A Solution to Problems Arising from Inflation When Determining Damages

Abstract

Inflation has been of great concern to most Americans in recent years. Inflation and the resultant rapid increases in earnings have also posed specific problems and concerns to economists and actuaries who are involved in computing economic losses in personal injury and death suits. For settlement purposes, economists project future earnings losses and then discount them to present value. Inflation has made it more difficult for economists to forecast future earning losses accurately; unless future earnings are properly projected, injured parties may not receive due compensation to which they are entitled by law. Actuaries seem to be concerned that inflation not only leads to higher future earnings, but that these inflated higher earnings result in settlement payments in current hard dollars for future soft or deflated dollars.' The objective of this paper is to analyze the effects of inflation on the present value of future earnings in light of legal constraints and economic findings and to suggest an approach which mitigates the problem that inflation poses to economists and actuaries who are involved in computing economic losses.