Friday, October 09, 2009

ACC: Talking up a crisis

Today, ACC announced that its liabilities had grown by $4.8 billion in 12 months. Like clockwork, ACC Minister Nick Smith announced that this was "unsustainable" and threatened "significant changes" (meaning: service cuts and privatisation) to ensure the future of the scheme. But are they necessary? At this stage, I think its worth remembering this Brian Fallow column from back in March, where he pointed out that the "crisis" is entirely manufactured and due to changes in discount rates:

A key variable is interest rates. The lower rates are the larger the notional lump sum needed to fund the required cash outgoings will be. And lately they have dropped with a thud.

In the actuaries' latest estimate the steep drop in interest rates, all along the yield curve but especially at the short end, has alone added $1.6 billion to the liability - more than half the overall increase.

Together with other changes in economic assumptions, including the outlook for economic growth and wage inflation, it accounts for 71 per cent of the latest "blowout" in liabilities the politicians are wringing their hands over.

In other words, ACC's books look bad because we are in the middle of a depression. As the economy returns to normal, interest rates will rise, long-term costs will decline, while asset values will increase. Instead of running around like a headless chicken screaming "crisis", all the government has to do is take a deep breath and wait.

But that wouldn't let them do what they want. And so we're going to see the depression used to gut a key public institution, for the profit of National's donors and cronies in the insurance industry. As Brian Easton points out, ordinary kiwis will lose out. But since when has National ever cared about us?