The Value of a Minor s Lost Social Security Benefits

Transcription

1 The Value of a Minor s Lost Social Security Benefits Matthew Marlin Professor of Economics Duquesne University Pittsburgh, PA Marlin@duq.edu And Antony Davies Associate Professor of Economics Duquesne University Pittsburgh, PA Antony@antolin-davies.com

2 The Value of a Minor s Lost Social Security Benefits I. Introduction The value of lost Social Security (SS) benefits is often estimated when determining the economic damages involved in a tort involving wrongful injury or death. When President George W. Bush proposed private or personal accounts as a partial or full replacement for participation in the Social Security (SS) program it generated a dialogue over the financial rate of return to program participants. All else the same, the consensus is that the returns are far lower than those available through the use of conservative portfolio of equities or even bonds. It would follow that the inability to participate in the program would result in little or no financial loss. The present analysis estimates the value of lost Social Security retirement benefits for a minor who has not yet entered the workforce and has no earnings history. Although no prior studies have focused exclusively on minors, the current research is consistent with previous studies that conclude that standard forensic analyses (as depicted in Martin, 2007) should lead to the omission of SS as a component of economic loss. Furthermore, the results confirm the previous findings (Roseman and Fort, 1992 and Rodgers 1999) that show the FICA tax method of estimating SS losses by multiplying lost earnings times employer contributions results in estimates that are in no way correlated with the net present value of any losses. The paper is structured as follows. Part II presents the assumptions and research design. Part III presents the estimates of loss for minors under assumptions regarding income and demographic characteristics. The final section presents a summary of the findings. II. Assumptions and Research Design An analysis of lost SS benefits requires a multitude of assumptions: the wages upon which the SS payroll tax is levied, the number of years in the worklife expectancy (WLE), the life expectancy over which benefits will be received, the age at retirement (full retirement age (FRA) or early retirement (ERA). This analysis makes the following assumptions: Annual earnings in 2008 equal the designated Maximum, Average, and Low levels assumed by the Social Security Administration ($101,700, $41,835, and $18,826) Earnings increase at 3.9% per year, the rate assumed in the Intermediate Forecast used by the OASDI Trustees ( 2

3 n is the worklife expectancy (WLE) or number of years, beginning at age 22, that the plaintiff could have been expected to work. The full WLE is assumed to be 35 years (to be discussed further, below). fra is the full retirement age (FRA). It is currently 67 for a worker who was 22 years old in It is assumed the worker would neither opt for reduced early nor augmented delayed benefits. le is life expectancy for a 22 year old as reported by the National Center for Health Statistics (71 for black males, 76 for white males, 77 for black females and 81 for white females) ( SSB fra is the single retirement benefit (Primary Insurance Amount or PIA) at full retirement age as determined by using the Social Security Administration s ANYPIA calculator ( SS contributions equal 5.3% of payroll wages. The SS cost of living adjustment is 2.8% per year (the average over the past 25 years) ( d, the discount rate, is the 5.7% interest rate in the OASDI Trustees Intermediate forecast. All benefit calculations are for a single individual and disability benefits are not considered. Because it would be highly unlikely (when preparing a damages estimate) to assume that a minor will be married and/or disabled when grown, the related issues raised by Durham (1993) can be ignored. The plaintiff was born on July 1, 1986 and begins work in 2008 on his or her 22 nd birthday. The present value of SS benefits is then calculated as: (1) Where contributions and benefits are estimated as: (2) (3) III. Estimating the NPV of Lost SS Benefits The Case of a Minor When estimating the lost value of earnings and/or benefits the analyst must assume a WLE for the individual. The average WLE for a 22 year old female is 31 years and for a 22 year old male it is 36 years (Skoog and Ceicka, 2001). The estimates discussed here use a 3

4 full WLE of 35 years for males and females because the Average Indexed Monthly Earnings (AIME) used to calculate SS benefits uses only 35 years of earnings. Assuming constant wage increases, after 35 years of reported earnings the monthly benefit is essentially constant while FICA taxes continue to be levied. The result is decreasing net benefits for each successive year. Although a WLE of 35 years overstates the estimated WLE of all females by about five years and understates the WLE for all males by about one year, it provides a reasonable working estimate and also generates the maximum value of net benefits in most cases. The above assumptions and equations were used to estimate the present value of the FICA contributions and the NPV of lifetime SS benefits for a minor. It is assumed that the analyst would use the full WLE of 35 years beginning at age 22 and ending with retirement at age 67 (although retirement age and the age at which an individual chooses to begin receiving SS benefits are not necessarily the same, it is assumed for simplicity that they are). The results for different genders and races and different assumed incomes are shown in the top portion of Table 1 (all values are rounded to the nearest $100). Negative values in the Table indicate that the individual would have paid more in FICA taxes than he or she would have received in benefits and that there is no SS loss. Income Category Table 1 NPVs of Social Security Benefits Life Expectancy to Age: FICA Contributions (Black (White (Black (5.3%) Male) Male) Female) 4 81 (White Female) Full WLE Expectancy (Minor) Low $26,700 -$9,800 $8,800 $12,300 $25,100 Average $59,300 -$31,500 -$800 $4,800 $25,900 Maximum $145,100 -$100,300 -$50,900 -$41,800 -$7,900 Three points are worth noting. First, the NPV of the SS benefits is positively related to life expectancy. This is not surprising: a black male (BM) with a life expectancy of 71 years who begins collecting benefits at age 67 will only be collecting benefits for four years. Regardless of income, his gross benefits will be less than his contributions resulting in negative net benefits. In contrast, a white female (WF) with a life expectancy of 81 years will collect benefits for 14 years. Other than for those in the top income class, this is long enough to realize a net benefit. Second, the NPV of benefits is inversely related to income. This again is not surprising since the SS benefit formula is skewed and redistributes benefits from high income to low

5 income wage earners. In all instances a high wage individual will experience a net lifetime loss, and with the exception of the black male, all low wage individuals experience a small, but positive gain. The accompanying Graphs A, B and C (and the accompanying Tables A through C) show how the NPV changes with years of WLE and life expectancy. The highest solid line in each graph is the NPV for a WF and the lowest is that for a BM; the differences in the vertical distances demonstrate the difference in NPV that arises from different life expectancies. The declining solid lines for each year in Graph A indicate that the NPV of benefits for those in the highest income classes will decline as assumed WLE increases and that for any reasonable WLE the NPV will be negative, regardless of life expectancy. For example, the values on Graph A associated with a WLE of 35 years would correspond to the bottom row of Table 1. Graph B (Average Income) shows that the NPV for the long-lived WF increases slightly, peaks at about a 35 year WLE, and then declines after that. The NPV for the BF is marginally positive for the same WLE and the NPVs for males are negative for relevant WLEs. Graph C (Low Income) shows that because of the skewed (redistributional) nature of SS benefits those in each category of the low income group, except the short-lived BM, could be expected to receive a positive net benefit from the SS program. The third and final point is that the present values of the FICA contributions are greater than the net benefits in each case; the only instance where the two are even close is for a low income WF. FICA contributions can be interpreted in two ways, either as the employee contribution to be subtracted from gross SS benefits to arrive at net benefits or as an estimate of the value of lost employer contributions when calculating the loss using the FICA tax method. Viewed from the latter interpretation it is obvious that this method of estimating the loss overstates the actual net loss in each and every instance. For example, a high income BM actually has a net loss of over $100,000 yet the FICA tax method would estimate a positive foregone benefit of over $145,000 over a lifetime, a difference of almost a quarter million dollars. In contrast, a low income WF will actually experience lifetime SS benefits ($25,100) roughly equal to her employer s tax contributions ($26,700). Included in each of the graphs is the estimate of present value of the FICA contributions (5.3%) made by both the employee and the employer (the dashed line). The values on the line are those that an analyst using the FICA Tax Method would use to estimate the value of lost SS benefits. The vertical difference between the FICA Tax line and the lines showing the NPVs represent the difference between the estimates generated using the two different techniques. As is readily apparent, the FICA tax method significantly 5

6 overstates the value of the lost benefits in cases where the projected income is at the maximum or average levels, and the overestimate increases with WLE. The FICA tax method generates an estimate equal to the NPV of losses only when the NPV line intersects the FICA tax line. As is also readily apparent, there is only one instance (a low income white female working about 30 years) that this occurs. If a WLE of 35 years or more from age 22 is assumed, then the FICA tax method will overstate the actual net value of the loss in every instance. DeBrock and Linke (2002) argued that even if the FICA tax method is not an appropriate measure of individual loss, the social good dimension of the FICA programs is valuable to the average worker and should be included in a lost earnings analysis (p. 171). The implication is that the difference between the FICA tax amount and the NPV of benefits represents a form of a public good. If this is indeed the case, then the analysis presented here would imply that the value of this public or social good varies with income, gender, and race: rich black men generate a substantial amount of such social good while poor white women generate very little. IV. Summary In seven of the twelve scenarios shown in Table 1 there is no economic loss experienced by a minor when the viewed over a reasonable WLE. Estimates of future earnings that assume a high wage for anybody, an average wage for males, or a low wage for black males should not include SS losses as part of the damages estimate. If anything, (consistent with Rosenman and Fort) damages should be reduced to account for the gains that will occur because the plaintiff would not have to experience the net loss associated with the lifetime participation in the SS program). In the other scenarios there are economic losses, but these are minimal reaching a maximum of $25,900 for a white female with an average income. (Estimates not shown here using an early retirement age of 62 showed a maximum loss of about $31,300). The above estimates are not intended to provide actual estimates in any personal injury or wrongful death case. Rather they are intended to show that in instances where an analyst is projecting the lost value of SS benefits to a minor there is a minimum of loss. While estimates using different parameters may result in larger losses than estimated here, one should evaluate estimates of lost SS benefits for minor that exceed around $30,000 with a critical eye. This is especially true for Given that the estimated lifetime losses of income and possibly household services for a minor will probably be in the seven figure range, an analyst might or might not be inclined to include an estimate of lost SS benefits. On the one hand purity might oblige the 6

7 analyst to include a $30,000 SS loss on top of a $1,000,000 damage estimate; on the other hand, practicality might lead the analyst to ignore it. However, the results strongly indicate that no preference for purity versus practicality should allow the analyst to estimate losses using the FICA tax method. References DeBrock, Larry and Charles M. Linke, Valuing Employer FICA Contributions in an Analysis of Diminished Earnings Capacity, Journal of Forensic Economics, Vol. 15, No. 2 (2002), pp Durham, Stephen E. The Correct Value of Social Security Contributions in Personal Injury and Wrongful Death Settlements: A Comment, Journal of Forensic Economics, Vol. 6, No. 2 (1993), pp Fractor, David T., Daniel L. McConaughy, and G. Michael Phillips, The Impact of Earnings Loses on Future Social Security Benefits: Much Ado About Nothing? Litigation Economics Digest, Vol.2, No. 2 (1997), pp Martin, Gerald D, Determining Economic Damages (Costa Mesa, California: James Publishing, Inc., 18 th Revision, 2007). Rodgers, James D. Estimating the Loss of Social Security Retirement Benefits. The Earnings Analyst, Vol. 3, No. 1 (2000), pp Robert Rosenman and Rodney Fort, The Correct Value of Social Security Contributions in Personal Injury and Wrongful Death Settlements, Journal of Forensic Economics, Vol. 5, No. 2 (1993), pp Skoog, Gary R. and William E. Ciecka, The Markov (Increment-Decrement) Model of Labor Force Activity: Extended Tables of Central Tendency, Variation, and Probability Intervals. Journal of Legal Economics, Vol. 11, no 1, (2001), pp

8 $200,000 Graph A Net PV of Benefits Maximum Income, FRA $150,000 $100,000 $50,000 $0 BM WM BF WF Fica Tax -$50,000 -$100,000 -$150, Worklife Expectancy 8

9 $80,000 Graph B Net PV of Benefits Average income, FRA $60,000 $40,000 $20,000 $0 BM WM BF WF FICA Tax -$20,000 -$40,000 -$60, Worklife Expectancy 9

10 $35,000 Graph C Net PV of Benefits Low Income, FRA $30,000 $25,000 $20,000 $15,000 $10,000 $5,000 $0 BM WM BF WF FICA Tax -$5,000 -$10,000 -$15, Worklife Expectancy 10

11 Table A PV of Contributions and Benefits for Maximum Wage Earner (FRA at 67) WLE Age 22 PV of Contributions Net PV of Benefits After Working WLE Years If the Life Expectancy is: 71 Years 76 Years 77 Years 81 Years 10 $50,563 -$28,758 -$4,701 -$278 $16, $59,730 -$35,141 -$8,013 -$3,026 $15, $68,579 -$41,203 -$11,000 -$5,447 $15, $77,111 -$46,955 -$13,685 -$7,569 $15, $85,360 -$52,423 -$16,086 -$9,406 $15, $93,324 -$58,298 -$19,655 -$12,551 $13, $101,024 -$64,692 -$24,609 -$17,241 $10, $108,464 -$70,830 -$29,311 -$21,678 $6, $115,650 -$76,711 -$33,752 -$25,854 $3, $122,595 -$82,353 -$37,958 -$29,796 $ $129,305 -$87,758 -$41,922 -$33,496 -$2, $135,789 -$92,940 -$45,668 -$36,977 -$4, $142,051 -$97,897 -$49,185 -$40,229 -$6, $148,103 -$103,294 -$53,860 -$44,771 -$10, $153,950 -$109,130 -$59,684 -$50,594 -$16, $159,599 -$114,748 -$65,265 -$56,168 -$22,209 Table B PV of Contributions and Benefits for Average Wage Earner (FRA at 67) WLE Age 22 PV of Contributions Net PV of Benefits After Working WLE Years If the Life Expectancy is: 71 Years 76 Years 77 Years 81 Years 10 $20,734 -$7,100 $7,942 $10,707 $21, $24,476 -$9,705 $6,591 $9,587 $20, $28,084 -$12,180 $5,366 $8,591 $20, $31,570 -$14,529 $4,270 $7,726 $20, $34,938 -$16,761 $3,292 $6,979 $20, $38,192 -$18,879 $2,428 $6,345 $20, $41,337 -$20,887 $1,673 $5,821 $21, $44,376 -$22,789 $1,025 $5,403 $21, $47,311 -$24,592 $472 $5,080 $22, $50,148 -$26,293 $26 $4,864 $22, $52,889 -$27,897 -$325 $4,744 $23, $55,537 -$29,409 -$583 $4,716 $24, $58,096 -$30,831 -$752 $4,778 $25, $60,569 -$32,736 -$2,029 $3,616 $24, $62,958 -$35,125 -$4,418 $1,227 $22, $65,266 -$37,412 -$6,681 -$1,032 $20,059 11

12 WLE Table C PV of Contributions and Benefits for Low Wage Earner (FRA at 67) Age 22 PV of Contributions Net PV of Benefits After Working WLE Years If the Life Expectancy is: 71 Years 76 Years 77 Years 81 Years 10 $9,330 -$2,145 $5,783 $7,240 $12, $11,014 -$2,390 $7,125 $8,874 $15, $12,638 -$2,578 $8,520 $10,560 $18, $14,206 -$2,712 $9,969 $12,300 $21, $15,722 -$3,167 $10,685 $13,231 $22, $17,187 -$4,121 $10,294 $12,944 $22, $18,602 -$5,025 $9,953 $12,707 $22, $19,969 -$5,882 $9,660 $12,517 $23, $21,290 -$6,692 $9,413 $12,374 $23, $22,567 -$7,454 $9,218 $12,284 $23, $23,800 -$8,181 $9,052 $12,220 $24, $24,992 -$8,858 $8,941 $12,214 $24, $26,143 -$9,499 $8,864 $12,240 $24, $27,256 -$10,356 $8,288 $11,716 $24, $28,331 -$11,431 $7,213 $10,641 $23, $29,370 -$12,463 $6,190 $9,619 $22,420 12