Economic Damages: Method

Lost Earnings, Discounting Methods and the Damages Schedule

What the tool computes

Economic damages in a personal-injury, wrongful-death or wrongful-termination case are the earnings and other economic contributions the injured person (or the survivors) would have received but for the event, reduced to a single sum at the valuation date, usually the trial or settlement date. The tool builds the standard forensic-economic schedule: year by year from the date of the event, the earnings that would have been made, the fringe benefits that came with them, the deductions the forum requires (income tax, the decedent's own consumption in a death case, the earnings the person can still make), the loss of household services and the cost of a life-care plan; then it splits the schedule at the valuation date into past losses, which are summed at their nominal amounts and carry prejudgment interest, and future losses, which are discounted to present value. Money is a plain number in one currency; the growth and discount rates are entered in percent per year.

Time line and conventions

Schedule year k runs from the (k − 1)th to the kth anniversary of the injury date, so year 1 is the first year after the event; the "year" column shows the calendar year in which the schedule year begins, the "age" column the age at its start. The valuation date sits T_v years after the injury, counted as whole anniversary years plus the fraction of the next anniversary year that has elapsed, so a loss period of exactly two years is 2.000 whatever the leap days. Each annual amount is treated as flowing uniformly through its year. The part of a year before T_v is a past loss; it earns prejudgment interest from the mid-point of that part to the valuation date. The part after T_v is a future loss; it is discounted from the mid-point of that part to the valuation date, DF = (1 + r)^{−(t − T_v)}, which is the usual mid-year convention for earnings received through the year. A component whose duration is not a whole number of years (a 22.5-year work life, a life expectancy of 37.3 years) is prorated in its last year.

Growth is applied in annual steps from the injury date: year k of a component carries (1 + g)^k−1 times its first-year amount. Residual earnings that start after a delay of t_m years begin at the entered level in the first year they apply and grow from there; a life-care item's cost is at the level of its start year.

The earnings loss

• Gross earnings E₀(1 + g)^k−1 through the work-life expectancy, the base being the annual earnings at the date of the event (or the earnings capacity that the event destroyed).
• Income tax. Federal law (Norfolk & Western v. Liepelt, 1980; Pfeifer, 1983) measures the loss after income tax; many state courts award pre-tax earnings. The entered effective rate is deducted from gross and from residual earnings; fringe benefits are not taxed.
• Fringe benefits lost with the job (employer-paid health insurance, retirement contributions, legally required benefits) at the entered share of gross earnings. They are not reduced by tax or by personal consumption, since the health and pension benefits of a household are largely family benefits.
• Personal consumption, deducted only in a death case, as the entered share of after-tax earnings: the survivors lose what the decedent would have contributed, not what the decedent would have spent on himself or herself. Consumption shares come from the Patton–Nelson tables by household size and income, which are copyrighted and must be entered.
• Residual (mitigation) earnings: the post-injury earning capacity, or the earnings of the replacement job after a termination, credited against the loss (after tax) from the end of the start delay through the end of the work life. The credit in any year is limited to the loss of that year, so the net loss is never negative; the output says when that limit applies.

The work-life expectancy is the expected number of years of labour-force activity remaining. The standard source is the Markov-process tables of Skoog, Ciecka and Krueger (Journal of Forensic Economics, 2011 and later updates) by age, sex, education and current activity; they are copyrighted and are not reproduced, so the value is entered. A fixed retirement age is the simpler alternative. The schedule is not weighted by survival probabilities (the "life-expectancy method"); the output prints the life-table probability of surviving to the end of the work life and of the life expectancy so the analyst can judge the difference. A survival-weighted (LPE) schedule is not offered.

Life expectancy

Household services and a life-care plan run to the end of life. The tool reads the remaining life expectancy e(x) from the United States Life Tables, 2020 of the National Center for Health Statistics (National Vital Statistics Reports Vol. 71 No. 1, Table 2 for males and Table 3 for females, ages 0 to 100 and over), interpolating linearly between the printed integer ages; the tables are public domain and are filed with the tool. The Social Security Administration's period life table for the same year (2023 Trustees Report) differs from it by about 0.1 year at birth; the SSA site refused automated download at the time of writing, so an entered life expectancy field is provided for that table or for any other (a race-specific, state or rated table). The same NCHS table gives the survival probabilities l(x + n)/l(x) quoted in the output.

Household services and life-care items

Lost household services are valued at replacement cost: hours per week (from time-use surveys by household type, such as the American Time Use Survey tabulations) times an hourly value times 52 weeks, growing at its own rate, for the entered number of years or, when blank, the life expectancy. A life-care plan or medical cost schedule is entered one item per line as "item, annual cost, growth %, start year, end year", the years counted from the injury (year 1 first); the end year may be a number, LE (the life expectancy) or WLE (the work life). Replacement items bought every few years are entered at their annual equivalent. Items are limited to the life expectancy.

Discounting methods

Future losses are reduced to present value because a sum awarded now can be invested. In Jones & Laughlin Steel Corp. v. Pfeifer (1983) the Supreme Court reviewed the methods and left the choice to the trier of fact, asking only that the growth and discount assumptions be consistent with each other:

• Nominal method. Earnings grow at the nominal rate g (price inflation plus real wage growth, or the person's own age-earnings profile) and the stream is discounted at a nominal market rate r, the yield of safe investments of matching maturity. The two rates act together as a net discount rate r_n = (1 + r)/(1 + g) − 1, which the output prints; it is the real interest rate when g is the growth of a wage index. Pfeifer discusses real rates of about 1 to 3 %.
• Total offset. Pennsylvania (Kaczkowski v. Bolubasz, 1980) and Alaska (Beaulieu v. Elliott, 1967) hold that future wage growth and the discount rate offset each other, so future losses are awarded at their value at the valuation date without growth or discounting. The tool implements this by setting every growth rate equal to the discount rate, which makes each future year worth its annual loss at the valuation date; past years are grown at the same rate. The entered growth rates are not used.
• Net discount rate. The schedule is kept in valuation-date (real) terms, with no growth, and discounted at the entered net rate; this is the "below-market discount rate" method Pfeifer describes, and it gives the nominal method's result when r_n = (1 + r)/(1 + g) − 1 and the flows sit at the same points in time.

Under the nominal method, when the work life and the valuation time fall on whole years, the output checks the future gross earnings against the closed form of the growing (geometric-gradient) annuity, PV = C₁ (1 + r)^½ [1 − ((1 + g)/(1 + r))ⁿ]/(r − g), with C₁ the first future year's earnings and the factor (1 + r)^½ moving the formula's end-of-year payments to mid-year (Blank and Tarquin, Engineering Economy, geometric gradient series); the two values agree to the cent.

Prejudgment interest

Past losses are awarded at their nominal amounts plus, where the forum allows, interest from the time of each loss to the valuation date, at the statutory or a market rate, simple or compounded annually as the statute provides. The tool applies the rate from the mid-point of each past period; a loss in the first year of a two-year past period earns 1.5 years of interest, a loss in the second year 0.5 year. Choose "None" where the forum awards no prejudgment interest or sets it after the verdict.

Reading the results

The earnings schedule shows, for every year of the work life, the gross earnings, the deductions and additions, the net loss, its past and future parts, the interest on the past part, the discount factor of the future part and the value at the valuation date. A second table does the same for household services and each life-care item. The totals table gives each component's past nominal amount, prejudgment interest, future nominal amount, future present value and value at the valuation date; the total of the last column is the damages figure. The sensitivity table moves the discount rate and every growth rate by one percentage point each way (the net rate alone under the net-discount-rate method); the spread shows how much of the figure rests on the rate assumptions. Figure 1 accumulates the value year by year and marks the valuation date; Figure 2 compares each year's nominal loss with its value at the valuation date.

Limits

Not modelled: survival-weighted (LPE) schedules, age-earnings profiles other than a constant growth rate, step changes in earnings (promotions, a known retirement date different from the work-life end), unemployment and participation adjustments other than through the entered work-life figure, taxes on the award's investment income, hedonic damages, and the valuation of a business or of lost profits. Worklife tables, consumption tables and the effective tax rate are inputs that the analyst documents from their sources.

Default case

A 40-year-old man injured on 1 January 2024, valued on 1 January 2026 (two past years): earnings 60,000 a year growing 3 %, fringe benefits 25 %, no tax, no consumption deduction, no residual earnings, a 22-year work life (to age 62), life expectancy 37.0 years from the NCHS 2020 male table, household services 10 hours a week at 20 an hour growing 3 % for the life expectancy, three illustrative life-care items, a 5 % discount rate and 5 % simple prejudgment interest. Value at the valuation date 1,874,999.71: past losses 183,930.00, interest 9,128.25, future losses 3,021,146.98 nominal and 1,681,941.46 discounted; the future gross earnings of 1,041,318.02 equal the closed form; the implied net discount rate is 1.94 %. An independent numpy schedule of the case is filed with the references and reproduces every total.