Friday, November 28, 2014

What percentage of earnings should be replaced by temporary disability benefits?

Workers’ compensation levels for temporary disability are of critical importance to workers and their families.  Any discussions I’ve read recently are around “benefit adequacy” of temporary disability benefits.  This is, of course, critically important but misses some important points.

Workers’ suffer from work-related injuries.  No one can share the physical and psychological pain.  Workers’ compensation is intended to offset the financial impact in terms of lost wages.  In addition to the pain and suffering of the work-related injury, workers must also bear the earnings lost that are not compensated by workers’ compensation temporary disability payments.  As with uncompensated waiting periods and earnings above the maximum insurable, workers are self-insured for the difference between what they lose in wages and what they get in compensation.

The obvious benefit adequacy argument characterizes the loss as a worker deductible.  It also shifts the cost of work-related injury from employer to worker.  The lower the cost to the employer, the less the incentive to invest in worker safety and return-to-work initiatives.  Workers’ compensation costs are part of the prevention feedback mechanism.  The historic trade-off that made workers’ compensation the exclusive remedy envisioned that costs of workplace injury would not unduly shift costs as well as the burden of injury upon the worker.  

How much of the worker’s loss should be compensated?  The National Commission on State Workmen’s Compensation Laws (July 1972) said the following:

We recommend that cash benefits for temporary total disability be at least two-thirds of the worker's gross weekly wage. The two-thirds formulation should be used only on a transitional basis until the State adopts a provision making payments at least 80 percent of the worker's spendable weekly earnings. (See R3.6 and R3.7)  [Emphasis added]

Here we are more than four decades after Professor Burton’s authoritative and comprehensive report and the fact is only 10 US state have made progress toward meeting this recommendation.  By contrast, all Canadian jurisdictions could be assessed as having met the recommendation with the majority exceeding the “at least 80% of net” standard set out in the report’s recommendation. [see accompanying table]

Beyond the benefit-adequacy argument, the financial costs of work-related injury being borne by workers are real and measurable cost.  Workers and their families bear other costs and there can be debates about what estimates of those ought to include.  Temporary Disability losses are easily quantifiable into the portion covered by workers’ compensation insurance and the portion self-insured by the workers themselves.  

If the work at least 80% of that loss.  Clearly a handful of US states and most Canadian jurisdictions have found ways to meet this standard.  Doing so may be fundamental to preserving workers’ compensation as the essential social insurance program it has become in the world today.


Anonymous said...

I don't agree that BC is making this standard. For those making over 78,000, will not meet this standard and depending on the amount over that may not even receive 50%. The cost of living in BC requires that in order to live an average lifestyle (e.g. own a home, car, etc) the worker needs to earn more then other provinces.
Thus a wage at the level of 80,000-100,000 is not excessive (you require this level of wage to buy a home for 500,000, which would only buy a small townhome). Thus the system is under insuring people that are earning a moderate wage which can lead to inability to meet your monthly expenses. this off setting of costs to the worker is unaccapetable.

Mike said...

I suspect the reason that few US jurisdictions have moved to the 80% of spendable formula is that, when workers’ comp benefits are tax-free (as they are in all US jurisdictions), the “80% of spendable” approach doesn’t reliably produce more generous benefits to workers.

For example, my take-home pay is about 74%* of my gross pay. To simplify, let’s say I make $1000 a week gross, so that’s $740 a week spendable. Applying each of the two formulas gives:

· 2/3 of gross formula gives a benefit of $666.67.
· 80% of spendable gives a benefit of $592.00, or around 11 percent less than the other formula.
So if you ask me, I’ll take 2/3 rather than 80%, thank you very much.

The breakeven tax rate can be computed as 1-(GRR/SRR) where GRR = gross replacement rate, and SRR = spendable replacement rate. It works out like this: 1-(.6667/.8) = 0.1666, in other words, if spendable earnings are 16.66% less than gross wages, the two formulas give equal benefits; if deductions are higher than 16.66%, the gross formula is more generous.

There is an argument that the spendable-wage approach is more equitable, and I agree, but that’s a different topic.

-Mike Manley