The Erroneous Selection of the Full Social Security Age as the Terminal Date for Lost Earnings Projections

Publication: Journal of Business Valuation and Economic Loss Analysis, Volume 16, Issue 1, July 2021

It seems to be increasingly common that some personal injury lost earnings projections are being extended by some experts to the “Normal Retirement Age” (NRA) – the age where workers can receive full, unreduced Social Security benefits. The selection of this age often implies a rejection of the worklife expectancy. However, statistics on claiming behavior of Social Security benefit recipients show that only a minority of recipients wait until the NRA to claim benefits. We use actual claiming behavior and the respective ages to show the use of the NRA for determining the ending date of lost earnings projections, instead of the well-researched worklife expectancy, results in exaggerated and speculative lost earnings damages.

Incorporating the Costs of Generic Drugs in the Valuation of Life Care Plans

Publication: Journal of Legal Economics, Volume 27, Issue 1, July 2021

This article addresses the issue of generic substitution for branded drugs included in life care plans. Such possible substitution is often usually ignored by life care planners and economists who value life care plans. This can be problematic for economists as the factors affecting generic substitution and its impact on health care costs has been a topic that has been extensively researched by health economists. The evolution of how drug regulation has evolved over time, allowing, and sometimes mandating, such substitution is reviewed. That review also covers the history of the generic drug approval process as that is relevant to the current state of generic drug approval. This has allowed generic manufacturers to thrive and consumers to enjoy the benefit  of  lower prices for prescription drugs. Relevant research on the effective market exclusivity period for branded drugs can be used by experts to determine the length of the period for which branded, monopoly prices could apply. Such adjustments, along with discounted prices of generic vis-à-vis branded drugs, could be used by economic experts when valuing the medication components of life care plans. Experts making such adjustments will show a lower cost of care. However, economists should be cautious applying such adjustments without indicating certain necessary caveats.

The Choice of Medical Care Price Index: Implications for Life Care Plan Valuations

Publication: Journal of Forensic Economics, Volume 29, Issue 1, September 2020
Co-author: Viviane Luporini

This study examines the importance of using appropriate inflation measures in the estimation of a life care plan value. Using data from 1989 through 2018, we compare medical inflation rates measured by the Consumer Price Index Medical (CPI Medical) and the Personal Consumption Expenditures Health (PCE Health) price index while discussing the reasons why the indices differ. We also explain why certain policymakers favor the Personal Consumption Expenditure (PCE) over the Consumer Price Index (CPI). In demonstrating how the value of life care plans can differ based upon the use of either of these indices we applied 10-year historical arithmetic averages of both indices to a large hypothetical life care plan. Our calculations indicate that using the CPI versus the PCE results in a difference that is 7.5 times the initial value of the plan, after accumulation of nominal annual values that are undiscounted to present value. We also show how the difference between using the CPI Medical versus the PCE Health increases over time, implying that using one price index or the other will have a greater impact on life care plan values the longer the projection period. Our analysis shows that experts should consider the use of PCE indices when valuing life care plans.

The Accuracy of the Social Security Wage and Other Economic Projections

Publication: Journal of Legal Economics, Volume 23, Issue 1, October 2016
Co-author: Charles L. Baum, II

The Social Security Administration’s (SSA) Board of Trustees regularly gauges the actuarial status of its retirement, disability, and medical programs in an annual report. Some forensic economists use the projections provided in these reports when calculating the present value of earnings growth and costs in economic damages analyses in wrongful death, personal injury, and employment termination cases. They may be incorporated into net discount rate assumptions or used to calculate nominal growth. Thus, the extent to which the SSA’s wage growth projections are accurate has implications for projections made by forensic economists who use the Trustees’ Report. In this paper, we examine the accuracy of the SSA’s wage growth projections and compare them with projections made using other methodologies. Our results show that the Trustees’ intermediate projections have overestimated actual wage growth—as have some of the other methodologies. When the Social Security wage inflation forecasts are applied to economic loss measures in personal injury litigation, they lead to overestimates. However, the Trustees’ interest rate projections have also been overestimated during the period we examine. The result is that net discount rates based on SSA wage growth and interest rate projections are not consistently over- or under-estimated.

📄 What Litigators and Insurers Need to Know About the Increases in U.S. Interest Rates

Publication: Litigation Economics White Paper Series, Winter 2023

One of the leading topics in financial markets has been the recent pattern of increased interest rates. Many expect these increases to result in a recession. Indeed, the somewhat Inverted Treasury Yield Curve is a semi-accurate predictor, or at least often a precursor of many recessions. The recent Federal Reserve policies are designed to slow down inflation. This is a result of a blunder by the Fed, and its chairman, Jerome Powell, a non-economist with no graduate training at all in the field of economics, who kept pouring in stimulus into the economy and the real estate market even though the economy was red hot. The Fed kept rates close to zero and allowed the money supply to increase by the most it has in half a century. When it started to raise rates, it did so feebly and then quickly reversed course when the market responded negatively. Then time passed, the Ukraine war started, and major supply disruptions occurred. This, combined with the over-the-top Biden fiscal stimulus, left the nation’s economy in a very high-inflation environment. Then, the Powell-led Fed tried to play catch up for its incompetence, and the U.S. economy and holders of 401(k) and retirement plans are paying the price.

Read the full paper to understand how recent interest rate hikes impact damages calculations and settlement values.

📄 What Litigators and Insurers Need to Know About the Expected Increases in Interest Rates

Publication: Litigation Economics White Paper Series, Spring 2022

One of the leading topics in financial markets has been the expected increases in interest rates. This has led to concerns that a recession may follow, which, in turn, has given the stock market jitters. This is because the Federal Reserve’s anti-inflation policies involving interest rate increases have played a role in some prior recessions.

The expected rise in interest rates has very important ramifications for attorneys and insurers in settlement negotiations. Higher market rates affect the discount rates being used to bring projected loss amounts to present value. It is useful for litigators to have a basic understanding of the process and how higher rates should lead to lower present values of damages that may be paid in lawsuits. The present value of a settlement amount agreed to in a very low interest rate environment may be significantly higher than in the new, higher interest rate environment that is coming soon.

Explore how changing interest rate environments affect present value of damages in personal injury and business cases.

📄 Ten Mistakes Plaintiff’s Economists Make in Measuring Lost Earnings in Personal Injury Cases

Publication: Litigation Economics White Paper Series, Winter 2017

Some economists project losses for arbitrary and unsupported periods. However, the standard in the economics profession is the worklife expectancy. This is a statistical construct based upon labor market data, which vary by a worker’s age, sex, and educational level. For many workers, especially younger workers, this is less than age 65, and most times it is less than other arbitrary end dates, such as age 70 or even 75. A worklife is not the same as a planned retirement date. Defendants need to consult their economist, who will show them what the various worklife expectancy tables indicate and which tables are accepted in the profession and which are not.

Attorneys should be aware of tables that some plaintiffs may try to utilize – so called disabled worklife tables. These tables are not accepted by the economics profession and tend to produce exaggerated and unreliable loss measures.

Learn how unsupported projections and misuse of worklife tables can lead to inflated damages claims — and how to counter them.

📄 Ten Mistakes Damages Experts Make in Lost Profits Valuation

Publication: Litigation Economics White Paper Series, 2017

Failure to Analyze the Relevant Economy. Economic conditions are constantly changing. Sales and profit levels that a plaintiff may have enjoyed in a strong economy, such as the years 2004-2007, may not be as relevant in a weak economy, such as during the 18 month Great Recession that occurred starting in January 2008 and the weak recovery the followed. Taking sales levels from a period of robust economic and industry growth and projecting them into a very weak period may result in an exaggerated projection.

Of course, each situation is different and brings with it its own special circumstances.

📄 Ten Mistakes Defendants Make in the Damages Part of Their Personal Injury Cases: An Economist’s Perspective

This usually means ignoring the damages aspects of cases. Unfortunately, this mistake is extremely common. In the world of insurance defense work, cost containment is greatly emphasized. Defense attorneys are regularly asked to accomplish more but bill less. This often results in high case loads and limited time to invest in each case. One response to such pressures is to focus mainly on liability, with the idea being that if the defense prevails on liability, there is no reason to be concerned about damages. On the other hand, if the defense does not prevail on liability and has not properly prepared the damage aspects of their case, the results can be disastrous.

📄 The Economics of Punitive Damages

Punitive damages is a controversial topic in the legal profession and the field of economics. This paper explores the economics of punitive damages as they relate to corporate defendants. The economic difference between large corporations and other potential defendants, such as individuals or smaller closely held companies, causes the effects of a punitive award to be different. In certain circumstances, these differences raise significant questions about the appropriateness of punitive damages when imposed on large corporations.

📄 Ten Mistakes Plaintiff’s Economists Make in Measuring Lost Earnings in Personal Injury Cases

Some economists project losses for arbitrary and unsupported time periods. However, the standard in the economics profession is the worklife expectancy. This is a statistical construct based upon labor market data, which vary by a worker’s age, sex, and educational level. For many workers, especially younger workers, this is less than age 65, and most times it is less than other arbitrary end dates, such as 70 or even 75. A worklife is not the same as a planned retirement date. Defendants need to consult their economist, who will show them what the various worklife expectancy tables indicate and which tables are accepted in the profession and which are not.

📄 Ten Concepts Defendants in Punitive Damages Cases Need To Be Aware Of

Publication: Litigation Economics White Paper Series, 2004

Economic or financial experts can be quite helpful in interpreting financial information for a jury as well as in helping a jury understand the extent to which the goals of punitive damages may be served. The economic or financial expert may be able to help the jury understand how a financial penalty will affect the corporation and who may be expected to bear the brunt of the penalty. Such experts may be able to assist juries by providing them with information and knowledge that they might not otherwise be aware of. Therefore, the role of the economic and financial expert may be to provide information and guidance that a jury might find helpful in evaluating complex economic and financial issues, as well as giving them a better understanding of why simplistic presentations made by a plaintiff’s attorney or expert may be flawed or erroneous.