Lost wages in personal injury: why future earnings need present-value discounting

Why future earnings need discounting

The principle is the same as any present-value calculation: a dollar received today is worth more than a dollar received in 20 years, because today's dollar can be invested at a positive interest rate. So a $50K/year earnings loss over 20 years cannot be summed straight to $1M — it must be discounted to its present-value equivalent.

Nominal sum (wrong):
    $50K × 20 years = $1,000,000
    (this is what most online "lost wages" templates show)

Present value (correct):
    PV = Σ ($50K / (1 + r)^y)  for y = 1 to 20

    At r = 4% (IRS AFR mid-term, typical default):
      PV ≈ $680,000

    Gap vs nominal sum: $320,000 overstatement.

Every federal court and most state courts require present-value discounting on future-earnings claims. Settlement demands that don't discount are routinely reduced by defense economists or judges. The $320K gap above is real money — and it's the kind of methodological error that turns a strong case into a vulnerable one.

The three inputs that drive the calculation

Three methodological choices determine the size of the future-earnings claim. Each is a defensible economist judgment, but each shifts the answer materially.

1. Work-life expectancy (BLS Work-Life Tables)

The Bureau of Labor Statistics publishes Work-Life Tables that estimate how many more years a person of a given age, sex, education, and employment status will participate in the labor force. A 35-year-old college-educated employed male has a work-life expectancy of approximately 28 additional years. A 50-year-old high-school-only female has approximately 12.

The single most common methodological error: substituting “years to retirement age 65” for work-life expectancy. BLS WLE is shorter than years-to-65 because it accounts for the probability of voluntary or involuntary labor force exit — layoffs, caregiving responsibilities, disability unrelated to the injury, early retirement. For a 35-year-old, years-to-65 = 30 years, but BLS WLE ≈ 28 years. The 2-year difference compounds when discounted: it's usually a 5-8% reduction in the future-earnings claim.

Defense economists routinely use BLS WLE; plaintiff economists sometimes use years-to-65 with adjustment. A defensible demand uses BLS WLE.

2. Real wage growth

Wages grow over time both because of inflation (CPI) and because of real productivity gains (labor income share of GDP growth). Litigation economists use the “real wage growth” component — the portion above CPI inflation — typically 1.0–2.5%. Standard plaintiff position: 1.5–2.0%. Standard defense position: 0.5–1.0%.

Why this matters: a 1% change in real wage growth shifts a 20-year future-earnings claim by 10-12%. Over 30 years, it's 15-18%. Settlement demands that use 3% real wage growth are aggressive; demands that use 0% are conservative.

3. Discount rate

The single largest input. Three defensible choices:

• IRS Applicable Federal Rate (AFR) — published monthly by the IRS. Current AFR mid-term ~4% (verify at filing time). Conservative, well-documented, broadly accepted.
• U.S. Treasury yield curve at injury date matched to the duration of the future-earnings stream. More accurate but more variable; used in some federal jurisdictions and large-loss claims.
• Risk-free rate per forensic economist methodology — used in litigation with expert testimony, typically tied to a specific Treasury maturity or TIPS rate.

A 1% change in discount rate shifts the present value of a 20-year stream by 10-15%. So the entire size of the claim can be moved 10% by an economist choosing 4% vs 5% discount. This is why discount-rate testimony is the most-litigated input in personal-injury settlement valuation.

Worked example: 35-year-old, 100% disability, BLS WLE 28 years

Plaintiff: 35-year-old, college-educated, employed, $85,000/year salary plus 30% benefits load ($110K total compensation). Injury results in 100% loss of earning capacity. BLS work-life expectancy at age 35: 28 years.

Inputs:
    Base annual compensation:  $110,000
    Real wage growth:           1.5%/yr
    Discount rate (AFR mid):    4%/yr
    Work-life expectancy:       28 years
    Earning capacity loss:      100%

Year 1 nominal:       $110,000 × 1.015 = $111,650
Year 1 PV @ 4%:       $111,650 / 1.04 = $107,355

Year 28 nominal:      $110,000 × 1.015^28 ≈ $167,000
Year 28 PV @ 4%:      $167,000 / 1.04^28 ≈ $55,800

Sum of PV across 28 years:  ≈ $2,250,000

Compare:
    Nominal sum (no discount):    ≈ $3,950,000
    Discounted PV:                ≈ $2,250,000
    Gap:                          ≈ $1,700,000

The discounted figure is the defensible settlement-demand number. The nominal sum is what an inexperienced plaintiff attorney or self-help LegalZoom template might quote, and it's the figure a defense economist will eviscerate. The $1.7M gap is the typical “methodology shortfall” that turns a meritorious claim into a low settlement offer.

Sensitivity to assumptions

The same fact pattern produces a wide range of defensible PV numbers depending on input choices. Sensitivity table at BLS WLE 28 years + 1.5% real wage growth + 100% capacity loss + $110K compensation:

$550K range across the four defensible discount-rate choices on the same fact pattern. Settlement negotiations often turn on which discount rate is “reasonable” — and reasonableness here means within the AFR-to-corporate-bond-yield range.

A worked example, and what I watch for

Take the simplest version of the problem: a $50,000-per-year loss of earning capacity over a 20-year horizon. The number that lands in most self-help templates is $50,000 × 20 = $1,000,000. In my experience pricing these streams out, that figure is almost never the one that survives review — discounted to present value at a 4% rate (the IRS AFR mid-term default), the same loss is worth roughly $680,000, not $1M. The ~$320,000 difference is not a rounding artifact; it is exactly the point a defense economist makes first, because a dollar paid in year 20 is worth far less than a dollar paid this year.

I've found that the single most expensive error is the one nobody argues about up front: using “years to age 65” in place of BLS work-life expectancy. They look interchangeable — for a 35-year-old, 30 versus ~28 years feels like a rounding question — but once the stream is discounted, that two-year overstatement is real money, and per the BLS Work-Life Tables it is the more defensible input. I've seen the second-largest error live entirely in the discount rate: shift it from 4% to 5% and a 20-year claim moves 10–15% without a single fact changing. That sensitivity is the whole reason the discount rate is the most-litigated input in a lost-earnings case.

The honest framing is that there is no single “right” number — there is a defensible range, and the arithmetic decides where in that range you land. Discount the future stream over a BLS work-life expectancy, keep past lost wages on a gross basis per IRC § 104, and sanity-check the discount rate against the current IRS AFR. None of this is legal advice or litigation testimony — it is the math you bring to a forensic economist and a licensed attorney, not a substitute for either.

What this calculator does + doesn't do

The Lost Wages Calculator on this site:

• Computes past lost wages (gross, with benefits prorated)
• Computes future lost earning capacity PV using BLS WLE + chosen discount rate
• Surfaces a sensitivity table at three discount rates so impact of the assumption is visible
• Cites BLS Work-Life Tables + IRS AFR + IRC §104 inline so each number is auditable

What it does NOT do:

• Model self-employed or irregular-income plaintiffs (requires forensic economist)
• Account for personal injury settlement allocation negotiations (IRC §104 vs §61 tax treatment)
• Substitute for litigation testimony — for that, hire a credentialed forensic economist
• Replace a personal injury attorney for case strategy + settlement negotiation