1 ECONOMIC DAMAGES IN AN EMPLOYMENT CASE CALCULATIONS AND ASSUMPTIONS John A. Beranbaum Beranbaum Menken & Ben-Asher LLP Three New York Plaza New York, NY (212) National Employment Lawyers Association Annual Convention June 2003 Vail, Colorado Calculating a plaintiff s economic damages in an employment case is seemingly quite straight forward. The basic meod is to take e total compensation at e plaintiff would have earned absent e employer s allegedly unlawful action and subtract e income at e plaintiff can expect to earn in mitigation. In fact, calculating economic damages involves a lot more an adding up columns of numbers. The same raw data (e.g., e employee s salary at e time of discharge, e anticipated grow rate of e salary, e leng of e ensuing unemployment) can yield drastically different damages figures depending which assumptions are made. This article discusses e mechanics of an economic loss assessment in an employment cases and seeks to bring to light e assumptions lurking wiin such estimates. Typically, a plaintiff s economic losses have two components: back pay and front pay, or future losses. Back pay refers to lost compensation for e period from e 1
2 alleged illegal act to e time of trial, and front pay represents plaintiff s anticipated losses after trial. Calculating Back Pay and Benefit Losses Past economic losses consists of all economic remuneration (e.g. base salary, salary increases, bonuses) and fringe benefits at an employee could have expected to receive rough e time of trial but for e allegedly illegal act, as well as e profit from employer stock options at an employee could have exercised during is period. Back pay awards are mitigated by amounts earned since termination, and prejudgment 1 interest is ordinarily awarded. Lost Base Salary The starting point in determining e lost salary of a discharged employee is to take his or her base annual compensation at e time of e termination or e illegal act, as reflected in a W-2 statement, and multiply at amount by e leng of time from discharge to trial (reduced to a multiple of a year or mon). Thus, where Plaintiff X was earning $50,000 per year at e time of discharge, and e trial took place ree years after e discharge, her lost base annual salary is $50,000 x 3, or $150,000. Similarly, e lost salary of an employee challenging e unlawful denial of a promotion is e difference between his or her annual salary wi and wiout e promotion multiplied by e leng of time between e date of non-promotion and trial. Where Plaintiff Y, earning $50,000 a year in his job, applied for and was denied a promotion to a job paying $60,000 a year, and en must wait two years to challenge e denial at trial, his lost salary is $20,000 (($60,000 - $50,000) x 2). 2
3 A discharged employee s base compensation is not necessarily his or her earnings immediately prior to e termination. When a discriminatory environment has deflated a plaintiff s pre-discharge earnings rough discriminatory practices, a court may apply e earnings he or she was receiving before e discrimination. In Durham 2 Life Insur. Co. v. Evans, e Third Circuit held at e district court, in calculating economic damages, properly used as a base salary plaintiff s higher earnings from e year before her discharge raer an e reduced earnings of her discharge year. The harassment at adversely court noted at in 1993 e plaintiff was subjected to severe affected her earnings. The court wrote at if e plaintiff s salary on e last day of employment was used to calculate back pay, Durham, 166 F.3d at 156. would be to a discriminator s advantage to increase its mistreatment from a hostile environment to a decrease in pay, so at any ultimate penalty would be minimized. [The plaintiff s] attempts to deal wi e discrimination wiout quitting, despite e negative effects on her salary, should not be held against her. 3 Where a plaintiff brings suit challenging e denial of a promotion to a position for which a salary had not yet been established, his or her attorney ordinarily will look to e salary of e successful candidate as a benchmark for calculating e plaintiff s damages. The salary awarded e successful candidate, e plaintiff will argue, reflects e employer s own measure of what e job is wor, and erefore is a fair basis to evaluate damages. 4 Alternatively, an estimate of plaintiff s lost salary can be based on e salaries of oer employees holding positions similar to e one at was denied e 3
4 plaintiff. By contrast, defendants often contend at e successful candidate s or replacement s salary is not a fair measure of a plaintiff s economic damages. Defense counsel will try to show at e successful candidate had superior credentials or a more favorable salary history an e plaintiff, and erefore commanded a higher salary. When e successful candidate s earnings depend on individual efforts, such as wi a sales executive paid on commissions, arguably ere is even less reason to use his or her compensation as a measure of damages. When calculating back losses, e plaintiff s counsel should make sure to include all forms of compensation, in addition to base salary, at e plaintiff had been 5 receiving, including commissions, overtime and tips. Loss of Potential Promotions and Salary Increases In addition to lost base salary, a plaintiff s back pay losses include e salary increases at e plaintiff would have received but for e wrongful discharge or nonpromotion. There are several approaches for estimating damages arising from forfeited salary increases. First, anticipated salary increases can be projected from e 6 employee s own history of salary increases wi at employer. A second meod is to look to e actual salary increases given to similarly situated employees subsequent to 7 e plaintiff s discharge. The plaintiff has e burden of showing, however, at e 8 comparators selected are truly similarly situated. A ird meod for projecting a plaintiff s would-be salary increases is by referring to e wage index grow rate of e private non-farm sector data, also known as e 4
5 9 Employment Cost Index ( ECI ). The ECI, published by e U.S. Department of Labor s (DOL s) Bureau of Labor Statistics on a quarterly basis, measures e changes in employers compensation costs, including wages and bonuses. The ECI provides industry- and region-specific data ordinarily a better indicator of a plaintiff s anticipated salary increases an more generalized economic data. As a general rule, e more closely e salary grow information is tied to e plaintiff s job or industry, e more 10 persuasive e economic loss estimate. Lost Bonuses A prevailing plaintiff may be compensated for lost bonuses as long as ere was a substantial probability at he or she would have received e bonus absent e 11 employer s illegal conduct. A plaintiff does not necessarily have to specify e size of e bonus he or she would have earned if still employed by e defendant in order to 12 claim lost bonuses as an item of damages. Where e amount of e potential bonus was not fixed prior to e discharge, e trier of fact may use e parties prior course of 13 dealings and bonus history to set damages. The Leng of e Back Pay Period Ordinarily, e period for which a plaintiff will be awarded back pay is from e date of e discriminatory event to e time of trial or entry of judgment. An employer can limit e back pay award, however, by establishing at after e unlawful discharge, but prior to trial, e plaintiff would have lost his or her job for reasons unrelated to its allegedly unlawful motive. Thus, a defendant can stop back pay damages from running by demonstrating at e plaintiff s employment would have been terminated in a non- 5
6 discriminatory reduction-in-force (RIF) taking place after e allegedly unlawful 14 discharge. The mere fact at e employer implemented a reduction-in-force subsequent to e plaintiff s discharge, however, will not necessarily limit damages. As long as e plaintiff can show at he or she would have been retained following e RIF 15 but for e employer s earlier unlawful conduct, back pay damages are permissible. Under e after-acquired evidence defense, if e employer can prove at during e course of discovery it learned at e plaintiff had committed an offense warranting discharge, but unrelated to e employer s purported reasons for firing e plaintiff, e back pay period will be limited to e period from e date of e unlawful 16 discharge until e time e misconduct was discovered. A plaintiff s entitlement to back pay may also expire as of e time when e court determines he or she should 17 reasonably have secured alternate employment. Finally, e accrual of back pay liability ceases if e employer makes an unconditional offer of reinstatement which e 18 plaintiff refuses. Lost Fringe Benefits A prevailing plaintiff may recover e value of lost fringe benefits, including heal insurance, pension and retirement benefits, unused vacation days, life insurance, sick pay, reduced cost of meals, and e loss of e personal use of an automobile 25 supplied by e employer. Lost heal insurance benefits ordinarily are recoverable only if e plaintiff has offered evidence of out-of-pocket expenses incurred for alternate 26 insurance coverage or actual medical expenses. In limited situations, it may be appropriate to value a plaintiff s fringe benefits as a 6
7 27 whole and to express em as a percentage of e individual s salary. At least one court has upheld an award of lost benefits expressed as a percentage of salary when e percentage was based upon data found in an annual survey of employee benefits published by e United States Chamber of Commerce. 28 Stock Options Stock options are a common form of compensation for executives, and increasingly, for non-executives. A stock option gives e option holder e right to buy a share of stock at a fixed exercise or strike price, usually e market price on e 29 date e options are granted. Typically, before e stock options become effective, ey must vest over time. After e options vest, e holder may continue to hold em or pay e strike price and purchase e stock in exchange for e options. The district court in Regier v. Rhone-Poulenc Rorer, Inc., described how stock options work: If e market price of stock is $10 and e strike price of a call [or stock] option on at stock is $8, e holder of e option could elect to exercise e option, tender e $8 in exchange for a share of e stock, and sell e share of stock on e open market for $10. The certain profit in is situation would be $2 e $10 received from e open market sale of e stock less e $8 paid to exercise e option Courts tolerate a certain amount of imprecision in e valuation of stock options. Economists use several meods to determine e precise value of a stock option, most prominently, e Black-Scholes option-pricing model. The Black-Scholes meod prices stock options by weighing e stock price at e grant date, e expected life of e option, e volatility of e stock, expected dividend payments and e risk-free interest 7
8 32 rate over e expected life of e stock. Courts, however, have determined e value of stock options, wiout recourse to sophisticated economic models, by using common law principles of damages. There are two competing common law eories of damages in valuing e loss of stock options: 1) breach of contract, and 2) conversion. Under e breach of contract eory, a plaintiff s damages consist of e difference between a stock option s exercise price and e market price of e stock at e time of breach. Breach occurs when e employer first fails to deliver e stock under e option agreement. Under e conversion eory, a plaintiff s damages are calculated by taking e difference between e option s exercise price and e stock s highest price for a reasonable amount of time after e company refused to honor e option. The conversion eory of damages benefits e plaintiff more an does e breach of contract eory. Under e breach of contract eory, e plaintiff must base his or her damages on e price of e stock at e time of breach, whatever e price. Under e conversion eory, e plaintiff, in computing damages, is presumed to have exercised e option when e stock reached its highest price. Accordingly, e conversion eory permits e plaintiff to realize a stock option s potential profits. As e Second Circuit explained, in e case of goods whose market value is volatile stock, for example to allow e injured party merely e value of e stock at e time of conversion would provide an inadequate and unjust remedy, because e real injury sustained by e principal consists.... in e sale of [e stock] at an unfavorable time, and for an unfavorable price. 33 8
9 34 Scully v. US WATS, Inc., shows how e two competing eories of valuing damages for a breach of a stock option agreement can lead to vastly different results. In May 1995, Scully entered into a two-year employment agreement to serve as president and chief executive officer of US WATS. Wi e execution of e employment agreement, e company granted Scully an option to purchase 850,000 shares of restricted company stock at would vest over a two-year period at 75 cents per share. The restriction provided at on exercising e option, Scully would not be able to transfer e stock for one year from e date of its purchase. Eighteen mons later, in December 1996, US WATS fired Scully. In January 1997, Scully attempted to exercise his option to purchase 600,000 shares of stock at had vested by at date. US WATS refused to honor e option agreement, claiming at it automatically expired when Scully was fired. Scully brought suit, and e district court found at he was wrongfully fired, in violation of e employment agreement. The district court calculated Scully s damages from e voided stock option as $531,250. The district court arrived at at figure by multiplying e number of shares of Scully s options by e difference between e exercise price of 75 cents per share and e stock s market price of $1.375 as of January 1997, e date e company refused to honor e option agreement. On appeal, bo sides challenged e size of e damages award. The Court of Appeals considered Scully s damages under bo e breach of contract and conversion eory. Using e conversion model, Scully argued at e district court erred in fixing his damages as of e January 1997 breach of e option agreement. Scully contended at his damages should have been calculated as of e 9
10 end of e restricted period one year after e breach because only en could he have sold all his shares. The one-year restricted period for e 600,000 shares expired in January 1998, at which time e US WATS stock was selling for $2 a share. Had Scully sold e stock on at date, he would have made a profit of $1.25 per share ($ $0.75), or $750,000. As to e remaining 250,000 shares at had not vested as of January 1997, eir sales restriction expired in May 1998, at which time e stock closed at $ per share. Wi respect to e 250,000 shares, under Scully s analysis he would have realized a profit of $ per share, or $328,125. Thus, under e conversion eory, Scully s total damages for e breach of e option agreement would have amounted to $1,078,125 ($750,000 + $328,125). Unfortunately for Scully, e Third Circuit opted for e breach of contract valuation of stock options and held at e district court properly assessed his damages as of e January 1997 breach. The court reasoned at e breach of contract rule is consistent wi e principle at a failure to deliver securities or stock options, pursuant 35 to a legally binding agreement, constitutes a breach of contract. In addition, according to e court, e breach of contract eory had e benefit of avoid[ing] e speculativeness and hindsight problems attendant to e conversion eory which presumes at e plaintiff would have had e foresight to sell e stock at its highest 36 price. Mitigation The earnings at a plaintiff receives after e termination of his or her 37 employment are deducted from back pay awards. Courts have made clear at e 10
11 38 preferred meod for determining a plaintiff s mitigating earnings is periodic mitigation. Under e periodic mitigation meod, e court takes e amount e plaintiff would have earned for each pay period and deducts e wage, if any, earned in oer employment at period. Earnings in any period at exceed e amount e plaintiff earned for each period do not operate to reduce e back pay award from any oer 39 period. Periodic mitigation becomes significant in cases when a plaintiff after a period of unemployment and/or reduced wages find a job better paying an e one from which he or she was unlawfully discharged. Take for example, a plaintiff fired from a job wi an annual salary of $60,000, who en was unemployed for one year, at which point he or she found a position wi an annual salary of $90,000. The trial was held ree years after e illegal discharge. In e aggregate, e plaintiff s interim earnings for e ree-year post-discharge period were $180,000 ($180,000 x 2), e same amount of compensation at e plaintiff would have earned had he remained wi e defendant employer. Thus, under e aggregate meod, defendant would have no back pay liability, even ough e plaintiff lost $60,000 while unemployed for e year following e discharge. Using e periodic mitigation meod, however, e plaintiff s acceptance of a more favorable job stops e accrual of furer back pay damages and does not act to eliminate ose already suffered while he or she was unemployed. As e Ten Circuit in Godinet wrote, quoting e trial court, While e aggregate endorsed by defendant seeks equity in e long run, such an approach fails to 40 adequately satisfy e very real and concrete period [of] injuries sustained by plaintiff. 11
12 iminish e back pay award for e year of unemployment at e plaintiff suffered. What if a terminated plaintiff obtains a lower paying job, and supplements his or her income by working extensive overtime or holding a second job should ese supplemental earnings be subtracted from e back pay award? The leading case is 41 out of e Seven Circuit, Chesser v. State of Illinois. The court held at interim earnings from a moonlighting job may be deducted from e back pay award only if e plaintiff would have been unable to hold e second job while working for e defendant employer. In at case, e Seven Circuit determined at e plaintiff-police officer would have been unable to hold her moonlighting jobs simultaneously wi e state trooper position (e job which she had been illegally denied), and erefore, e 42 earnings from e supplemental jobs are deductible. The same analysis applies to overtime: overtime compensation may be subtracted from back pay as long as e plaintiff would not have earned such compensation while employed by e defendant 43 employer. There remains some controversy as to wheer benefits at a plaintiff receives sources oer an and collateral to e employer may be deducted from a damages award. Under e collateral source rule, funds unrelated to e conduct at issue and 44 received from ird parties are not counted as mitigating earnings. Under e collateral source rule, an employer is entitled to no credit for moneys paid to e injured 45 employee by ird parties. Some Circuits strictly apply e collateral source rule to require, as a matter of law, at ird party payments, not be subtracted from a back pay 46 award, while oers Circuits have left e matter to e discretion of e trial court. 12
13 47 48 A majority of courts hold at unemployment benefits, disability benefits, workers compensation benefits and pension benefits are collateral and should not be 51 applied to offset e back pay award. Severance payments generally are not considered collateral source benefits and, erefore, are deducted from a back or front 52 pay award. Pre-judgment Interest Pre-judgment interest may be awarded as a normal incident of actions brought 53 under Title VII. As e Third Circuit stated, e purpose of an award of pre-judgment interest is to reimburse e claimant for e loss of e use of its investment or its funds 54 from e time of e loss until judgment is entered. Pre-judgment interest should be awarded in e absence of unusual 55 circumstances favoring its denial. The rate at which pre-judgment interest is to be 56 awarded on federal actions is left to e sound discretion of e trial court. In federal actions where e plaintiff has recovered under bo federal and state civil rights statutes, courts will normally apply uniformly a lower federal rate raer an a higher rate available under state law. 57 In awarding pre-judgment interest federal courts commonly use e average 52- week Treasury bill rate over e period for which interest is due, e same rate utilized 58 by e federal post-judgment interest rate. Alternatively, federal courts apply e Internal Revenue Service (IRS) adjusted prime rate, codified at Section 6621 of e Internal Revenue Code (Code). Interest is compounded annually. 61 Back pay awards are taxable under e Code. In furerance of e equal 13
14 62 employment opportunity laws make whole objective, a district court has discretion to include as part of e back pay award an additional sum to compensate for e increased tax liability at a plaintiff may incur from receiving e damages award as a 63 lump sum raer an over time as annual wages. Calculating Front Pay Whereas e calculation of back pay involves ascertaining economic losses already suffered, calculating front pay requires anticipating economic losses to be 64 experienced in e future. The meod for calculating front pay can be summarized as follows: project e plaintiff s likely earnings from e defendant but for e illegal act for e period he or she could reasonably be expected to have worked for e defendant. From at amount subtract e plaintiff s projected earnings from alternative employment. Finally, reduce e resulting estimated future earnings to a present, lumpsum value. Projected Future Earnings but for e Discrimination Projecting a plaintiff s future earnings at his former job involves many of e same considerations as does calculating back pay, at is, fixing e base salary, placing a value on fringe benefits, and determining e earnings annual grow rate. Unlike computing back pay, where e leng of time from e illegal conduct to e trial is certain, estimating front pay requires predicting e leng of time a plaintiff would have worked for e defendant and will work at alternative employment. Courts frequently limit e leng of time for which front pay may be awarded to 65 ree to five years. To predict a plaintiff s economic fortunes beyond at point is 14
15 considered overly speculative. There are, however, no absolute rules, and when warranted, courts stretch out e front-pay period, particularly in cases involving an 66 older worker facing limited job prospects, courts will extend e front pay period. In projecting a, courts generally will not base a plaintiff s age of retirement solely on e 67 plaintiff s own stated intentions. Oer factors at courts consider in determining front pay are e leng of time employees in similar positions stay at e defendant 68 employer, Because predictions as to how long a plaintiff would have remained working for e defendant absent e illegal conduct are unsure, e plaintiff may want to present to e trier of fact several front pay calculations wi alternative dates of retirement. The trier of fact can en select e front pay award wi e most credible retirement date. One way to take e guesswork out of estimates of how long a plaintiff will remain in e labor force is by referring to work-life expectancy tables e United States 69 Department of Labor s Bureau of Labor Statistics. The tables give e average work- life expectancy of men and women according to eir current age and labor force status, and take into account e likelihood of an individual dying, becoming disabled or voluntarily widrawing from e labor force. For instance, according to e work-life tables, a 50-year old male wi 15 years or more of education is expected to work anoer 15 years, while a 50-year old woman wi less an a high school education is only expected to work anoer six years. Projected Earnings at Alternate Employment If e plaintiff has obtained anoer job by e time of trial, and ere is a 15
16 reasonable expectation at he or she will continue working ere in e foreseeable future, calculating e plaintiff s projected earnings from e alternate employment is straightforward. The plaintiff s estimated future earnings from e alternate employment are computed by multiplying e annual earnings, including e value of fringe benefits and salary increases, by e number of years e plaintiff is expected to continue working ere. If by e time of trial e plaintiff has not obtained alternative employment, bo parties will need to make plausible predictions about e likelihood of e plaintiff s future re-employment. The plaintiff s counsel can be expected to argue, wi persuasive force when e plaintiff is an older worker, at e plaintiff s heretofore unsuccessful job search demonstrates at e chances of future re-employment are negligible. The defendant s counsel will likely counter at wi reasonable efforts, e plaintiff should have found a job already or can be expected to do so shortly. One resource available to bo plaintiffs and defendants to take predictions about future re-employment out of e realm of guesswork is e Displaced Workers Survey, 70 published biennially by e DOL s Bureau of Labor Statistics. The Survey analyzes by age group, education, class of worker, occupation, leng of tenure on e job, and earnings level e re-employment status of workers who have lost eir jobs of ree or more years for reasons such as plant closings, corporate restructuring, and oer major economic events. The Survey indicates e percentage of displaced workers who become re-employed wiin ree years and eir earnings relative to ose of eir former jobs. 16
17 Among e relevant findings in e 2000 Survey is at nearly 75% of longtenured workers who became displaced during e past ree years were re-employed by February Re-employment rates, however, were much lower for older workers, ages 55 to 64 (56%) and 65 and older (26%). 71 Table 7 of e survey reveals at almost 80% of displaced professionals became re-employed wiin ree years, and of ose who returned to full-time work, 22% were earning 20% or more below e earnings of eir lost jobs. Eier party may challenge e applicability of e Survey to e case at hand by arguing: 1) e plaintiff does not fit e definition of displaced worker and erefore e Survey is inapplicable; 2) even if e plaintiff can be considered a displaced worker, e Survey provides statistical data at fail to take into account e circumstances relating to e plaintiff and e termination; and 3) e plaintiff s experience in finding work up to e time of trial is a better indicator of his or her future success in obtaining 72 re-employment an are e generalized data of e Survey. Reduction to Present Value A plaintiff s future economic damages are calculated by subtracting e income stream at e plaintiff is expected to earn from alternate employment from e income stream at e plaintiff would have earned while employed by e defendant but for e illegal conduct. Because e plaintiff is being compensated today for damages at will occur in e future, it is necessary to determine how much ose future losses are wor today, at is, e present value of ose future losses. The term time value of money refers to e fact at a dollar received today is 17
18 73 wor more an e right to receive a dollar in e future. Because one can earn interest on one s money, a dollar invested today will be wor more in e future. How much at dollar grows depends upon e rate you can earn by investing. For instance, if someone invested $1,000 in a savings account at pays annual interest of 10%, after one year e investment would total $1,100. If e entire $1,100 is left in e bank, by e second year e individual will have earned $110 ($1,100 x.10) in interest, for a total of $1,210 ($1, ). After five years at $1,000, left untouched in e bank and earning 10% interest, would have grown to $1, Discounting, or reducing, for present value is e reverse of calculating future value. Instead of calculating how much $1,000 will be wor in five years, one computes how much $1,000 five years from now is wor today. The formula for determining e present value of $1 to be received t years into e future at a discount t. 74 rate of r is: PV = $1/(1 +r) Under e formula, e amount one must invest at 10% 5 interest to yield $1,000 in five years is $ ($1,000 x1/(1 +.10). Thus, $ is e present, or discounted, value of $1,000 to be received in five years at a discount rate of 10%. When reducing to present value a stream of income over a period years, e formula must be applied to each year separately. The Discount Rate The higher e discount rate, e lower e present value. Thus, wi a discount rate of 15% (i.e., one invests e money in an instrument wi a 15% interest rate), e present value of at same $1,000 to be received in five years is only $ By e same token, a lower discount rate yields a higher present value. For example, wi a 5% discount rate, e present value of e $1,000 to be received in five 18
19 years is $ The furer into e future e money is to be received, e lower e present value. For $1,000 to be received in ten years, wi a discount rate of 10%, e present value is $ Clearly, e present value of future earnings varies substantially depending on e discount rate used and e leng of e payout. There is general agreement among e courts at in discounting, or reducing, lost future wages to present value, e discount rate at is used should be based on e 75 rate of interest at would be earned on e best and safest investments. Commonly, e average yield of Treasury bills or oer government bonds will be used as e discount rate. Inflation Effect on Present Value One complication in calculating e present value of future economic losses is e impact of inflation on e calculation. Inflation has an impact on bo e discount rate used to calculate present value and e grow rate of e plaintiff s future earnings. Interest rates, and in turn, discount rates, are calibrated to take into account e 76 anticipated rate of inflation. Because of inflation, money received in five years is wor less an e same amount of money received today. Discounting reflects e devaluation of today s money in e future because of inflation. As for an employee s future earnings, ey will increase because of his or her increasing experience and skills 77 and because of general wage inflation. Is e impact of inflation in devaluing future earnings offset by e fact wage inflation will increase e total amount of e future earnings? Courts have grappled wi at question and have taken one of ree approaches when considering e impact 19
20 78 of inflation on future damages. The first technique, e total offset meod, assumes at e market rate return on investment is totally offset by future wage inflation, 79 making unnecessary any reduction to present value of future losses. The second approach, e reduced-market discount rate meod, presumes at market interest rates include two components: an estimate of future inflation and a real rate of return on investment. Historically, e inflation-cleansed real rate of return on investment is between 1-3%; e remainder of e interest rate is due to inflation. When future inflation is eliminated as a factor in bo e market interest rate 80 and e lost wages estimate, what remains is e real interest rate. For example, if for e next five years inflation is anticipated to average 5% a year, and e market rate of interest is 7%, e real or reduced market rate of interest is 2%. Under e reduced market rate approach, e discount rate should be set at between one and 81 ree percent. A widely accepted meod of calculating e reduced market rate is to subtract e average annual change in e Consumer Price Index over a period of years from e interest rate on government bonds held during e same period. 82 The ird approach is to discount future losses by e full market interest rate. This approach is appropriate when a plaintiff s lost future earnings have been augmented to take wage inflation into account: e discount rate must reflect e full 83 market rate and not be reduced below market value. Wi respect to computing e present value of future pension benefits, since e amount of e yearly pension benefits is fixed, and does not increase because of inflation, e discount rate should reflect e 84 full market rate of return and not e lower real rate of return. 20
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