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 guarantee.
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 was:
- 4.8 per cent of wages (Statement No 5);
- 6.9 per cent of wages (blue Government pamphlet, undated);
- 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, 1986, said:
'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 avoided.
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 of wages.
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 beyond repair.
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.