Determing Spousal Support in Divorce Cases
Stauffer, Robert F., Lynch, Larry A., Journal of Legal Economics
The methodology developed in this analysis provides present value estimates of economic losses resulting from divorce. These loss estimates are based on the future lost personal consumption of one spouse that would have been provided by the other spouse, had the marriage continued.
The losses involved are individualized and separable, and they are estimated using methods that have long been accepted in court testimony. More specifically, the loss calculations rely on data that are typically used for personal consumption adjustments in wrongful death cases. In respect to divorce cases, the personal consumption loss in question is suffered by the spouse with the lower earnings capacity. Such losses can be identified, estimated, and projected into the future. This loss estimate is then reduced to present value terms, thereby arriving at a loss figure that can be annuitized or used in settlement proceedings. Such a procedure provides loss estimates that are more rational and accurate than various simplistic formulas that are sometimes used. In addition, such estimates are consistent with many state laws on spousal support that emphasize the concepts of maintenance of living standards, earnings capacity or ability to pay, and aid for the dependent spouse.1
Personal Consumption Data
Personal consumption is defined as spending on those items exclusively for the use of one individual. Examples would generally include clothing, food, medical care, personal care items, hobbies, entertainment and perhaps some transportation and utility costs. On the other hand, joint consumption items involve benefits that are indivisible, or at least not clearly separable among family members. In other words, if one spouse is removed due to death or divorce, the remaining spouse still needs these items. The most important examples here are housing and various household durable goods (furniture and appliances). In cases of divorce, both spouses are subject to economic losses involving such shared resources, since the economies of scale enjoyed by a married couple in the purchase of housing and durables will be lost (along with any economies of scale in the purchase of nondurables). If such losses are significant, they should be estimated separately and added to personal consumption losses.
There are other items in the family budgets that are neither personal nor joint consumption. For instance, income taxes are simply a cost to the household with no direct or separable benefits. Since no consumption benefits are involved, the logical course of action is for each spouse to be responsible for his or her own tax bills after divorce. However, this is not the case for other items in the family budget: namely, social security contributions, savings, and private pension contributions. There is a direct link between these expenses and standards of living after retirement. Therefore, this may be a factor in loss estimates, particularly for individuals with higher incomes. Recent research by Ajwa, Martin and Vavoulis (2000) provide data that facilitate the analysis of this saving issue in a future section of this study.
Earl Cheit (1961) did the pioneering study of personal consumption trends. He concluded that each spouse would use 30% of family income for personal consumption, with this percent declining by 4% for each of the first two children, and 2% for each child after that (i.e., with four children, each adult would consume 18% of family income.)
Virtually all studies of personal consumption are based on data gathered by the Bureau of Labor Statistics in their Consumer Expenditure Surveys, the last two of which used data from 1986-87 and 1994-95. As Martin (2001) notes, there is a reasonable consistency among different researchers as to how these data should be converted to personal consumption percentages. Table I presents averages of eight different studies on personal consumption as a percent of income. …