Kaczkowski v. Bolubasz, 491 Pa. 561 (1980), is one of the few decisions in the nation that rules out discounting to present value, under the assumption that the inflation rate is equal to the discount rate. This method is called total offset. Kaczkowski is a wrongful death case, but the principle of inflation rate equal to the discount rate appears to indicate that it applies in general to lost earnings cases except when trumped by the MCARE Act that requires discounting in medical liability cases. In addition, the Helpin decision leads to a broad interpretation of Kaczkowksi beyond wrongful death.

Social Security is a frequently overlooked component of an economic damage case. While some cases may involve the loss of a defined benefit pension, in almost all cases involving a wrongful death, personal injury or wrongful termination, there is a lost Social Security component as well as lost earnings. Note that in some cases the lost Social Security may be offset by the Social Security survivor's benefits or disability benefits. Since Kaczkowski applies to lost earnings, the question that remains is whether or not it applies to lost Social Security.

The underlying assumption in Kaczkowski is that wage inflation is equal to the discount rate. Once the Social Security benefit (called primary insurance amount, or PIA) goes into pay status, it is subject to annual cost of living increases, not wage increases. Therefore, Kaczkowski does not automatically apply in discounting payments that start at Social Security retirement age (SSRA) and continue until the life expectancy, back to the Social Security retirement age. Instead, the PIA beginning at the SSRA is increased annually with an assumed cost of living increase (COLA) based upon the consumer price index projections (available from the Social Security Administration or Congressional Budget Office) and discounted back to present value (as of SSRA) using a reasonable discount rate, normally a long-term bond rate or the Pension Benefit Guarantee Corporation (PBGC) rates.

Once the present value as of SSRA is determined, the question is then whether Kaczkowski applies in terms of discounting back to trial date. While it is beyond the scope of this article, a mathematical derivation combined with empirical data shows that Kaczkowski does indeed apply in terms of discounting from SSRA back to trial date. In other words, it can be shown that the increase in PIA is comparable to the increase in annual average wage during the period from trial date to SSRA. Since, under Kaczkowski, the wage increase is, by definition, equal to the discount rate, so is the PIA increase. In order to demonstrate this, the period from trial date to SSRA is broken into two periods: the period of earnings up until the work-life expectancy (WLE), at which earnings cease, and the period from the WLE to Social Security retirement age (SSRA), where the PIA increases due to wage indexing and also adjustments to the Social Security formula (bend points) that are based on wage increases. Since the Social Security benefit is based on lifetime wages, wage indexing is used to bring past wages up to current levels, taking wage inflation into account. For example, $40,000 in 1985 is equivalent to $114,400 in 2017, based upon the increase in the average annual wage.

During the latter period, the PIA increase is passive, and not due to any increase in service or earnings. During the period of earnings, the PIA also increases due to earnings and service. If it can be shown that the PIA during the passive period increases at a rate comparable to wage increase, then the PIA during the active period must grow at an even greater rate. This is because PIA during the active period increases due to both increases in the Social Security formula and wage and service increases, while during the passive period the PIA increases due to increases in the Social Security formula only.

We compared the historical growth in the average annual wage to the growth in the PIA, from 2006 to 2016. In this example, 2006 is assumed to be the end of the work-life expectancy and the wages terminate at that point, and 2016 is when the employee reached Social Security retirement age. In this example, the injury hypothetically occurred in 1985 and the projected lost wages from 1986 until 2006 are used to compute the hypothetical lost Social Security benefit. Note that in a real case we would be looking forward, not backwards, but this case is hypothetical. Also, in this example, only the lost wages and Social Security based on the lost wages are analyzed, for simplicity. In a real case, the real earnings up to the injury would be included, and the total lifetime Social Security benefit is calculated, with and without the injury. The difference in the trial date value of the two benefits is the loss.

The PIA is then calculated as of 2006, with zero wages after that point. In this example, the wages are equal to the average annual wage for each year. Even with career wages ending in 2006, the PIA will increase every year after 2006 until the SSRA, due to wage indexing and the Social Security 'bend point” formula, where the bend points increase every year, based upon wage increase. Even with the actual career wages ending in 2006, the salary used in the Social Security formula, average indexed monthly earnings (AIME) increases due to wage indexing. This input, the AIME, is then fed into the bend point formula, with the output being the PIA. Since the bend points increase every year, as well as the AIME, so does the PIA. The result shows that over the entire 10-year period, from the end of the work-life expectancy until Social Security Retirement Age, the total increase in PIA (30.43 percent) is very close to the total increase in Average Annual Wage (AAW): 30.39 percent. In fact, PIA tracked AAW very closely on a year to year basis also, except for a short period following the Great Recession of 2008-2009.

The equal growth in PIA and AAW means that Kaczkowski then applies to the PIA from the period of the WLE until Social Security retirement age. Therefore, instead of trending the PIA from the WLE (with wage indexing and projected bend point increases) until the Social Security Retirement Age (SSRA) and discounting that benefit back to the WLE, the PIA (Social Security benefit) as calculated at WLE is used at the SSRA, and not discounted back to the WLE. Thus, the increase in PIA during this period is equivalent to wage increases and under the Kaczkowski assumption this increase is equal to the discount rate.

The next step is to demonstrate that PIA growth from the current date to the WLE equals wage growth. We can observe by inspection that this has to be the case, based upon the calculation above. The PIA calculated at the end of the work-life expectancy, with zero future wages, increases at the same rate as wage growth, due to indexing plus the increase in the bend points. Therefore, in going from current date to the end of the work life expectancy, PIA has to increase at least as fast as wage growth, since wages are earned during this period.

To demonstrate this empirically, the first step is to eliminate the growth in the PIA due to increased years of service. Like most defined benefit pensions, the Social Security benefit (PIA) grows with increases in both salary and years of service. In Social Security, the increase due to years of service stops at 35 years. Therefore, in computing PIA growth from 1986 to 2006 based upon wage growth and change in the formula only, a factor has been introduced to adjust for years of service decreasing from 20 in 2006 to just one in 1986. With this adjustment, it turns out the PIA growth over this period is 119 percent and average annual wage (AAW) growth is 121 percent, thus demonstrating the above reasoning empirically. The reason that PIA growth with respect to AAW during the active period is essentially the same as during the post work life inactive period is because of wage indexing.

Therefore, the Kaczkowski assumption holds for PIA growth from trial date until SSRA (Social Security retirement age) and therefore the method for computing lost Social Security is the following:

• Trend earnings from the date of injury to current date.
• Project current earnings without growth until the work-life expectancy (WLE)
• Use the current formula for PIA (social security benefit) and projected current earnings to compute the hypothetical Social Security benefit without injury.
• Value the PIA at SSRA and do not discount back to current date.

Note that if past earnings growth exceeded growth in average annual wage, it may be reasonable to include a productivity factor for the future earnings. In terms of computing the net loss, the actual post-injury value of Social Security is subtracted from the value of the hypothetical Social Security benefit without injury. For example, in the case of death or total disability, the future earnings are zero regarding the actual post-injury Social Security benefit. In the case of partial disability or wrongful termination, post injury earnings (if any) are projected without growth, following the Kaczkowski assumption. In the case of wrongful death, the loss may be mitigated by survivor benefits. Regardless of circumstances, in almost every economic damage case there is a lost Social Security benefit in addition to the lost earnings, which should be included in the economic damage report.

Mark K. Altschuler is an actuary for Pension Analysis Consultants, Inc. Thomas Delevie is an attorney in solo practice. He and has written and lectured on a variety of subjects including personal injury, employment and commercial litigation.