Estimating Personal Consumption With and Without Savings in Wrongful Death Cases

Journal of Forensic Economics 13(1), 2000, pp. 1 10 2000 by the National Association of Forensic Economics Estimating Personal Consumption With and Without Savings in Wrongful Death Cases Martine T. Ajwa, Gerald D. Martin, and Ted Vavoulis * I. Introduction In wrongful death cases, forensic economists consider personal consumption costs of a decedent when determining economic damages. Examples of personal consumption costs used by only one person include food, apparel, health care, entertainment, and personal care products. These personal consumption costs are typically deducted from income because they would otherwise have been used exclusively by the decedent and their deduction should allow the family to maintain a comparable standard of living. Many forensic economists have, in the past, attempted to quantify personal consumption costs, but most have ignored a household s savings as a form of delayed consumption. However, it is logical to assume that a portion of the household s savings, whether consumed before or after retirement, would have been consumed exclusively by the decedent just as any other portion of a household s income. By ignoring savings as delayed consumption, the economist s deductions for a decedent s consumption will be too low. This study will present consumption tables which both include and exclude various forms of savings. Prior studies which have attempted to quantify personal consumption costs are numerous. A seminal study by Earl Cheit (1961) calculated the percentage of income consumed by the head of the family by family size. Since then, new data have become available that allow the calculation of consumption not only for the head of a family, but for each parent and child. These data are available through the Bureau of Labor Statistics Consumer Expenditure Surveys. Indeed, Nelson and Patton (1984) recognized that these Consumer Expenditure Surveys could be used to measure personal consumption as a function not only of family size, but also of income level. They found that income for adult males and females varied inversely with family size and with income level (Patton and Nelson, 1991; Lierman, Patton & Nelson, 1998). It is understandable that each member in a large family would consume a smaller portion of income than those in a small family. However, for higher income families, a portion of income appears to be set aside for savings. And if savings represents delayed consumption for these higher income families, then the figures that have been presented in previous studies understate consumption. II. Data The most recent consumer expenditure survey data made available by the Bureau of Labor Statistics are for 1997. The tables used in this study can be *Dr. Martine Ajwa and Ted Vavoulis are consulting economists with Vavoulis & Ajwa, Inc. in Fresno, California. Mr. Vavoulis also practices with Vavoulis & Associates in Pasadena, California. Dr. Gerald Martin is Professor Emeritus, California State University, and co-author with Mr. Vavoulis of Determining Economic Damages. 1

2 JOURNAL OF FORENSIC ECONOMICS easily downloaded from the internet at http://stats.bls.gov:80/csxcross.htm. Their tables 37-40 show the average expenditures in households of various sizes by before-tax income levels. We have ignored consumption for households of one person not only because we typically see lawsuits by those who lived with decedents but also because we would expect that person to consume all his income either as immediate consumption items or later as savings. Even excluding the one person households, there are 59,664 consumer units reporting in these tables. Similar to the Patton-Nelson studies, we have divided consumption across adult males and females. However, considering that the Consumer Expenditure Surveys also account for expenditures on children under age 18, we have added a third category of consumption attributable to children. This figure may not be exact as the average number of children in households of two persons is 0.1, in households of three persons is 0.8, in households of four persons is 1.7, and in households of five or more persons is 2.9. For simplicity, we have assumed that there are two adults in each household with the remaining number of persons represented by children. The Consumer Expenditure Survey lists the average expenditures by an "average" household meeting both household size and income bracket criteria. These expenditures are broken down into categories. We have aggregated male, female, and children s expenditures very similarly to Patton and Nelson (1991): 1. Food, health care, entertainment, personal care products and services, reading, education, and "miscellaneous" items are all divided equally among the household members. 2. Alcoholic beverages, tobacco products, life/personal insurance, cash contributions, and gifts to others are divided only among the adult household members. 3. One-half of "utilities" and "housekeeping supplies" were divided equally among the household members. The remaining household expenditures were considered indivisible. 4. The apparel and services category in the survey breaks down these items across males/females and age groups. Apparel for "Men, 16 and over" was attributed to the male in the household, "Women, 16 and over" to the female in the household, and "Boys, 2 to 15" and "Girls, 2 to 15" were attributed to the children. Therefore, as Patton and Nelson (1991) point out, these expenditures may be overstated for the adults. Footwear and other apparel products were divided equally among family members. 5. The value of transportation to each adult and child varied as did the number of vehicles in a household. For households with fewer than two vehicles, consumption for the male or female was represented by a reduction of expenditures to a household with one vehicle. The one vehicle was considered indivisible consumption. For households with two or more vehicles, consumption for the male and female was represented by a reduction of expenditures by one vehicle with the expenditures on the excess of two vehicles being attributed to the children. For example, in a three person household with 1.6 vehicles and $5,000 spent on transportation, the male or female would be attributed $1,875 (=$5,000/1.6 x 0.6) for the 0.6 vehicle with the remaining $3,125 being considered indivisible. However, in a three-person household with 2.7 vehicles and $8,000 spent on transportation, the male and the female would each be attrib-

Ajwa, Martin & Vavoulis 3 uted the value of one vehicle or $2,963 (=$8000/2.7) with the value of 0.7 vehicle being attributed to the children. 6. Unlike Patton and Nelson (1991), we are introducing savings as a delayed consumption item. Savings was defined in two different ways. One form of savings represented gross earnings less taxes, social security, pensions, and expenditures. It may be considered as savings immediately available for consumption. The expenditures deducted include all the categories listed above for male, female, children, and indivisible expenditures. The second form of savings also included pensions and social security and may be considered as savings available for consumption over a longer time horizon. 1 If either form of savings was a negative number, as was often the case for lower income households, it was considered zero savings. No attempt was made to consider "dissaving" or borrowing in this study. With the shorter-term savings, the amount was equally distributed among family members as expenditures. With the social security and pension savings, those figures were divided equally among the adult family members. Therefore, with any positive savings, the children s expenditures included only a portion of the shorter-term savings. By dividing the share of savings among household members this way, several assumptions are being made. First, the assumption for both shorter-term and longer-term savings is that none of the savings will be spent on indivisible consumption items such as housing. If indivisible consumption items are indeed a factor, the adult share may be overstated. The effect on children s share is more difficult to determine since some of the indivisible items may be returned to them in the form of gifts or bequests. Second, the assumption for shorter-term savings is that all household members will utilize the funds equally. This assumption was made due to the limitations of the data. The decision to allocate savings among household members is specific to the household (will the funds be spent entirely on a child s education so the adult share is zero or be used to supplement other retirement programs in which case the adult share is understated?) and cannot be quantified in this data. In addition, the decision to allocate savings among household members is specific to the life-cycle of the household. For example, a household with young children may be more likely to use savings as a down payment on a home (an overstatement of adult consumption) than an older couple who own their own home, whose children have savings for education and are now saving for retirement (an understatement of adult consumption). While it would be an interesting study to consider the age of the household members, the BLS data used do not allow the three-way consideration of the age of the household members with household size and income. Third, with the longer term savings, it is assumed that only the adult members of the household will utilize the funds and that no bequests or gifts to children are made. Therefore, children s consumption factors may be understated if there are indeed inter vivos gifts or bequests. 1Savings were divided into these two categories and presented in two separate tables to provide flexibility. If a loss of earnings support includes a loss of retirement income, the forensic economist may wish to utilize the table which includes social security and pension savings. However, if the loss of earnings support is not considered beyond retirement age, the table which excludes social security and pensions may be more appropriate. For those economists who do not wish to include savings at all (updated Nelson-Patton figures), a corresponding table is also provided.

4 JOURNAL OF FORENSIC ECONOMICS III. Results and Discussion Tables 1 through 3 contain the consumption figures by the number of persons in the household and by income level. Table 1 excludes savings as a consumption item. Table 2 includes the shorter-term savings (savings available only for immediate consumption), and Table 3 contains short-term savings plus pensions and social security as consumption items. Average gross income was the average for households which fell into the household size and income bracket category. It is the same as reported in the Consumer Expenditure Survey. In all tables, indivisible consumption is represented only as the difference between average gross income and consumption of all household members. Theoretically, it includes taxes, most housing expenditures, the value of a vehicle in households with fewer than two vehicles, and savings where relevant. It should be noted that by calculating indivisible consumption in this manner, households with fewer than two vehicles have the value of the partial vehicle subtracted twice, resulting in a lower indivisible expenditure figure. It is also apparent from the tables that indivisible consumption is actually negative at low income levels. One possible reason for these results is that gross income as reported does not include such sources as public assistance, unreported cash earnings, borrowing, and gifts. The differences between male and female consumption are not great because the only item separating the expenditures of the two sexes is the expenditure on apparel. Children s consumption presents a figure which is the total for all children in the household. Therefore, in households with four members, a single child s consumption would be represented by taking one-half of the expenditures reported in the table. In households with five or more people, each child s consumption can be determined by dividing children s consumption by the number of children. Similar to the results found in the Nelson-Patton studies when savings are excluded as a consumption item, household members consumption falls as a percentage of income as income level increases. This relationship does not always hold when savings are included as a form of delayed consumption. Comparing the two highest income levels in Tables 2 and 3, in most cases the expenditures as a percentage of income actually increase as income increases. Comparing Tables 1 through 3, it can be noted that at the highest income levels (usually $40,000 or more), a household member s expenditures as a percentage of income increase as savings are introduced as an expenditure. Only the highest income levels are affected because savings is a positive number only for these levels of income. Regressions in log form were run on the data in Tables 1 through 3 and are presented in Table 4. 2 X represents the natural logarithm of income and Y represents the natural logarithm of consumption. Not only do these regression equations confirm that there is a strong negative relationship between income and consumption percentages, but also that these equations can be used by the forensic economist to determine a more specific percentage of income used for consumption by each family member. For example, the no savings equation for adult males in a three person household with an income level of $32,000 would indicate average consumption of 28.16%. 2Regression results are available upon request from the authors.

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8 JOURNAL OF FORENSIC ECONOMICS Table 4 Log Regressions of Household Income on Family Member Consumption Percentage Family Member Household Size Equation R Squared No Savings With Savings With Savings and Social Security Adult Male Adult Female Children Adult Male Adult Female Children Adult Male Adult Female Children Note: t-statistics in parentheses 2 Y = 11.2560-0.7395 X (16.7) (-11.0) 3 Y = 10.0579-0.6478 X (21.7) (-14.0) 4 Y = 9.4281-0.6004 X (13.8) (-9.0) 5 or more Y = 8.5590-0.5306 X (11.0) (-7.0) 2 Y = 11.2845-0.7397 X (16.3) (-10.7) 3 Y = 10.2237-0.6614 X (19.9) (-12.9) 4 Y = 9.3941-0.5954 X (12.9) (-8.4) 5 or more Y = 8.6838-0.5388 X (11.1) (-7.0) 3 Y = 9.1955-0.6056 X (12.6) (-8.4) 4 Y = 8.8182-0.5293 X (13.0) (-8.0) 5 or more Y = 9.3637-0.5557 X (12.8) (-7.8) 2 Y = 10.6293-0.6703 X (11.6) (-7.4) 3 Y = 9.5421-0.5917 X (13.7) (-8.5) 4 Y = 8.6784-0.5223 X (9.9) (-6.1) 5 or more Y = 8.0319-0.4758 X (9.2) (-5.6) 2 Y = 10.6734-0.6722 X (11.6) (-7.3) 3 Y = 9.7198-0.6065 X (13.2) (-8.3) 4 Y = 8.6677-0.5197 X (9.5) (-5.8) 5 or more Y = 8.1789-0.4863 X (9.2) (-5.6) 3 Y = 8.5255-0.5327 X (8.5) (-5.3) 4 Y = 7.6721-0.4100 X (7.7) (-4.2) 5 or more Y = 8.4228-0.4580 X (8.0) (-4.5) 2 Y = 10.2410-0.6262 X (10.0) (-6.1) 3 Y = 8.9327-0.5223 X (11.3) (-6.7) 4 Y = 7.7301-0.4211 X (7.5) (-4.2) 5 or more Y = 6.9295-0.3583 X (7.1) (-3.8) 2 Y = 10.2936-0.6291 X (9.9) (-6.1) 3 Y = 9.1207-0.5383 X (11.1) (-6.5) 4 Y = 7.7403-0.4207 X (7.2) (-4.0) 5 or more Y = 7.1141-0.3728 X (7.1) (-3.8) 3 Y = 8.5255-0.5327 X (8.5) (-5.3) 4 Y = 7.6721-0.4100 X (7.7) (-4.2) 5 or more Y = 8.4228-0.4580 X (8.0) (-4.5) 0.9452 0.9655 0.9311 0.8904 0.9426 0.9598 0.9215 0.8919 0.9088 0.9138 0.9105 0.8853 0.9119 0.8621 0.838 0.8835 0.9068 0.8495 0.8394 0.8009 0.7484 0.7682 0.8416 0.8635 0.7439 0.7043 0.8407 0.8594 0.7296 0.7103 0.8009 0.7484 0.7682

Ajwa, Martin & Vavoulis 9 Table 5 Comparison of Studies: Two Adults, One Child Study Author(s) Indivisible Husband Wife Child Harju & Adams 31.4% 27.7% 27.7% 14.2% Gilbert 45.6% 22.6% 22.6% 9.2% Patton & Nelson 37.8% 25.7% 25.7% 10.8% Ruggles 54.4% 14.7% 14.7% 16.2% Dulaney 26.0% 32.0% 32.0% 20.0% King & Smith 53.2% 21.7% 21.7% 3.4% Olson 30.0% 24.8% 24.8% 20.4% Cheit 40.0% 26.0% 26.0% 8.0% BLS Revised Equivalency Scales 19.6% 31.8% 31.8% 16.8% Martin & Vavoulis 38.0% 23.9% 23.9% 14.2% This Study: Table 3 31.8% 27.1% 27.6% 13.5% We have examined several other studies in an attempt to compare their overall results with those of this study. Overall results refers to the consumption percentages for the "total reporting" with no consideration given to the various levels of income. In Table 5, the comparison study values for a family consisting of two adult parents and one child are presented along with numbers from Table 3 of this study which includes savings and social security/pension contributions as consumption items. In the studies examined, there was not a uniform standard for presenting the results; therefore we found it necessary to make interpolations of the data to provide consistency in the comparison with this study. Any errors in the interpolation of the data are not the fault of the authors of the prior studies. We have chosen the studies by Ruggles, 1990; Olson, 1983; King and Smith, 1988; Gilbert, 1991; Patton and Nelson, 1991; Harju and Adams, 1990; and Dulaney, 1991. In addition, an average of sixteen studies, including those listed above, examined by Martin and Vavoulis, 1999, has also been included. The findings for the consumption by the husband and the wife are seen to fall within a narrower range than do the finding for indivisible consumption and the consumption by the child. The findings in this study fall within the range of results from the comparison studies. IV. Conclusion It is hoped that these tables will provide economists with a greater ability to determine a decedent s consumption patterns over a long period of time. Economic theory posits that a person s income and consumption patterns vary over a lifetime. In general, young people with little income and few household members tend to consume a greater portion of their incomes. As income rises and family members increase, parents tend to forego personal consumption items to benefit their children and attempt to save for retirement. As children leave the home, parents can consume and save more of their income. Finally, as parents retire and income drops, they begin to consume out of the previous savings. While there are data limitations that prevent a more comprehensive set of tables with consumption estimates according to a household s life-cycle in

10 JOURNAL OF FORENSIC ECONOMICS addition to household size and income level, we hope that these tables provide an important first step by considering the consumption of various forms of savings. By deducting expected consumption from savings when it is produced, economists may be more closely measuring a decedent s consumption pattern. Future studies may wish to consider measuring and including a household s "dissavings" which represents a constraint on future consumption. References Cheit, Earl, "Measuring Economic Loss Due to Death and Disability," In Injury and Recovery in the Course of Employment, 1961, Wiley & Sons. Department of Labor, Revised Equivalency Scales, Handbook of Labor Statistics, Bulletin 1865, 1975. Dulaney, Ronald A., "Estimating Decedents Consumption Expenditures in Wrongful Death Actions: Some Refinements," Journal of Legal Economics, 1991, 1(2), 94-98. Gilbert, Roy F., "Estimating Personal Consumption of a Deceased Family Member," Journal of Forensic Economics, 1991, 4(2), 175-85. Harju, Melvin W., and Clarence H. Adams, "Estimating Personal Expenditure Deductions in Multi-Income Families in Cases of Wrongful Death," Journal of Forensic Economics, 1990, 4(1), 65-81. King, Elizabeth M., and James P. Smith, Computing Economic Loss in Cases of Wrongful Death, Santa Monica, CA: The RAND Corporation, 1988. Lierman, Walter K., Robert T. Patton, and David M. Nelson, "Patton-Nelson Personal Consumption Tables Updated," Journal of Forensic Economics, 1998, 11(1), 3-7. Martin, Gerald D. and Ted Vavoulis, Determining Economic Damages, Santa Ana, CA: James Publishing Group, 1999. Nelson, David M. and Robert T. Patton, "Estimating Personal Consumption in Wrongful Death and Survival Actions," Washington State Bar News, 1984, 38(6), 43-51. Olson, Lawrence, Costs of Children, Lexington: Lexington Books, 1983. Patton, Robert T. and David M. Nelson, "Estimating Personal Consumption Costs in Wrongful Death Cases," Journal of Forensic Economics, 1991, 4(2), 233-240. Ruggles, Patricia, Drawing the Line, Washington, DC: The Urban Institute Press, 1990.