Assessment of the Adequacy of Methodology for Calculating Lost Earnings for the Protection of Victims’ Rights: Post-Hoc Testing Using Real Data

Korean courts continue to apply the Hoffman method which applies the legal interest rate of 5% per annum as a simple discount rate when they calculate the present value of lost earnings. The Hoffman method does not account for future wage growth and only discounts using a 5% interest rate in the present value calculation. Therefore, it has been criticized for its lack of economic rationality and for underestimating the actual damages suffered by victims. In this regard, this study empirically verified whether the Hoffman method underestimated the amount of damage. To do this, we confirmed the adequacy of the Hoffman method by calculating the actual economic damages occurred in a wrongful death case using historical time-series data for 20 years of the general worker’s wages and market interest rates from 2001.01 to 2020.12. When we evaluated based on the present value, the Hoffman method underestimated the actual amount of damages by 35% to 92%. Plus, in the case of the net discount rate method, which considers both wage growth and interest rate effects when we calculate lost earnings, it was found that a negative net discount rate must be applied for the general worker in order for actual damages to be calculated. Therefore, in Korea, it is judged that the method of calculating lost earnings should be replaced with at least the total offset method or the method of applying a negative net discount rate.