John Judge: ACC's challenge is achieving the right balance

Some combination of higher ACC levies and lower costs is the only way to a fully funded scheme that our children can inherit. Photo / Glenn Jeffrey

Here's a simple fact - ACC doesn't have enough money in the bank to meet the future costs of the claims already on its books.

Right now the difference between how much we have and what we need is about $12.8 billion and it's growing, up around $9 billion in the past five years alone.

Some people will tell you, quite rightly, that in its 35-year history ACC has never had enough money in the bank to meet its future debts. So they'll tell you there's no need to worry about the current situation.

For example, in an article in this publication on October 20, Professor Tim Hazledine argued that we don't fully fund our children (ie put aside enough money at birth to cover all the costs they will incur), so why should we fully fund our ACC scheme?

The answer is because it makes good financial sense; because we can (assuming we make some wise decisions now); and because failing to do so will simply hand the problem to our children, and I say that's irresponsible.

If we were talking about a few million, or maybe even a few hundred million, you might get away with ignoring the problem. But no one can ignore a $12.8 billion gap between our assets and liabilities.

Fortunately the idea of not fully funding ACC has been dismissed by both the present and previous governments. The decision to move to a fully-funded scheme was made a decade ago, and if we get the current situation sorted out ACC can be back on its feet within the next decade.

So how do we sort it out? Any household budget adviser will tell you that if you have growing debts you need to do three things. You need to cut your spending, you need to increase your income (if you can) and you need to do it quickly, because debt builds on itself and you begin paying interest on your interest.

The same logic applies to ACC, but what is the right balance? In theory ACC could lift levies (its income) to a high enough level that spending cuts would be unnecessary. Alternatively we could cut spending (on entitlements) to such a point that current levies would be sufficient. Neither of these options would be acceptable and so, as is often the case, the answer must lie somewhere in the middle.

So ACC has begun by firstly cutting spending in areas that were obviously out of control.

For example; physiotherapy, elective surgery and high-tech imaging are areas where costs have nearly doubled in the past five years, far beyond what could be explained by population growth, claim numbers or inflation. That was clearly unsustainable.

But that won't be nearly enough by itself. So we have proposed increases in levies as well, and the public response has been immediate and strong, as I knew it would be. I understand that what we're proposing is unpalatable, especially in tough economic times. Ultimately this will be a decision for the Minister for ACC and his Cabinet colleagues but I would urge them to take a long-term perspective. In my view, some pain now is worthwhile if it helps ensure the future of this unique scheme.

The minister has another role, which is to determine whether the scheme, both in scope and operation, remains appropriate for the situation we find ourselves in, and he has begun that process. Legislation is currently before Parliament that addresses a range of issues and he has also initiated a stocktake of the scheme itself.

Every New Zealander has a part to play as well. I encourage everyone with a view on these issues to make submissions on the proposed levies and on the minister's bill. Better injury prevention is another area we can all contribute to, and that will be the biggest factor to bring down costs and levies.

Some have suggested all of this amounts to an attack on the core principles of the scheme or a breach of the social contract that it embodies - which is no-fault, 24/7 compensation in exchange for losing the right to sue.

Quite the opposite is true. We are trying to save ACC for our children and grandchildren. And if we don't properly fund and manage that social contract then we are already in breach.

The ACC board is proposing a combination of increased levies and reduced spending to ensure the future sustainability of the scheme.

I welcome the public debate on whether we've got the balance right. But let's be clear, doing nothing is not an option.

* John Judge is chairman of the Accident Compensation Corporation.