Damage experts often disagree regarding the appropriate discount rate in a lost earnings claim, a factor that can make a meaningful difference in the economic damages conclusion. A recent article, “An Interactive Settlement Tool Streamlines Negotiations in Lost Earnings Matters“, demonstrates the significance of the applied rate on damages. A low discount rate benefits the plaintiff as it results in a higher ultimate damages result (all else equal). Notably, certain commonly applied methods actually provide a windfall to plaintiffs.

Every few years, the Journal of Forensic Economics (JFE) publishes the results of its survey of National Association of Forensic Economics (NAFE) members regarding their methods, estimates, and perspectives on lost earnings calculations. One of the areas of inquiry is present value discount rates. In the most recent JFE survey, published in early 2018, the following question is posed:

When discounting, I generally use (select one):

A net discount rate 30.7%
Separate wage growth and interest rates 65.6%
Other (please elaborate) 3.8%

 

Although a minority of the surveyed practitioners are using it, a net discount rate generally provides a 1% discount rate in recent years for future damages, as demonstrated in the following related question and response:

“Assume the judge instructs that you MUST estimate a net discount rate (and use a fixed rate) in your forecast of total compensation for a 30-year period. The net discount rate may be based upon either nominal or real values. Please note that for this question the net discount rate is (approximately) equal to the interest rate minus the general rate of increase in total compensation for all U.S. workers. Complete the following sentence: “I would use _____% per year as the average net discount rate over 30 future years.”

Results of the 2003, 2009, 2012, 2015, and 2017 (current survey), are provided in the following table:

2003

2009

2012

2015

2017

Mean

1.89%

1.76%

1.61%

1.36%

0.98%

Median

2.00%

1.75%

1.50%

1.25%

1.00%

 

For the most current survey, the mean and median was 0.98% and 1.00% respectively. The minimum value was -3.60% and the maximum value was 4.00%. Approximately 20% of respondents thought the net discount rate was 0% or less (recall that the total offset rule dictates a net discount rate of 0% may be mandated by jurisdiction). The table above suggests a consistent declining trend in the net discount rate since at least 2003. Much of this decline is likely associated with the decline in U.S. government securities rates since the 2009 recession, as many damage experts simply apply those rates in lost earnings matters.

Approximately two-thirds of respondent use something other than a net discount rate for a thirty- year future damage period. However, additional survey responses do not provide a dominant answer as to which interest rates are applied for present value:

When determining the interest rate for present value purposes over 30 years, I generally use (select one):

The current interest rate on a particular financial instrument 16.5%<