N002050
Saturday, January 19, 2002 12:57 PM
Calculation of Loss
I have reviewed the memo sent by of the Feinberg
Group titled "Explanation of Process for Computing Presumed Economic
Loss." This memo makes certain changes to the initial set of tables
provided by Mr. Feinberg. In particular, it now uses the much more
appropriate and recent worklife tables prepared by Dr. James Ciecka
incorporating data for the workforce from 1997-1998. However, rather than
use the Ciecka data that are separated for males and females, Mr. Feinberg
has taken an average worklife for men and women and intends to use that
for both sexes. That is not the best use of the data, which should be
used to prepare two sets of loss tables; one for males and one for
females. If a unisex table is going to be used, there is one further
correction that needs to be made to calculate an average worklife table
combining both sexes. A simple average assumes that there is an equal
number of males and females in the group, and this is not true. To
correctly create an average unisex worklife, it must be a weighted average
based on the weights of males and females in the workforce. This
information is readily available from the Bureau of Census in their annual
report in the P20 series. Specifically, the report that should be used is
not the most recent, but the one that corresponds in time to the period
used by Dr. Ciecka in developing the worklife tables, namely, the 1998
data. The report I refer to is P20-513, "Educational Attainment in the
United States, March, 1998, Table 6, "Educational Attainment of Persons 16
Years Old and Older, by Labor Force Status, Age, Sex, Race and Hispanic
Origin: March, 1998." This entire document is available on the Census web
site and it contains the numbers of male and female workers at each age
used in the Feinberg tables. Failure to use a weighted average will under
compensate males, whose worklife is statistically longer than that of
females, yet males comprise a larger proportion of the workforce. The
only advantage to the Fund of using a non-weighted average is to reduce
the total payout from the Fund. I do not believe this is the intent or
purpose of the Fund.
The second point is that the net discount rates (NDRs) have been
incorrectly calculated. Reference to any standard finance or business
statistics text book will explain that the NDR is not calculated by use of
simple subtraction, as was done by the persons who prepared the loss
tables for Mr. Feinberg. In the tables now proposed, there are three NDRs
based on age of the decedent. These have been calculated by subtracting
the wage growth rate (G) from the discount rate (D) to derive the NDRs as
follows:
Age 30 and younger: 5.13% - 6.60% = -1.47% NDR
Age 31 through 50: 5.13% - 5.10% = 0.03% NDR
Age 51 and over: 5.13% - 4.20% = 0.93% NDR
The correct procedure is as follows.
D = Discount rate
G = Growth rate in wages
NDR = Net Discount Rate
D and G are entered as decimal values. For instance, 5.13% is entered as
.0513.
NDR = ((1+D) / (1+G) - 1) x 100
Using this procedure, the corrected NDR's are, respectively, -1.38%,
.0285%, and .893%.
The lingering questions are: 1) Why were the earnings histories of civil
service personnel and military personnel used as a proxy for earnings
growth in private industry? It certainly cannot be for a lack of data as
there is a plethora of data available for the civilian private workforce
sector. 2) Why is it assumed that a person working full time provides
absolutely zero value in household services? This is totally unrealistic
in real life and is a routinely included element of damages in civil
cases, both injury and death.
My last point has to do with collateral sources. In civil litigation,
life insurance is considered a collateral source and not used as a
mitigating offset to the loss. Repeatedly, appeal courts have ruled that
the defendant cannot benefit from the foresight and provisions made by a
decedent to protect his heirs financially. I fear that by using life
insurance proceeds as a mitigating offset the Fund will reap the result it
is specifically trying to avoid: the filing of individual lawsuits in
civil court. Those heirs who were the beneficiaries of substantial life
insurance proceeds will have no incentive to apply through the Fund, and
will be driven to civil litigation for redress of their losses. This will
not benefit the airlines nor the airports nor the security firms at those
airports.
My qualification for offering these comments is 29 years experience as a
forensic economist with over 5,000 cases evaluated, equally divided
between plaintiff and defendant. I have a Ph.D. in Finance, am the author
of now in its revision, .
(Please note that I am not the spokesperson for NAFE.)
Individual Comment
San Diego, CA