The below-market discount rate is a present value convention under which future losses are projected without the inflation component of wage growth and discounted at a real rate of return, the yield on low-risk investments less expected inflation, rather than at the full market rate. It rests on the observation that a market interest rate contains a payment for the inflation the future losses will also carry, so removing inflation from both sides leaves the real growth of earnings against the real return on the award, a net rate that has historically been small and positive.
The convention is one of the three ways a report can state the relationship between growth and discounting, between the full market-rate method the present value page describes and the total offset assumption that the two cancel entirely. It is the approach the Supreme Court described, in a federal maritime case, as an acceptable way to compute the present value of lost earnings, and it is used in lost earnings, wrongful death, and personal injury reports wherever the venue permits the economist to choose the method. Its practical appeal is that it separates the inflation question, which the parties rarely dispute in principle, from the real growth and real return questions, which they do, and puts the report's assumption about the future in a single small number the trier of fact can weigh. The net versus gross discount rate comparison explains how the same net rate can be reached from nominal inputs.
The convention removes inflation but does not remove judgment: the real growth rate and the real discount rate each depend on the historical window chosen, and the net rate they imply can move from near zero to two or three percentage points depending on the decades included. Because the net rate is small, a change of a fraction of a point moves a long-horizon present value materially, so the sensitivity of the result to the window matters more here than under a market-rate method where the gross figures are larger and the difference between them more stable. The convention also assumes the loss stream and the discount rate share a common inflation component, which holds for wages but not necessarily for medical costs or replacement services, whose prices have grown at their own rates; a mixed stream needs a separate real growth rate for each component. Where the venue directs a market rate or the total offset, the convention is presented as an alternative rather than adopted.
The Supreme Court, in a federal maritime case, reviewed the methods available for discounting lost future earnings, described the below-market approach as one a court may adopt, and left the choice of the real rate to the evidence in the record while observing that a rate within a modest positive range would be difficult to fault. Federal courts applying that guidance have accepted reports that state the real growth rate, the real discount rate, and the window each comes from, and have excluded or discounted reports that asserted a net rate without support. State courts that have not adopted a rule of their own generally admit the convention as a matter of method and leave the rate to cross-examination. The challenges that succeed target the inputs: a historical window selected for the net rate it produces, a real growth rate for the whole economy applied to an occupation whose earnings have grown more slowly, or a real discount rate taken from a single date rather than a horizon-matched curve. A report presented in a New Jersey personal injury matter, or in any venue, that names the window, shows the series, and presents the market-rate alternative is positioned to be examined on those inputs, and the rebuttal guide lists the questions an opposing economist will ask about them.
A real rate is the return on an investment after the inflation it will experience is removed. The economist takes it from low-risk government securities, either by subtracting the expected inflation the market prices in from the nominal yield or by reading the yield on inflation-protected securities directly, and matches the maturities to the years of the loss.
No. Total offset assumes the growth and discount rates cancel completely, so nothing is grown or discounted. The below-market convention removes only the shared inflation component and keeps the real growth of earnings and the real return on the award as separate, stated inputs, which usually leaves a small positive net rate rather than zero.
The one the report states and defends. A longer window smooths out unusual decades; a shorter one reflects recent conditions. The economist shows the net rate under the chosen window and how it would change under the alternatives, because a window selected for the result it produces is the first thing an opposing economist tests.
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