Jeremy Babener, a third year Juris Doctor candidate at New York University School of Law, has completed a seminal research paper titled "Justifying the Structured Settlement Tax Subsidy: The Use of Lump Sum Settlements" which identifies and analyzes 12 historical dissipation studies plus two law commission dissipation reports.
This S2KM blog post summarizes and reviews Babener's dissipation paper. A prior S2KM post introduced dissipation studies and "claimant centric" business models as strategically important for structured settlements and settlement planning. A subsequent post will feature an interview with Jeremy Babener about his dissipation paper.
Babener's conclusions about injury victim dissipation studies:
- No existing published dissipation study supports either of two structured settlement industry claims:
- Injury victims "squander" lump sum awards;
- Nine out of 10 lump sum injury victim recipients dissipate their awards within five years - the "90% - five year" statistic.
- Dissipation studies exist which reach the opposite conclusion - injury victims have no more propensity to dissipate lump sums than non-injury victims.
Scope: Although Babener's dissipation paper is comprehensive, it focuses on a specific topic - the 90% - five year statistic.
Babener's dissipation paper does not:
- Contend that claimants spend money responsibly. Instead, it "exposes as industry allegory the frequently stated belief that studies have proven [injury victim squandering] to be true." Babener recommends a new United States study to develop "empirical and substantiated" dissipation statistics for injury victims because the United States tax subsidy for structured settlements is premised on this belief.
- Address possible explanations for injury victim dissipation besides "squandering". Other commentators, however, have identified two explanations which deserve greater consideration and analysis:
- Alternative # 1 - Asset and income qualification requirements for certain government benefits (including Medicaid and SSI) which:
- Force and re-enforce recipients into poverty; and,
- For many persons, require asset spend down strategies (dissipation) to qualify.
- Alternative # 2 - Inadequate funds - where the proposed settlement plans:
- Don't exist; or
- Make inaccurate or unrealistic assumptions; or they are:
- Under-funded; or
- Improperly implemented; or
- Badly administered.
- Alternative # 1 - Asset and income qualification requirements for certain government benefits (including Medicaid and SSI) which:
- Characterize the secondary market as either proving or disproving claimant dissipation characteristics.
Babener's paper contains six sections - each of which S2KM separately summarizes below.
- Section I - Introduction. Babener focuses on the linkage between the structured settlement tax subsidy and dissipation studies.
- Section II - An Empty Statistic? Babener attempts, but fails, to locate any source supporting the 90%- five year statistic.
- Section III - Other Evidence of Lump Sum Use. Babener reviews other studies casting light on claimants' financial responsibility.
- Section IV - The Informed Conclusions of Others. Babener examines why the unproven 90%-five year assertion endures.
- Section V - Rhetoric of the Dissipating Claimant. Babener addresses the rhetoric of the enduring assertion, calling for a modern American study to answer the question long thought answered.
- Section VI - Conclusion:
- Appendices (the surveys);
- The lack of evidence for the 90%-5 year statistic;
- Other evidence of lump sum dissipation;
- Evidence of responsible lump sum usage.
Section 1 - Introduction
Babener's paper does not contend that personal injury claimants responsibly expend lump sum settlement monies. Instead, the paper exposes as industry allegory the frequently stated (but unsubstantiated and largely unanalyzed) belief that studies prove injury victims prematurely dissipate lump sums. Babener's paper highlights the federal income tax subsidy for structured settlements and estimates the annual subsidy to total between $360 and $840 million per year assuming $6 billion of annual structured settlement annuity sales. Babener's paper incorporates and builds upon the findings of two other authors who have studied dissipation, Ellen S. Pryor and Adam F. Scales. Babener's paper also reviews and relies upon 12 studies and two law commission reports - most of which are from non-United States countries. Babener also conducted extensive interviews with structured settlement practitioners.
Section 2 - An Empty Statistic?
Babener identifies and traces historic references from 1978 to 2009 citing "insurance studies" which allegedly support the 90% - five year statistic. In every case, Babener finds the reference either lacks any citation or cites to a study that does not support the 90%-5 year statistic. Although articles, treatises and practitioners continue to cite the statistic as proven, Babener's research does not discover any study that supports the 90%-5 year statistic. That statistic, which Professor Scales characterized as "the most consistently repeated 'fact'" in structured settlement law and lore, appears to be a mythical falsehood. Babener does not explore the consequences of this industry myth which extend beyond the scope of his paper.
Section 3 - Other Evidence
Babener summarizes his findings after reviewing 12 dissipation studies plus two law commission reports and references his more detailed analyses of these sources in his paper's Appendices. None of the dissipation studies or reports support the 90% - five year statistic. According to Babener's analysis, seven of these studies, plus two law commission reports support an opposite conclusion: lump sum recipients do not spend their recoveries unwisely.
The law commission reports Babener analyzes are by the Law Reform Commission in Ireland in 1996 and the Canadian Manitoba Law Commission in 1987. The Law Reform Commission of Ireland found "studies recently conducted by the Law Commission and the Disability Management Group of the University of Edinburgh have shown that the risk of dissipation is less than was widely believed and that those awarded very high damages are least likely to fritter away their compensation".
The 12 dissipation studies Babener reviews in his paper are listed here chronologically:
- 1947 U.S. Retirement Railroad Board Compensation study;
- 1959 University of Michigan study;
- 1973 British Personal Injury study;
- 1983 Australian Accident Compensation study;
- 1983 Canadian Auto Accident Compensation study;
- 1984 British Personal Injury study;
- 1984 Australian Traffic Accident study;
- 1987 Canadian Manitoba Law Commission study;
- 1992 Australian Auto Accident study;
- 1993 Scottish PersonaI Injury Compensation study;
- 1994 British Personal Injury Compensation study;
- 1996 Law Reform Commission of Ireland study.
Section 4 - Informed Conclusions of Others
Babener acknowledges that none of the studies he cites and analyzes is directly analogous to 21st century United States injury victims. Babener calls for a modern American study of injury victim dissipation to support the structured settlement tax subsidy.
Section 5 - Rhetoric of the Dissipating Claimant
In discussing and analyzing the continuing rhetoric within the structured settlement industry, especially the pejorative and unproven characterization of injury victims as "squanderers", Babener quotes from Adam Scales' 2002 paper. Scales argues that the image of the dissipating claimant has "intuitive appeal". According to Scales, “What is objectionable in the rhetoric of structured settlement enthusiasts is the unsubtle attribution to tort claimants of characteristics, values, and habits that are generally held in contempt in American political discourse: a lack of self-control, and the concomitant propensity to wind up on welfare." Scales continues, “An essential element of the discussion has been the assumption that successful tort claimants simply cannot be trusted with large sums of money."
Section 6 - Conclusion and Appendices - Babener concludes his paper by calling for a modern American dissipation study. In his paper's Appendices, Babener analyzes existing dissipation studies under three categories:
- Appendix A - frequently cited dissipation studies which do not support the 90%-five year statistic;
- Appendix B - other studies suggesting lump sum settlement recipients dissipate;
- Appendix C - studies offering evidence of responsible money management by injury victims.
For related S2KM blog posts, see:
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