Choosing a Discount Rate for Future Losses in Wrongful Death and Injury Cases

Abstract

Choosing a Discount Rate for Future Losses in Wrongful Death and Injury Cases There is an on-going discussion of the appropriate discount rate in determining the present value of future losses in wrongful death and injury cases (Bryan and Linke, 1988 and Lane and Glennon, 1988). But the net discount rate (roughly, interest less expected loss growth) is only one element of the calculation to reduce future losses to present value. appropriate discount rate depends upon what is being discounted. For example, the typical `humped' income stream clearly demonstrates that earnings can be expected to increase with age for a significant portion of the life cycle. (See Miller, 1965 and Levy, 1988.) Using such an age-income distribution as the earnings stream to be discounted in a wrongful death or injury case, a discount rate which incorporated a full measure of historic productivity growth would be too low, leading to an estimate of lost earnings that is too high. A simple graphic may clarify this point. It is analogous to the Bryan and Linke (1988) [B-L] figure based on earnings reports for 1978 and 1979. However it shows a wider period: from 1969 to 1987. Unlike the B-L figure, the data discussed here have been transformed to constant 1982-84 prices by dividing 1969 and 1987 earnings by the Consumer Price Index for those years. figure Distribution of Male Earnings by Age is based on the most recent annual Consumer Population Report [CPR] (U.S. Department of Commerce, 1989b) and a 1970 census Subject Report (U.S. Department of Commerce, 1973). age brackets differ in these two publications. For 1987 they are for ages 18-24, 25-34, 35-44, 45-54, 55-64, and 65 and over. A five-year interval is also available for the intermediate age groups. However, because the 1969 data set has even broader age brackets (25-34, 35-54, and 55-64), these were not employed. Note that in real terms the 1987 age-earnings distribution is generally below that for 1969. After adjusting for inflation, men in 1987 are earning less in most age brackets from 25 through 64 than they were in 1969. It is possible that the lack of information about the youngest and oldest workers and the broad age bracket (35-54) in the 1969 data set has led to a distortion in the comparison of 1969 earnings to those in 1987. Data from several alternative sources imply that this is not so. First, 1969 data were gathered from a census Subject Report rather than a CPR comparable to the 1987 data source because earlier CPRs reported only income, not earnings. (In death and injury cases one is normally concerned with potential earnings rather than income, since the difference, unearned income, is likely to be unaffected by the wrongful act.) But when real income for 1969 (U.S. Department of Commerce, 1970) and 1987 are compared, the results are similar to those presented here. 1969 income data have age groupings like those in 1987. Recall that dissimilar age groupings were a concern with the earnings data. Thus, the finding of similar results for income and earnings reinforces the earlier observation. Second, data on average earnings of year-round full-time workers confirm these results. According to the U.S. Department of Commerce (1988, p. 5), The 1987 median earnings of men, $26,010, was at a level comparable to that of 1970 in real terms, and below the peak earnings figure of $28,610 in 1973. Finally, monthly data on real wages indicate that they have decreased on average for more than a decade and a half (U. …