Is ACC Broke?

Tim Hazledine (professor of economics at the University of Auckland) seems to think that ACC is just fine.  He uses the example of putting money aside for you child’s future university studies, the total cost of which he places as $500 thousand:

“And you haven’t got that, have you? You’ve got about $20,000 in KiwiSaver accounts. You’ve a bit of equity in your house, but, hey, you can’t bring up your children in a tent, can you? Let’s face it. Strictly speaking, you are broke; busted; bankrupt. And so are several hundred thousand other New Zealand families just like you – billions of dollars of unfunded liabilities, in total.

“It’s the “biggest loss of any entity, public or private, in New Zealand history”, to slightly paraphrase Dr Nick Smith on the $4.8 billion “loss” recorded last year by the ACC. If you think this is silly, then the ACC fracas is truly dumb. It’s basically the same story writ large – the idea that future accident compensation payments are rigid “obligations” which have to be “pre-funded”, as they say, along with some jiggery pokery with the projections of payouts and expenses. It’s dumber because, of course, the Government’s ability to raise revenue when needed is much more secure than any individual’s future income, and also because, on the payment side, our ACC obligations are in fact rather more fluid than are the parents’ obligations to do the best for their children.”

Well, yes and no, Tim. While the ACC future liabilities are indeed guesswork, they are based on past liability requirements, in much the same way as your guess of the cost of university in the future is based on the current price plus inflation. In ACC’s case, though, much of the liability is already occurring. There are people now who have chronic problems from their accident who represent an already established liability. This liability will almost certainly have to be funded in the future.

Unlike Prof. Hazledine, however, I am not at all certain that the statement “the Government’s ability to raise revenue when needed is much more secure than any individual’s future income” is actually true. I believe that the government’s ability to raise taxes further is quite constrained. Raising taxes would likely see a very short-lived government and would oversee an exodus of businesses overseas. Simply raising ACC to cover liabilities when they become due may result in very steep increases in the future, rather than a more modest increase now. Although I think Nick Smith’s talk of a “loss” is very “loose” (and clearly intentionally provocative), it is still prudent to provide for estimated liabilities. Should you over-estimate the liabilities and wind up with too much, this will not be a problem. I have yet to encounter a government that has any problem with spending money.

Normal insurance companies provide a fund for future liabilities. I see no reason why ACC should be exempt from this requirement, merely because the government has ready access to the taxpayers pocket.

Eventually the golden goose will die of anorexia.

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