By Chang Se-moon
 |
Near the end of 2020, well over 200,000 people signed a petition posted on the Cheong Wa Dae National Petition Bulletin calling for a tougher sentence for the SUV driver.
The SUV driver may have committed a minor traffic violation in the eyes of existing laws. But the outcome, however, is a very serious civil case referred to as wrongful injury.
If the driver received a 50-year prison sentence rather than the one-year sentence, of what value is this to the victim? This is where a civil case attempts to provide some remuneration. Simply stated, how much should the victim receive from the reckless driver for her irreparable injury? As an economist who has worked on more than 100 such cases, I can answer the question.
Broadly speaking, the compensation should have three components: today's value of lost future earnings; today's value of care expenses; and the value of the loss of happiness during her lifetime.
We begin with the year when the victim may start working if she had not suffered the injury. Assume it is 2025. We need to know how much she would be earning during 2025 (base year) which becomes the base earning. Assume it is $20,000. We now need to determine the projected worklife. This is the projected number of years one would work without sustaining this injury. Assume it is 40 years, i.e., in the workforce until 2065.
Worklife often ends before the legal retirement age. People may suffer health problems and withdraw from the labor market for that reason or another. One can find worklife tables in Korea, the United States and other advanced countries.
Next, we project increases in income from 2025 to 2065. We usually rely on past rates of growth for selected occupations. We would then "discount" future values to the present value. This is because we are making compensation now and not in future years.
For a quick primer on discounting: Consider $100 today and $100 a year from now. If you have a choice in claiming the $100 between now and one year from now, you will choose $100 today. Put differently, if you are entitled to receive $100 one year from now, but you can have a lesser amount now, how much will you be willing to take now in exchange for receiving $100 one year from now? If you say $95, the discount rate becomes 5 percent, or 0.05.
The growth rate and the discount rate of future earnings are the variables which can lead to wide variances between forensic economists working for the plaintiff and those working for the defendant.
We will rely on the offset approach which some courts allow. In the offset approach, the growth rate and the discount rate are assumed to be equal to each other, making the calculation simple. According to the offset approach, the present value of future lost earnings in our example is $800,000, obtained by multiplying $20,000 of base earnings by 40 years of worklife.
We need to add fringe benefits. Fringe benefits are those in addition to the base salary. They may include holidays, vacation days, health insurance, life insurance, educational subsidy, retirement pay, holiday bonuses that are popular in Korea and others that may be particular to a company.
The percentages of fringe benefits to base earnings vary widely from one occupation to the next, and may range from zero to over 50 percent. Assuming a 25 percent fringe benefit ratio to the base earning, the loss now becomes $1 million, obtained by multiplying $800,000 by 1.25.
In this instance, there will be healthcare expenses. Attorneys usually hire a healthcare expert to calculate care expenses. Healthcare expenses do not end with retirement. These expenses will continue until one's life ends. This means that we now need to consider life expectancy.
Because of the severe health conditions, her life expectancy may be shorter than the life expectancy of other women of comparable age. Assuming that annual care expenses, which include medicine, physical support, personal care and more, are $30,000 a year and the remaining life expectancy is 50 years, the present value of future healthcare expenses becomes $1,500,000.
Adding the present value of lost future earnings and the present value of healthcare expenses, the calculated compensation covering earnings and healthcare becomes $2,500,000.
Hedonic damages is the term used for the loss of enjoyable life. Economists are usually not well-equipped to calculate the dollar value of hedonic damage. Jurors or judges are likely better equipped to make that calculation.
The moral of this heartbreaking example to me is that we can all be much more careful not to harm other people especially when we sit behind the wheel of a car.
Chang Se-moon (changsemoon@yahoo.com) is the director of the Gulf Coast Center for Impact Studies.
