21 June 2012

Crusher Collins' voodoo economics

The Minister for ACC has rejected shifting ACC's funding model back from full-funding to pay-as-you-go (see note below for an explanation of these terms), but her reasoning is utterly illogical.
Her first attempt at a justification goes like this: "It would be irresponsible to leave future generations of New Zealanders to pay for claims that happen today as well as the cost of their own injuries."
But in 2010-11, 95.3% of claims were closed within one year. It is only a tiny minority that out-last one generation of levy-payers (let alone "generations" plural!) Her choice of words is little more than scare-mongering.
Some severe-injury claims do last a long time of course, and these are very costly. Either way (PAYG or full-funding) New Zealanders will have to support a roughly similar number of people with permanent total or partial disability over decades, regardless of the years in which those claims were lodged. To the levy-payer, it's irrelevant when the claims currently being funded were lodged.
Converting from PAYG to full-funding, as we are right now, disadvantages today's levy-payers as they have to pay more in order to build up a multi-billion-dollar fund. The size of the reserve required for full-funding is only estimated (currently estimated to be in excess of $25 Billion), and so ACC may be collecting too much or too little from us to achieve the goal. We cannot be sure if the actual levy paid by any person or firm is genuinely 'fair' from a point of view, say, 40 years in the future.
The Minister's second attempt at an explanation argued that, under PAYG it "becomes more expensive as future levy payers are required to pay more and more to cover a backlog of injuries."
This is also illogical as it assumes that the overall size of the tail must grow and grow indefinitely - which it doesn't do. All long-term claims do come to an end eventually (either by return to work, eligibility for NZ Super, or death). The ACC scheme is nearly 40 now, and its maturity means that the so-called "backlog" need not grow at an unaffordable rate. The Corporation does have some control over managing the long-term tail of partial disability, and it has been reducing those claims.
As ACC is a Crown-owned entity with statutory powers to levy individuals and firms, there is no risk of insolvency. Hence the private-sector insurance standard of fully funding is un-called-for, and this financial policy is only relevant if the government is still toying perilously with the idea of privatizing ACC.

Explanatory note: Under full funding, the levy-payers contribute to a reserve fund that is large enough to pay for the entire estimated future costs of all claims that are open today. Under pay-as-you-go (PAYG), the levies collected pay at minimum for the costs of the current year's expenditure. It is possible of course to have a compromise where a partial pre-funding reserve is maintained, and PAYG applies from there.


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