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STATEMENT OF YUNG-PING CHEN, PH. D., ASSOCIATE PROFESSOR, DEPARTMENT OF ECONOMICS, UNIVERSITY OF CALIFORNIA, LOS ANGELES

Mr. CHEN. Thank you, Mr. Chairman.

I regret that the U.S. Post Office has not cooperated to the fullest so that, as I understand it, my written testimony has not arrived before I came into the room here this morning. I am at a loss as to how I should proceed thinking that you Senators and others have not read the highlights of my testimony which I have prepared specifically for the presentation today.

Senator Moss. I think we do have the highlights here.

Mr. CHEN. Yes. Did you have an opportunity to review this? Senator Moss. Well, we have had a chance to scan but not in very much detail here. Now in addition to the highlights you have a larger statement that you prepared and that is what has not arrived, is that right?

Mr. CHEN. That is correct. That will be in the record afterward.

Senator Moss. Yes. We will see that it is placed in the record in full. I would suggest that you use this memorandum of the highlights and amplify or emphasize those parts that you think you would like to expand upon and then if questions occur to us we will ask.

Mr. CHEN. Thank you for that suggestion. Instead of reading from these highlights I shall paraphrase as I go along and improvise as I see fit and answer questions as they arise.

I should say that the main purpose of my presentation today is to indicate the general principle for a housing-annuity which I have devised, and I have devised this housing-annuity under what I call the actuarial mortgage plan. The reason for suggesting such a new concept is twofold. On the one hand I am quite impressed with the generally low level of income or inadequate level of income that older people in this country receive. I refer to the incomes that they receive currently.

On the other hand, I am concerned with the desire by many older people to remain in their own homes, to live independently, and for that reason many of them hold on to their homes despite advancing age with financial and other difficulties.

In essence, my plan is trying to make a theory work. The theory is that a person's economic status or circumstances should be judged not only by his current income but also with inclusion of his assets minus liabilities: namely, net worth.

We learn from statistics that nearly 70 percent of the aged-that is, age 65 and older-own and occupy their own houses. More than 80 percent of them own their homes free of mortgage. Although some older persons would desire other type of housing accommodations, a very large number of them apparently prefer independent living and hold on to their homes despite the advancing age.

There are problems with homeownerhip, and among them is a growing difficulty relating to residential property taxes. These taxes create a financial problem for older people because many of them, as I said before and is well known, receive low incomes. As

a response, probably tax laws in many, many States now provide means through exemptions, credits or deferrals to reduce their taxes.

I feel that there are limits to such preferential tax treatment and we may be near them. Basically, the policy of tax concession is vulnerable to objection in view of the economic circumstances of older people relative to those of the nonaged. I might say that I have made a study of the various exemptions, credits and deferrals arrangements in State laws in this country and if they interest you we could amplify them later or have them available in the record.

Senator Moss. I think we do have a copy of the study and we can utilize it.

Mr. CHEN. What I just referred to is a separate one.
Senator Moss. Well, we will be happy to have that, too

Mr. CHEN. Thank you.

(See appendix 1, p. 849.)

THE ACTUARIAL MORTAGE PLAN

Mr. CHEN. Very briefly, I think an actuarial mortgage plan in the form of a housing annuity can serve two purposes: First, to enable older homeowners to realize the fruits of savings in the form of home equity and second, to enable those homeowners, who wish to remain in their homes either for physical convenience or for sentimental attachment, to do as they wish.

Suppose we picture someone today 65 years old with very low income and he has a home free of mortgage perhaps at a market value of $10,000, $15,000, $20,000, $25,000. What can he do with his housing situation? Property taxes have been rising and there is no great letup as far as we can see. Exemptions, credits and deferrals do help some older people but the extent of financial assistance is definitely limited. Annually some older homeowners may save $70, $150 or somewhere around there. Their income problem as I see it is a main issue.

The tax rebate can help, of course, but it can help only very little. If we were able to design a system to make it possible for older people to get the worth of their capital, namely, home equity, into currently expendable cash, at the same time when they can hold on to their home for whatever reason that they have, then I think we will be doing a very substantial job.

It seems to me that the psychological problems attendant upon sale of the home when the owner is not ready-that is, not quite willing to sell-can be a very traumatic experience. I should hasten to add that older people, as in the case of younger persons, have a great variety of tastes and preferences and this is manifested not only in housing but in every sphere of consumption. My plan will open up an additional option which is not now available to those older people who would like to have their home and to realize on a continuing basis some addition to income based on the equity that they have built up over the years.

Now the advantages of such a plan are many. First, I believe I have already stated it would increase their income. No. 2, it will enable

them to hold on to their home ownership. No. 3, I believe this plan would and has the spirit of self-reliance on the part of the older people. Fourthly, related to it, this plan because of its result of increasing income would reduce the pressure on public transfer payments. There are other advantages which would be brought out in the formal statement as well as in responses to your questions.

ANALYSIS OF PROBLEMS

Now let me turn to the problems. I think it is only fair for the proposer of a program to cater to the problems that would arise. The No. 1 problem I think relates to inheritance. As I talked to many people about this plan, one of the first questions people ask is, you are depriving older people of the uprivilege of bequeathing their property

to their heirs.

I might say that this is, of course, a considerable consideration. However, it is my observation that at least in the contemporary situation parents are generally more concerned with providing their children with good education, passing on a "heritage" rather than bequeathing physical assets to younger persons.

Secondly, on the same point I feel that I would treat the building up of equity as a form of saving and in old age when there is need for more income some financial mechanism ought to be available for them to use past savings. It seems to me that in many cases to increase income for sustaining life in later years would be a more weighty consideration than conserving the capital to be passed on to the heir.

There are some additional problems relating to technical aspects of putting the plan into operation. These are mainly actuarial problems: that is, how to calculate potential income from home equity, what kind of mortality table you would use, what kind of interest rate do you use and things of this sort. In general I would say that the annuity payment on the basis of home equity would be determined by the following factors: (1) the net equity value of the property; (2) the mortality experience; (3) the interest rate assumption; (4) I would include the rate of price inflation expected over time.

To conclude this phase of my presentation I would call attention to the possible involvement of the forthcoming White House Conference on Aging and the proposed Aged Research Commission which Senator Williams has suggested. I feel that there are merits in this plan but at the same time these are technical problems to be resolved. I strongly recommend that the actuarial mortgage plan be made a topic of study under the auspices of the White House Conference and the Aging Research Commission which I hope will be established.

Senator Moss. Thank you. This is, of course, a very inter posal. Basically you suggest that the elderly person w fee-that is, his equity that he has built up in the lan life estate in effect, is that right? He would continu property for the remainder of his life.

[graphic]

Mr. CHEN. Indeed.

Senator Moss. But he would not have any fee to pass on upon his death, the life estate would terminate.

Mr. CHEN. That is right. He has life tenure with a series of annuity income once the arrangement is made. However, I should add that in the plan there are provisions for people who wish to change their place of residence afterwards either for physical reasons or for other considerations, and I think that arrangement can be made to enable them to do so. Also I should indicate that this is a completely voluntary contract that the homeowner would enter into with an insurer.

Senator Moss. Would this be with just any traditional financial institution that the person would deal with?

ROLE OF LIFE INSURANCE COMPANIES

Mr. CHEN. My first thought is that the life insurance company is the natural financial intermediary. Of course as I thought about it more, pension funds can be a fruitful source as well.

Senator Moss. Well, the annuity then would of course vary according to the value of the estate so some elderly people might be able to get quite an adequate annuity and perhaps others would get very little. Would not many of our elderly still require other supplemental sources because they would not have enough in the annuity to take care of themselves?

Mr. CHEN. I would feel this way. Even in the case of those homeowners who with this plan would get relatively small increments of income, they possibly would require other assistance but these other means of assistance will be correspondingly reduced or be smaller because of the additional income that they would be able to raise with this plan.

Senator Moss. Have any of the lending institutions, insurance companies or others who have shown any interest in this idea been willing to discuss it?

Mr. CHEN. Yes. As a matter of fact, I have an actuary friend whose name is Timothy Giles and he has been assisting me in looking into some of these actuarial aspects of the plan.

I would say that I have spoken with two larger insurance companies in the country and both their actuarial staff and the real estate department people have shown a much higher level of interest than I had anticipated. I am very much encouraged by their voluntary assistance. In one of these companies there is an informal study group being formed consisting of the major figures in the company to render assistance in whatever way they could to help. So I feel that this idea is not only sound in theory but it is very possible it can be practically applied.

Senator Moss. Under the proposal, who would pay the property taxes after the fee had passed and the life estate vested in the older person?

Mr. CHEN. There can be various arrangements on payment of property taxes. One possible way, of course, would be that the issuer or the insurance company or the pension fund or whatever would assume the responsibility of paying the taxes. This, of course, would reduce the

monthly income that the homeowner annuitant, as I call him, would receive. This may or may not be a desirable way in that the older homeowner would get off considering or thinking about taxes completely if this arrangement is made.

Secondly, of course, the homeowner can be a taxpayer pure and simple. He would pay taxes out of all sources of income, this annuity being an additional source.

Senator Moss. Are you aware of the proposal that former Secretary Cohen made yesterday calling for the creation of a corporation? How would that fit in with your plan or what comment do you have on it?

RESERVATIONS ABOUT PUBLIC CORPORATION

Mr. CHEN. I was given a copy of his s'atement an hour ago and while the previous witness was testifying I glanced through it, so my reactions at this time are not very well considered. I should say that former Secretary Cohen has a fertile mind and any ideas from him deserve serious consideration. Personally, as little as I have seen of it, it was described in a page and a half. I would not at this point be wholeheartedly in favor of such a corporation or the creation of a public corporation.

My reason I think is twofold. No. 1, there are at the present time under HUD a large variety of programs: rent supplement, public housing, rehabilitation loans and grants, mortgage insurance and others. I do not know what Mr. Cohen has in mind in dealing with these existing programs in relation to this corporation that he is talking about.

No. 2. I believe that the housing-annuity as I have proposed can do a much better job than one aspect of his proposal relating to his corporation buying the home of someone who is ill. I think that the housing-annuity ought to be made on a much more comprehensive basis. As I see it, if private enterprise such as an insurance company or even a savings and loan association can take on such a new procedure then it may be a healthier competition in this field. I think that the approach I have proposed here can do a much more effective job than the aspect of Mr. Cohen's testimony relating to home purchase.

Senator Moss. Do you have any rough estimate of the amount of annuity that this plan would create among the elderly people if it were adopted and accepted?

Mr. CHEN. I do not have an aggregate estimate. I think that perhaps we could think in terms of what a person can do now as opposed to what a person can do with the plan that we are talking about.

Suppose you have $10,000 of cash today and vou go into an insurance company and buy what they call a single premium annuity and you have a wife with you of the same age, sav 65. You could probably get a monthly annuity ranging between $53 to $60.

Senator GURNEY. Say that again. I cannot hear you.

Mr. CHEN. For $10.000 of cash you could purchase an annuity for yourself and your wife, both 65 years of age

Senator GÜNEY. Sixty-five?

Mr. CHEN (continuing). Sixty-five-ranging from $53 to $60 a month. I have just checked on these amounts offered by something like

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