This is a growing collection of topics aimed at developing a broader understanding of personal injury claims to assist professionals in the medico-legal industry. While these are generally accepted principles, there may be differing opinions.

Earnings Inflation and Real Growth

Interest, earnings inflation, and net discount rates

The interest rate is the rate that we assume claimants would earn on their lump sum payout in the future.

Earnings inflation is the rate of growth of earnings. Actuaries typically assume that earnings grow with CPI or CPI + 1%. 

The relationship between the interest rate and earnings inflation rate dictates the net discount rate. The net discount rate is generally agreed on by actuaries. 

Earnings inflation should not be addressed by Industrial Psychologists.

Real earnings growth

Earnings can grow above earnings inflation. For example, government workers’ basic salaries grow above earnings inflation due to notch increases. In some cases, claimants’ earnings grow in line with published wage increases.

Often, increases of 8% to 10% are mentioned in IP reports, based on an observed past period, but this is most likely not sustainable until retirement. Careful consideration should thus be given as to the appropriateness of these assumptions. An alternative approach is to suggest suitable career ceiling figures at an appropriate age.

A straight-line increase results in annual increases of the same amount in real terms between two earnings points.
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Earnings Expert - Understanding remuneration

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Taxation of Damages Awards

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Earnings Inflation and Real Growth

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