When calculating an individual's lost earnings and benefits, the future damages are adjusted to present value. The present valuation of future damages accounts for the time-value of money. In short, money received today is more valuable than money received in the future, as money received today may be invested and earn interest over time.
Most settlements and awards are paid as a single lump sum, which includes both past and future damages. Future damages must include an adjustment to present value, otherwise they would be over-compensated.
To convert the future damages to present day value, a discount rate is applied. The discount rate accounts for the interest the individual could expect to receive from investing their lump sum in a risk-free investment. The use of a risk-free investment is necessary as it is assumes the investment will be secure, ensuring the annual funds needed to cover the projected future economic loss would be available.
U.S. Treasury Securities are the most commonly used interest rates in adjusting economic losses to present value, as they are backed by the U.S. government. For example, Treasury STRIPS offer a range of maturity dates and can be bought at a set interest rate. Learn more about U.S. Treasury Securities and interest rates here.