TEA.3.1

Description

One of the legally-mandated fringe benefits provided to virtually all U.S. workers is coverage under the Old Age, Survivors, Disability and Health Insurance (OASDHI) system, commonly known as “Social Security.” When a worker is wrongfully terminated, injured or killed, forensic economic experts often value the loss of these benefits using the employer’s share of the Federal Insurance Contribution Act (FICA) tax (currently 7.65%) levied on estimated lost earnings; or, excluding the 1.45% Medicare portion of this tax, at 6.2% of estimated lost earnings. Because the Social Security system is so complex, the simplicity of this “FICA tax method” of valuing lost Social Security benefits is very appealing. Unfortunately, this valuation method is unlikely to correctly measure losses vis-a-vis the Social Security system. Following a review of some of the related forensic literature, this author estimates the size of the measurement error arising from using the FICA tax method for death cases. The magnitude of the error is exposed by first describing how to estimate the true financial losses of Social Security retirement benefits that result from a loss of earnings, and then by showing that the FICA tax method gives an accurate estimate of these losses in only a minuscule portion of the situations where forensic economists are called upon to supply damage appraisals. Examples illustrating the quantitative size of the errors that result from using the FICA tax method are shown.