Andrew Little recently suggested that ACC's current funding model is more suitable for private insurance, and suggested that a future Labour government might change it - but in doing so failed to get to the heart of the issue.

In a recent interview on Morning Report (reported here), Andrew Little suggested that the “fully funded” model currently used to fund ACC was fine for a competitive insurance market but not necessary for a socially-backed insurance scheme like ACC. Little indicated that a future Labour government might return to the “pay-as-you-go” system of funding that was in place from 1974 – 1999.  I would suggest that the interview missed out an important aspect of the debate over ACC’s funding.

Fundamentally, the pay-as-you-go versus fully funded issue is about how to fund ACC fairly. To explain why this funding issue boils down to fairness, I need to start by explaining the two competing funding models.

A few notes before I go on. First, I worked for ACC for six years in various roles and I’m now a Lecturer at the Faculty of Law at the University of Otago. This post represents my views. Second, part of the interview is about whether the Government’s practice surrounding the setting of levies and announcing possible future levy cuts is “dishonest” or “manipulative” – I’m not getting into that here. Finally, I’ve glossed over a few of the finer details of funding.

The pay-as-you-go and fully funded funding models

Pay-as-you-go funding is relatively straightforward: each year, ACC collects levies to make up for the scheme’s outgoings that year.

Fully funded is a bit more complicated. Each year, ACC collects levies to pay for the lifetime cost of every claim that occurs that year. “Lifetime” cost means all the money that will ever be spent on the injury. Each year, ACC will set aside huge amounts of money with the expectation of spending it in the future.

Both models can collect reserves and provide security

The interviewer suggested that the fully funded model provides greater security because, by collecting reserves, it guarantees the payment of future costs. Little argued that pay-as-you-go also provides security. I think that he is correct that security is not a particularly helpful basis for distinguishing the two models. Both funding models can collect reserves in case actual costs are higher than forecasted costs. As Little said, it is sensible to keep a healthy reserve. 

The pay-as-you-go model’s security is provided by the state’s ability to collect levies in the future. In a way, this is the ultimate security – as long as the scheme has the backing of the state, the state can find a way to collect the funds to pay for it.  Private insurers lack that security: they can go bust and lose the ability to gain future levies. If the scheme were to be administered by private insurers (as it was for a brief time) then it makes sense to require those insurers to keep reserves. Requiring reserves means that, if a particular private insurer goes bust, there’s money set aside to pay for the future cost of any claims that insurer was managing.

So there is a link between the fully funding model and private insurance: fully funding is necessary if the administration of the scheme were to be handled by private insurers. But it’s a mistake to think that that is the only rationale for the fully funded model.

Different groups pay for the cost of injuries under the two models

The pay-as-you-go and fully funded models differ as to who pays the levies that fund injuries. That is, they spread the cost of accidents across different groups of levy payers. This naturally raises the question of which model is fairer, but we have to appreciate the difference to address that question. Let’s take a simple example:

I injure myself while gardening at home. I’m an earner, so the cost of my injury is paid out of the Earners’ Account, which is funded through levies deducted via PAYE. Under the current fully funded model, the money collected for the Earners’ Account this year is enough to pay for the lifetime cost of injuries that earners suffer this year. So, if I need surgery 20 years in the future, the money’s already been set aside, and I contributed to it.

In a sense, I’ve paid for the cost of my injury. More accurately, the people paying the earners’ levy this year have paid for the cost of my injury. The levy I paid might not have been enough by itself to pay for my injury - but not everyone paying the earners’ levy is going to get injured. By paying my levy, I’ve effectively insured myself against the possibility that I’m one of the earners that happen to get injured.

Under the pay-as-you-go model, it’s quite different. The levies collected this year will fund any costs relating to my injury paid this year. The levies collected this year will also be funding any money paid this year in relation to injuries suffered last year, or any year before that. If I need surgery in 20 years time, it’ll be the levy-payers in the year 2035 that foot the bill – which may or may not include me (perhaps my injury was severe and I’m no longer working, perhaps I retired early.)

Would that be fair? To answer that question, you need to have a conception of a fair method for distributing the cost of the ACC scheme across the community. We can put two different conceptions of our ACC scheme at opposite ends of the spectrum: community insurance and compulsory insurance. 

Community insurance or compulsory insurance?

Community insurance: the essence of the ACC scheme is that the community takes responsibility for those members of our community who are injured. The cost of doing so should be spread broadly across the community, and absorbed primarily by the sectors of the community that are in a better position to absorb that cost.

Compulsory insurance: the essence of the ACC scheme is that we are all required to insure against injury by accident. The funding of the ACC scheme should therefore reflect the basic principles of insurance funding: levies should vary by benefit and by risk. The greater the benefits an individual will receive if injured, the higher levy they should pay and the greater the risk taken by an individual or employer, the greater the levy they should pay.

Broadly speaking, the left tend to see ACC as community insurance while the right tend to see ACC as compulsory insurance. This fits with the left’s tendency to understand people in terms of the groups they belong to in contrast to the right’s tendency to understand people as individuals.

In terms of funding models, fully funded fits best with compulsory insurance: it’s unfair for me to have to pay for other people’s accidents in the past, just as it’s unfair for me to expect future levy-payers to pay for any injuries I suffer in the present.

Pay-as-you-go fits best with community insurance. As a member of the community currently in a position to help fund the ACC scheme, I should do so, thereby helping fund injuries suffered in the past by those who are no longer funding the scheme themselves.

The current funding of the ACC scheme sits somewhere on the spectrum between community insurance and compulsory insurance. The scheme uses the fully funded model, and levies do reflect benefits and risks to some extent. For example, higher earners pay more into the Earners’ Account which reflects that they will receive higher earnings-based compensation if injured. However, some aspects of the funding spread costs more broadly. For example, employers pay levies based on the risk of their industry group rather than their individual accident record. And, the Non-Earners’ Account, which would be the account paying for my gardening injury if I was not employed, is funded through general taxation.

Recent changes to the funding of the Motor Vehicle Account (which pays for injuries suffered as a result of motor vehicles on public roads) shift the scheme further towards the compulsory insurance side of the spectrum. From July this year, the ACC levy component of vehicle registration fees takes into account the risk classification of the vehicle. This reflects a compulsory insurance philosophy (people with safer cars should pay less because they are less likely to suffer an injury) rather than a community insurance philosophy. Indeed, a community insurance-based scheme might observe that the owners of safer vehicles are probably in a better position to absorb the costs of the ACC scheme, and ask more of them rather than less. 

It’s about fairness

The point I hope I’ve made is that the question of whether ACC should be funded on a pay-as-you-go or fully-funded basis is not primarily about competitive provision of the scheme. Fundamentally, it’s about which system is fairer – and there’s a political competition between different conceptions of a fair response to the problem of injury.

In my view, if Labour wants to sell the voting public the idea of pay-as-you-go funding, the way to do this is to sell the idea of the ACC scheme as community insurance – not by references to competition. That might be difficult, for several reasons. First of all, it might be difficult to persuade voters who are soon to pay lower vehicle registration costs to fund a larger slice of the ACC funding pie.

Second, there is an intergenerational fairness issue here (should I expect future levy-payers to pay for the cost of my injuries?) that invites comparison to the thorny issue of universal superannuation. The dual pressures of an ageing population and the introduction of effective but expensive new treatments potentially reduce the levy-paying population in the future while simultaneously increasing the cost of the scheme.

Finally, there’s what is often the elephant in the room when it comes to discussions about ACC: the injustice of treating illness and injury differently. The distinction is perhaps easier to justify for the right. If ACC is compulsory accident insurance scheme then the reason ACC doesn’t extend to illness is that that’s not what the levies we pay cover, and anyone who wants illness insurance should pay for it. However, if ACC is about the community taking care of our own it’s rather difficult to explain the disparate treatment of victims of injury and illness.

One final note – it is arguable that the simple picture of levy-payers paying their levies and funding the scheme that underpins the idea of compulsory insurance is flawed. Individual people and employers exist in a complex web of relationships and interactions, and it is artificial to ignore this. The Woodhouse Report argued that:

[T]here should be a general pooling of all the risks of accidents to workers [instead of employer or industry-specific levy rates]. Just as the steam power station relies upon the work of the coal miner so do all industries depend directly upon one another.

In addition, those interactions allow for cost-shifting. For example, a logger that pays a high levy due to high risk can, to some extent, shift that cost to the purchasers of their products who can, in turn, shift it to consumers. So, the setting of levies might be the beginning of the story in terms of the funding of ACC, but it is not necessarily the end.