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Adequacy of Earnings Replacement in Workers' Compensation Programs

By: H. Allan Hunt, Editor
Published: December 2004

A Report of the Study Panel on Benefit Adequacy of the NASI Workers' Compensation Steering Committee.

Benefit adequacy in workers' compensation (WC) programs remains a critical issue facing the WC system. Recent statutory developments, particularly changes made to the WC system that were generally designed to reduce costs by encouraging the prevention of workplace injuries, have led some to claim that those changes significantly undermined the adequacy of WC benefits. Others counter that, as a result of those changes, most states' benefits actually increased or were adjusted to be in line with those paid by other states. Further heightening the interest in the issue of benefits adequacy is a series of groundbreaking wage loss studies recently conducted in five states. The data and methods used in these studies constitute a breakthrough for statistical analysts interested in estimating the lost earnings that WC benefits are designed to replace.

Recognizing the opportunity to add clarity to this contentious issue, the Workers' Compensation Steering Committee of the National Academy of Social Insurance formed the Benefit Adequacy Study Panel to review the literature on benefit adequacy and to develop an approach to document what is currently known—and not known—about benefit adequacy in WC programs. The panel documents the extent to which WC cash benefits replace workers' lost wages, and assesses the adequacy of that wage replacement. This book is the result of the panel's work.

Following a brief review of the WC system, the book's contributors explore the alternative meanings of benefit adequacy and trace the statutory benefit structure among the state WC programs over three decades. They ask “What are the earnings losses suffered by disabled workers?” and “To what extent do WC program benefits replace those losses?” Theoretical answers to these questions are sought by studying statutory benefits while empirical answers are sought by studying data from the group of wage loss studies conducted in California, Wisconsin, Washington, New Mexico, and Oregon. These studies are based on the pre- and postinjury earnings of actual workers, and the empirical methods used in the studies lead to the most convincing assessment yet of benefit adequacy in WC programs.
 
Next, the panel turns their attention to the question of adequacy. Specifically, they explore the extent to which existing benefits are considered “adequate” and tackle the controversial question of just what are “adequate” benefits. Several yardsticks for wage replacement adequacy are used, including the traditional and still widely used two-thirds of gross wages, the standards included in the Model Workers' Compensation Act (Revised), introduced by the Council of State Governments in 1974. The panel also assesses whether WC wage replacement benefits are adequate financial support to keep injured workers from falling below the official poverty line.

The final chapter reviews the findings and provides conclusions on the extent to which cash benefits paid to injured workers replace their lost earnings. Directions for further research are also identified.
 

$16.00 paper / 177 pp. / 2004 / ISBN 0-88099-314-6

Available through W.E. Upjohn Institute for Employment Research, call (616) 343-4330