies in the account, including those enjoyed by diesel users, commercial road users, and motorcyclists. Officials are now undertaking work on how, in the future, we can better reward safe drivers and deter unsafe drivers to help make

• ur roads safer.”

McCully 1999

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Injury Prevention, Rehabilitation, and Compensation Act 2001

Election of Labour saw social insurance principles firmly reinstated To “...reinforce the social contract represented by the first accident compensation scheme.” Reversed privatisation experiment of the AIA

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The curious 2000s

So why did the 2001 Act keep actuarial funding by 2014?

 Of all funds including the non-earners  3 year funding smoothing

Didn’t it just pave the way for new government to:

Claim ACC insolvent? Charge higher levies – offset inappropriate tax cuts? Privatise ?

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Labour’s conversion? Actuarial liabilities on balance sheet whether funded or not “As a consequence of improved performance by ACC, its overall unfunded liability has reduced considerably and some schemes are now approaching full funded status.” July 2000 Michael Cullen

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Reserves Levies must reduce! Employers paying too much Cost blow-out

Pattern of our history

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2009 Scheme insolvent „Premiums‟ must rise! Private insurance time

Tail wags the dog

Have we allowed the stability of the scheme to be determined by actuarial funding? Today funding is $9.6B or nearly 4 years

• f claims expenditure

“[Actuarial projections] as a scientific exercise almost as pointless as the debate in mediaeval scholasticisms as to the number of angels that can dance on the end of a pin.” Alan Clayton, 2003

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Fund or PAYG

 Both PAYG and Full funding are flawed  Both concepts used to attack ACC eg recent debate

• ver full funding by 2014

“Hon David Parker: When will the Minister come clean and say that the reason he is delaying legislation to extend the date for full funding of the earners account, which would, of itself, reduce levies? Is it because he wants to include cuts to accident compensation entitlements in the same legislation?

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 Hon Dr NICK SMITH: The first point I make is that Labour had 9 years to address the time frame. It had 9 long years to address the issue of the timetable for full funding, and it did nothing. I remind members

• pposite that simply extending the full funding date
• nly adds to the Crown‟s liabilities and debt. That is

something, I know, that Labour is not particularly focused on, but this Government is focused on it. If we are to secure the sustainability of accident compensation, it is absolutely plain that other changes will also be required.” Hansard June 22 2009

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The social contract of the ACC’s social insurance scheme

Benefits more redistributive and comprehensive than private insurance Coverage and scope does not have to be clearly delineated We give up the right to sue for better coverage and benefits Evolution possible Funding should be therefore be pragmatic rather than actuarial

Political accord required

Set the fund to be say 3.5-4.5 years of claims expenditure and allow to fluctuate as the economy and markets fluctuate Require political agreement

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"Those who cannot remember the past are condemned to repeat it."

George Santayana

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