Military Survior Benefits are Increasing

As of March 2008, if a military member died under the old rules the surviving spouse then received 35% of his retirement pay. Under the new rules, that spouse now will receive 55%.


Details (from retirement planner newsletter):

As March came to an end so did the Survivor Benefit Plan (SBP) Social Security Offset. As a result of Public Law 108-375, the Social Security Offset for annuitants was eliminated effective April 1, 2008. The law provided for a phased-in elimination which began October 1, 2005, and ended March 31, 2008, with the last Social Security Offset deduction. Prior to October 2005, at age 62 the SBP annuity was reduced because the beneficiary became eligible to receive the retiree’s Social Security benefits.

Effective April 1, 2008, annuitants that had their annuity reduced by the Social Security Offset now have the offset removed. Annuitants that were eligible for the minimum annuity percentage of 35 percent prior to October 2005 are now entitled to the full 55 percent of the base amount. Annuitants who were receiving the Supplemental Survivor Benefit in addition to the basic benefit will also be paid at the new rate of 55 percent. The minimum annuity percentage is now 55 percent for all annuitants.

For example: with a $1,000 base amount the annuitant should see an increase in monthly annuity to $550 (55% x $1,000).

What is a person's life worth?: A Three Act Play

Act One: The realization of the problem
Everyone realizes that a person's life is worth more than what they could have earned in the labor market over their working life. A typical person does a lot more than work. For example, the average person spends over 15 hours a week on household production related activities such as maintaining the lawn and chores. People spend over 40 hours a week on leisure activities such as going to movies and socializing with friends.

(See expecantacy data website for Time Value of Day publication)

The question posed in legal cases where there is a death or significant injury is how do you put a price tag on the value of the non-labor market time? One approach is simply to let the courts decide. That is let the jury place a value on the lost of non-labor market life. Others think that the court system would be better served by providing some guidance to courts and juries on this issue.

Act Two: The solution?
Enter the economists. Starting in about the 1980's economists, who since the begining of modern economics period have been researching and studying human behavior thru utlity models, began formulating specific models to attempt to address this types of issues in court cases. Generally speaking the models and concepts offered by modern economists fall into two catagories.

One class of models attempts to value a person life by looking at how much people would pay not to have their life taken away from them. These types of models involve measuring how much people are willing to pay to reduce the probablity of death. Market measures of people's actions can be seen thru the insurance people buy and implictly thru the things that they buy. For example, how much more would you pay for an automobile that would increase your chance of survival by 25%? How about 75%?

The second class of models attempts to value a person's life by looking at what it would cost a person to replace or purchase all the things, out side of the labor market that the person does. For example how much would it cost you to hire a person to take care of your lawn? How about to watch over your kids at night? The replacement value of these activities is determined by estimating the number of hours spent by the applicable hourly wage.

See: Economic/Hedonic Damages, by Michael Brookshire and Stan Smith (1993) for an excellent overview of the approach.

Act Three:The re-realization of the problem
Economist Exits, Stage Left Daubert and related cases,has significantly effected how these actual issues are handled in the courts. In short, while most economist realize the power and the value of these types of economic models when applied to large groups of individuals, the same economist recognize the substantial problems when trying to apply these models to individuals. Thomas Ireland, et al, in a 1997 aritcle in said it best:

"The impact of the Daubert decision is clear. In every reported case in which Daubert, the Federal Rules of Evidence or their state statute derivatives, or even Frye, have been mentioned as a basis for the admissibility of scientific evidence, “hedonic damage” testimony has been disallowed. Furthermore, in every case in which the scientific accuracy of “ hedonic damage” testimony was considered as a basis for the evidentiary decision, this testimony has failed the various tests of scientific accuracy posed by the courts.” (p. 155)"

Non-working spouses income in a divorce

Guideline Economics

www.guidelineeconomics.com/files/Advanced Degree.pdf

The Personal Sacrifice Approach:
First, determine the additional earnings to date from the degree and deduct what the degree holder would have made without the degree. Next, subtract that portion of additional income devoted to the personal consumption of the degree holder and income taxes. This approach is much like the present value approach but in reverse and provides for the possibility for a buyout to occur.

Conclusion

....The authors believe that more attention needs to be devoted to the actual contributions and sacrifices made by the non-degree holding spouse.

The "Personal Sacrifice Approach" presented here for calculating an advanced. degree is not complicated. It has the advantage of providing a method for revealing the true cost of a degree that is fair to both parties in the divorce. The most apparent advantage is that it allows the degree holder to systematically payoff the cost of the degree.

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Concern:

Is the same considered for the supporting spouse (the non-degree-holder)? Consider this:

He was a biology under-grad. She was a Junior when they married. She quit college & supported him through medical school. Had she not done this, she would have graduated (with an English/Tibetan-Art degree) & he would have gone into sales. After he finally finished his neurosurgery residency, she stopped working outside the home & started working at home -- bearing and raising 3 kids. Now, 30 years after the marriage, the kids are gone, she hangs out at the Club, and he's fooling around with a nurse barely older than his daughter.

Following King, we must take neurosurgery income less sales income, less the Lothario's personal consumption & income taxes. [...determine the additional earnings to date from the degree and deduct what the degree holder would have made without the degree.
Next, subtract that portion of additional income devoted to the personal consumption of the degree holder and income taxes.]

But what of Mom? Where would she have been had she completed her degree & stayed hitched to Dad who was in sales rather than finishing med school? Given the 3 kids, she probably wouldn't have worked outside the home continually after graduation. Her job & earnings might have been different assuming college graduation, but she was destined to spend some time as a stay-at-home mom. As things worked out, when the 3rd kid, Buddy, finally entered 1st grad, she didn't have to go back to gainful employment because her husband was a rich doc.

Is there any part in the King mechanism (or in Court in these matters) for saying: "For the non-degree-holder, determine the potential earnings to date from the time of the marriage and deduct what the non-degree-holder would have earned without supporting the ultimate degree holder. [This is her loss of own earnings.] Next, subtract that portion of additional household income devoted to the personal consumption of the non-degree-holder."

The last sentence is the nub. Sure, she sacrificed in those early years. But she's lead a life of luxury in the last two decades so that the actual contributions and sacrifices made by the non-degree holding spouse have been paid back manifold. King seems to invite this argument.

Divorcing the self-employed spouse: Getting what you are entitled to

Determining how much the damages are in cases involving self employed professionals is difficult. In a lot of situations, the difficulty arises because the self employed individual's actual tax reported income does not reflect how much he or she is bringing into the household. In divorce cases the problem can be amplified because the analyst is not only trying to figure out how much the individual makes or could make, but the value of a income stream into the (post-divorce) future.

Below is an example of the problem and a number of suggested solutions. The problem is based on posting to a popular forensic economics bulletin board.

The setting
Beavis Matfry (age 50) owns a highly successful local chain of hair salons, Beavis Matfry Styles. He has won national and international styling awards, has his own line of hair care products, and his is THE salon in town for anybody important. He still cuts hair personally, and his operators are trained by him and sign non-compete contracts.

Now comes the divorce and the non-working spouse wants half the business.

The Problem
A "standard" business valuation, that uses generally accepted valuation methods such as the Discounted Cash Flow Method, places the value of his business at $1.2 - $1.5 million. However, his personal tax returns show that his personal income from the salons is about $600,000 per year.

In the real world, it is hard for anyone to believe that anyone would give up $600,000 a year for a one-time upfront payment of $1.2 - $1.5 million.

The solutions

1. The analyst may want to value the service business as the capitalized value of the stream of income above that portion that is compensation to the owner/manager in his role as manager. To do this you may want to use a methodology based such as "Sellers Discretionary Earnings" methodology instead of approaches such as the 'Excess Earning method' that in part value on parts of a company that are not really applicable to a service business.

The SDE method incorporates personal earnings and adds back the non-cash stuff like deprecation and interest expense. The Business Reference Guide -2004 edition by Tom West does a good job of explaining this method and also states that it is becoming the most popular method for business valuation (page 294).

2. It may be ok to use the standard approaches such as the 'Excess Earnings' approach but the analyst may need to 'add back' certain expenses to get a more accurate picture of the company's worth. For example, adding back all non operating expenses (cell phone, personal vehicle, professional fees not specific to the business, non working relatives on payroll, etc.), as well as any other expenses an arm's length buyer would not expect to incur as a normal operating expense may produce a more realistic assessment.

Valuing Pensions in Divorce Cases

In California and other states, the idea is to reckon the economic value of the pension at the time of divorce. In theory this is done so that the individuals post-divorce work efforts are not incorrectly awarded to the marital period.

There appear to be several ways to handle the valuation of a pension in an divorce case. The ease at which it can be done really depend on if it is a defined benefit or defined contribution plan. Overall here are the approachs:

1. One approach is to value the defined benefit plan at the date of divorce. In otherwords, just look at what is in the pension at the time of the divorce.

2. Another is to value it at the projected retirement and then to do a time rule analysis, apportioning the pension by the fraction of marital years to total years.

3. A third approach is called here a a QUILDRO qualified Illinois domestic relations order. This approach assigns the pension in proportions in the future. The proportions are based on when the retirement would be paid out.

4. A fourth approach simply values the contributions and their interest as they have been paid in - more appropriate for defined contribution plans. This is somewhat problematic for defined benefit programs.