In Search of the Magic Pudding
The Problems of Workcare
In June 1985, at a public meeting chaired by Hugh Morgan,
I described WorkCare as 'a hollow sham designed to
suck employers in' . I have since spoken to many employers
who admit that they felt that they had no option but
to be sucked in; after all, everyone likes a cost reduction,
especially if it is offered in the form of a five-year
What you are going to hear from me today is the story
of how employers were deceived and what the consequences
must be when that five-year period is over if no changes
of substance are made.
Sir Charles Court, giving the Walter Scott Rotary
Lecture for 1985 on the subject 'Australia and the
Challenge of Change', addressed the subject of the
quality of public information on key issues. He said:
'The potential for misinformation is huge, and some
politicians and pressure groups take advantage of it'.
Indeed they do.
WorkCare had its origins in 1983 with the Cooney Enquiry
which contained the first piece of mis-information.
Table 1.16 of the Enquiry's Report was pure fantasy,
stating that only 52 cents of the premium dollar paid
by employers went to the worker. This table was sourced
to statistics that did not even exist. I challenged
this statement and produced evidence of its falsehood
when I published in The Insurance Record for
October/November 1984. The Government did not reply.
However, Premier Cain repeated the figure regularly
in spite of being advised that it was wrong and misleading.
In December 1984, the Government issued Statement
No. 5. Its general validity was challenged by the insurance
industry, particularly the assertion that the cost
of the then Workers Compensation scheme was $1,200m.
Subsequent Government returns showed the actual figure
to be $741,951,389, including the premiums of the State
Insurance Office. Despite the fact that Premier Cain
was also made aware of this, he and his entourage continued
to advise employers that they would save $600m under
the new scheme. On almost the same day in December
1984, the Government released material which stated
that the then cost of the workers' compensation scheme
- 4.8 per cent of wages (Statement No 5);
- 6.9 per cent of wages (blue Government pamphlet,
- 7.4 per cent of wages (advertisement in Financial
Review, 18 December 1984)
Obviously at least two of these were concocted and
in fact none was anywhere near the mark. The Government
promised to reduce costs from its concocted figures
to just a little under what it really was under the
existing workers' compensation system. Unions were
simultaneously offered increased benefits. Another
bit of misinformation came from the pen of Dr Peter
Sheehan, the Director-General of the Department of
Management and Budget. In a paper presented to the
Institute of Actuaries on 31 January 1985, he claimed
that WorkCare could save $124m in premiums, consisting
of $62m on administration and $72m on stamp duty and
brokerage. Ignoring for the moment that stamp duty
was a Government-imposed tax, the saving of $124m would
have suggested that the Government would run the scheme
for next to nothing. Actual administration costs are
in fact now close to $100m a year.
On 30 June 1985, Premier Cain published 'WorkCare'
and in the Foreword stated that benefits had been increased
by 20 per cent and costs reduced by 50 per cent. He
claimed the scheme would be fully funded over ten years
at an average cost to employers of 2.4 per cent on
wages or even lower. In a speech to the Chamber of
Manufactures, he claimed that the scheme had been costed
by top actuaries (later identified as Cumpston and
Orford) and that any costings by insurance company
actuaries were biased because of their interests.
On 12 July 1985, I reported to the Chamber of Manufactures
that, on the basis of data in my possession, WorkCare
would never be fully funded at a cost of 2.4 per cent
of wages. I noted at that time that no formal actuarial
reports had yet been made available. Reports by Cumpston
and Orford were published later that month, and revealed
certain pertinent conditions to the calculations:
- Cumpston made many assumptions on economic and claim
matters 'supplied by the Department of Management and
Budget', assumptions which were not, in my opinion,
realistic. Cumpston openly stated that: ''The 'best
estimate' for incapacity benefits assumes that only
53 per cent of the persons who now receive redemptions
or common law payments will receive long term incapacity
benefits in the new system. It also assumes an average
degree of incapacity of 60 per cent for these long
term pensions'. Cumpston, a year later, agreed his
assumptions might prove unrealistic.
- Orford stated that he had ignored any future widening
of the benefit definitions which may result in current
accidents, etc. which would not result in a claim pre
WorkCare becoming a claim when the benefit definition
was widened. This was to be a cost which future generations
would bear and this could be significant.
Subsequently, Mr R H Burke, Principal Statistician
and Actuary of the ACC in a report dated 22 September,
'In WorkCare Volume 1 page 19 the target for the average
duration of long term claims is stated to be 7.8 years,
but the derivation of this figure from the work of
the consultants who prepared volumes 2 and 3 is obscure.'
Right from the start, there was a series of misinformation
issued for the purpose of a nationalisation measure;
WorkCare was just like the emperor's new clothes in
the Hans Anderson story, and no doubt you all recall
how that tale ended.
How then has WorkCare fared these past three years?
There is no doubt but that the patient is very sick,
and a few band-aids here and there will not cure him.
Drastic surgery is necessary.
I think I was the only person who published quite
openly all my calculations and logic as to why WorkCare
would fail. It is important to understand some of the
reasoning behind my predictions so that we can try
and get the system back on the rails.
One Government hypothesis, put forward in 1985, was
that by spending $30m a year on rehabilitation, a staggering
turnaround in claims paid would be achieved. I noted
that 80 per cent of claims then were for less than
$600 and that of the remaining 20 per cent many workers
were not necessarily candidates for rehabilitation:
many would refuse the service and some would start
and then drop out. Massive financial expenditure was
not the answer.
Indeed there was, and still is, a shortage of rehabilitation
experts and it would be several years before any real
effect could be achieved. You can't march people up
to a rehabilitation centre and make them rehabilitate.
It needs a lot of arm-twisting; and if there is no
financial incentive, many will prefer to stay at home
rather than work---particularly lowly-paid workers.
In June 1988, the Department of Management and Budget
made a submission to the Victorian Parliamentary Joint
Select Committee of Enquiry into WorkCare, and they
continued to say the same things that the Government
said three years ago about the need for rehabilitation.
Words are fine but they don't save money.
It is my contention that the human factor is most
important. Particularly if benefits were to be reduced
after a certain period to around social security levels,
we might see quite a remarkable degree of recovery
and return to work.
Another Government hypothesis was that the abolition
of Common Law cases and their replacement by weekly
benefit would provide further savings. Again, I questioned
this, and the early experience of WorkCare does not
support this hypothesis. For the last three years prior
to WorkCare, the number of claims was gradually reducing
each year. WorkCare saw a substantial increase in claims---and, moreover, a higher proportion of long-term annuitant-type
claims which cost, on a present-value basis, far more
than Common Law type settlements.
I predicted this claim increase, but in fact the end
result was even worse than I suggested: official actuarial
reports commissioned by WorkCare two years on predicted
total bankruptcy of WorkCare by 1992, or a trebling
of contribution rates if this sorry state was to be
At this point it would be helpful if I explained the
costing process to be used for WorkCare, and why it
is so important to the economy of this State.
Premier Cain and his advisers---and indeed I think
everyone who has considered this problem seem to agree
that schemes of this nature must be fully funded; that
is, the amount paid by employers each year must meet
the whole cost of the claims incurred that year. Claims
of course are paid out over a period of time; we therefore
consider the present value of all those incurred claims
on a discounted basis to allow for investment earnings,
and take this as a percentage of the expected wages
paid during the year to get an aggregate rate. There
are variations about that aggregate for different risk
categories, and there may be further variations about
each risk category to allow for some sort of bonus
and penalty system; but as far as the State is concerned,
we consider the aggregate fully funded rate as a percentage
The Government, as you know, promised 2.4 per cent
of wages for five years.
I initially predicted a cost of 3.5 per cent. However,
as the unions during the passage of the legislation
bargained for more and more benefits and, importantly,
for easier access to benefits, I upgraded the cost
to nearly 5 per cent. After two years the Government
now admits that WorkCare is only 31 per cent funded.
If this trend continues, WorkCare will very shortly
become totally unfunded---that is, enough money will
be collected during each year from employers only to
make the payments during that year whenever the injury
may have occurred. This means in effect that the next
generation pays for this generation's injuries and
for its generosity to the injured.
A consequence of this state of affairs is that new
industries will pay for old, or, if you like, sunrise
industries will pay for sunset ones. This is no way
to attract the sunrise industries which this State
so badly needs.
With the threat of very large increases in contributions
which I doubt employers will be able to afford, or
with the threat of a non-funded system, neither of
which is desirable, the WorkCare system needs major
reform. One cannot wait for the five-year period to
end because by then the damage will be done and possibly
We must of course retain the utmost sympathy for the
genuinely injured worker who suffers demonstrable injury
incurred at his workplace, but we should not be subsidising
non-demonstrable injury or plain work shyness. Clearly
one of two things must be done:
- The Government must break its promises on two counts:
- the aggregate cost of the scheme; and
- the revenue neutrality of bonus and penalties.
- Benefits must be reduced.
Perhaps it would be possible to reduce benefits and
retain an aggregate cost at around 3 per cent of wages,
but this could only be achieved by action now. Benefit
structure changes could involve no benefit for three
weeks. After all, most awards provide for sick pay.
People will be less reluctant to claim sick pay for
minor injury as they know sick pay is cumulative. And
there should be a compulsory cut-off period for benefit---after say 26 weeks where injuries are of the non-demonstrable
nature. Make-up pay should be illegal.
Of course, one must also continue with the pressure
to prevent accidents and rehabilitate people, but the
resources spent here are unlikely to give much economic
gain, even though they may give gains in the field
of compassion. The real gains will only be made by
making it uneconomic for people to claim. To improve
the system further, I would strongly suggest that Victoria
introduce a medical board system as practised in Queensland.
These boards act compassionately and are efficient.
There is no right of appeal nor indeed should there
be. I have observed these boards in action and they
usually give any benefit of doubt in favour of the
worker. The worker may bring along a friend or lawyer
but at his own cost; this also works well and avoids
over-legalising the system.
I commend the continuation of collection of premiums
or levies through the payroll tax system and also the
collection of statistics by a neutral government agency.
I perceive that an insurance system is probably more
likely to be cost-effective because it is not the public
purse which pays; insurers, however, must be properly
licensed and deliver benefits speedily.
Above all, Premier Cain and his advisers must admit
they made a mistake, because to pretend everything
is on track is just yet another piece of misinformation.