Section 11. Proof of Claim. Every claimant under this act shall supply to the [department of taxation], in support of his claim, reasonable proof of rent paid, name and address of owner or managing agent of property rented, property taxes accrued, changes of homestead, household membership, household income, size and nature of property claimed as the homestead and a statement that the property taxes accrued and used for purposes of this act have been or will be paid by him and that there are no delinquent property taxes on the homestead. Section 12. Audit of Claim. If on the audit of any claim filed under this act the [tax commissioner] determines the amount to have been incorrectly determined, he shall redetermine the claim and notify the claimant of the redetermination and his reasons for it. The redetermination shall be final unless appealed within 30 days of notice.

Section 13. Denial of Claim. If it is determined that a claim is excessive and was filed with fraudulent intent, the claim shall be disallowed in full, and, if the claim has been paid or a credit has been allowed against income taxes otherwise payable, the credit shall be canceled and the amount paid may be recovered by assessment (as income taxes are assessed), and the assessment shall bear interest from the date of payment or credit of the claim, until refunded or paid, at the rate of one percent per month. The claimant in such case, and any person who assisted in the preparation of filing of such excessive claim or supplied information upon which such excessive claim was prepared, with fraudulent intent, is guilty of a misdemeanor. If it is determined that a claim is excessive and was negligently prepared, 10 percent of the corrected claim shall be disallowed, and if the claim has been paid or credited against income taxes otherwise payable, the credit shall be reduced or canceled, and the proper portion of any amount paid shall be similarly recovered by assessment (as income taxes are assessed), and the assessment shall bear interest at one percent per month from the date of payment until refunded or paid.

Section 14. Rental Determination. If a homestead is rented by a person from another person under circumstances deemed by the [tax commission] to be not at arms-length, he may determine rent constituting property taxes accrued as at arms-length, and, for purposes of this act, such determination shall be final.

Section 15. Appeals. Any person aggrieved by the denial in whole or in part of relief claimed under this act, except when the denial is based upon late filing of claim for relief [or is based upon a redetermination of rent constituting property taxes accrued as a arms-length] may appeal the denial to the [appropriate state agency] by filing a petition within 30 days after such denial.

Section 16. Public Welfare Recipients Excluded. No claim for relief under this act shall be allowed to any person who is a recipient of public funds for the payment of the taxes or rent during the period for which the claim is filed.

Section 17. Disallowance of Certain Claims. A claim shall be disallowed, if the department finds that the claimant received title to his homestead primarily for the purpose of receiving benefits under this act.

Section 18. Extension of Time for Filing Claims. In case of sickness, absence, or other disability, or if, in his judgment, good cause exists, the [tax commissioner] may extend for a period not to exceed six months the time for filing a claim.

Section 19. Separability. [Insert separability clause].

Section 20. Effective date. [Insert effective date].

ITEM 3. MATERIAL SUBMITTED BY YUNG-PING CHEN,* PH. D., ASSOCIATE PROFESSOR, DEPARTMENT OF ECONOMICS, UNIVERSITY OF CALIFORNIA, LOS ANGELES

How To HAVE YOUR CAKE AND EAT IT TOO; THE CASE OF HOMEOWNERSHIP BY THE ELDERLY

PREVALENCE OF HOMEOWNERSHIP AND PREFERENCE FOR INDEPENDENT LIVING

Nearly 70 percent of the aged (age 65 and over) own and occupy their own houses. More than 80 percent of them own their homes free of mortgage. Although

*See statement, p. 792.

some older persons would desire other types of housing accommodations, very large numbers of them apparently prefer independent living and hold on to their homes despite advancing age.

TAX PROBLEMS WITH HOMEOWNERSHIP AND THE POLICY OF TAX-CONCESSION While other problems exist, one major and growing difficulty with owning a home relates to residential property taxes. These taxes create a financial problem for the aged because many of them receive low incomes. As a response, property tax laws in nearly one-half of the States now provide means (thru exemptions, credits, or deferrals) to reduce their taxes. There are definite limits to such a preferential treatment, and we may be near them. Basically, the policy of tax-concession is vulnerable to objection in view of the economic circumstances of the aged relative to those of the non-aged.

THEORETICAL MEASURE OF ECONOMIC STATUS

Measured by income they receive currently, many aged persons are in lowincome and poverty categories. But their economic status, when the measurement includes asset-holdings (less debts) as well as current income, may be considerably improved. Theoretically, a comprehensive measure should combine the current flow of money receipt and a portion of the stock of net worth (assets less debts, inclusive of liquid and nonliquid assets) as determined by life expectancy. The aged face a set of problems under this measurement since homeownership represents a significant portion of their net worth. There is a dilemma. If home equity is not converted into current income, homeownership's contribution would consist solely of the imputed rental income which is not subject to current allocation as is money income. Yet, conversion of home equity into cash normally requires its sale which would create, for some, psychological adjustment problems. In addition, they would become renters paying the rent from sale proceeds. Moreover, existing modes of financing homeownership would, for the most part, preclude borrowing by older persons against their homes as collateral. Even if funds became available from either sale or loan, the stream of future income thus created may not be dependable or certain with the prospect of exhaustion.

MAKING THE THEORY WORK THROUGH A HOUSING-ANNUITY UNDER
ACTUARIAL MORTGAGE

A combination of home sale and annuity purchase may be possible. Under the actuarial mortgage plan I propose, an older homeowner, assured of life-time tenure in the house, would create an irrevocable escrow to convey the property title to a financial intermediary (possibly an insurance company or a pension fund) at the death of the owner or of his spouse if later, in exchange for a monthly annuity income, which I call a housing-annuity. The amount of the annuity would be based on the appraised value of the property, the amount of home equity, the life expectancy, and the generally expected rate of price inflation. If the owner wanted to change his residence after such a contract is entered into, he would have the option of selling his home to a third party (thus paying back to the financial intermediary the sum of total annuity payments to date plus interest) or the option of conveying title to the financial intermediary (thus receiving additional annuity payments). Any outstanding mortgage on the house would be deducted from the house value and the annunity computed on the net equity value. The problem of property value changes (appreciation and depreciation) would be solved by a variable annuity arrangement or a re-negotiation clause for adjusting annuity payments. To prevent frequent reappraisals, a plan might be created whereby FHA, for example, could guarantee the property's value over its economic life in return for an appropriate insurance premium. The homeowner-annuitant would not face the prospect of reduced annuity payments.

ADVANTAGES OF A HOUSING-ANNUITY

The suggested plan would be a completely voluntary agreement, which is in full accord with the freedom of choice and which serves to widen the range of options to older people. Widening possibilities of option in the field of housing

appears highly desirable, since there exist a variety of tastes and preferences among the elderly concerning housing accommodations. If the creation of a housing-annuity would enable homeowners to remain in their homes when they otherwise might have to be forced by financial considerations to live somewhere else, this additional option would be a very substantial one, because it would remove the painful adjustment problems which are often attendant upon the outright sale of the house for cash. This plan has more advantages to offer. It would provide assurance of retaining the house for residence as long as the person wishes. It would represent another source of current income in addition to social security, private pensions, and other forms of receipts. It would reduce the dependency on public transfer payments by those older persons who, in the absence of a program of the sort suggested here, might require and actually receive such payments. It would avoid tax revenue reductions for those governmental units offering tax-concessions to older persons because of the generally inadequate current income status as measured under the yardstick and institutional arrangement now prevail. As a supplementary source of income, the plan suggested would offer a degree of flexibility in planning income for old age. Finally, since I regard low income as a more important problem than high taxes when the aged are financially embarrassed, I believe that increment in income instead of decrement in taxes should be a preferred approach. Although tax reductions result in income increment, the increase is usually rather small. By contrast, my proposal would bring forth larger increments of income.

PROBLEMS WITH A HOUSING-ANNUITY

I anticipate certain problems in setting up such an annuity program, but none of them appear insurmountable. Since the exhaustion of home equity at life's end is clearly the consequence of this plan, objection may arise on grounds of bequest and inheritance. However, the plan is wholly voluntary. Moreover, there are several motives for saving, and I would not expect the desire to bequeath to take precedence over the need for income, under normal circumstances, before the estate passes on. In addition, people in general feel these days little moral obligation to conserve inheritances for bequests and rather consider as more desirable passing on a "heritage" through providing educational opportunity for their children. The problems associated with appreciation and depreciation of property values would create additional reservations about the plan. However, measures such as those indicated earlier (variable annuity approach, re-negotiation clause, FHA guarantee) or other methods could attend to these difficulties. Technical issues relating to house value appraisal, mortality rate assumption, interest rate assumption and the like would obviously arise. I continue to believe that differing opinions on these questions among actuaries and economists could be resolved once interested professionals are drawn together for the task. ROLE OF THE SECOND WHITE HOUSE CONFERENCE ON AGING AND THE PROPOSED AGING RESEARCH COMMISSION

Because of the merits I see in the proposal and for the technical questions involved, I strongly recommend that the Actuarial Mortgage Plan be made a topic for study under the auspices of the Conference and the Commission. EXHIBIT 1. MAKING A THEORY WORK: THE CASE OF HOMEOWNERSHIP BY THE AGED

(By Yung-Ping Chen*)

This paper discusses an actuarial mortgage plan in the form of a housingannuity. It is intended to be a financial mechanism for gradual conversion of an aged homeowner's stock of capital (as embodied in the equity of his home) into a flow of monthly income for life, while maintaining life-time tenure in the home. Viewed in the customary way of accumulating equity in homeownership, the housing-annuity is a suggested method of utilizing home equity during old age. It is thus a reverse process based on actuarial considerations; hence, it is called the actuarial mortgage plan. The income under this plan, which is based on home equity, is analogous to a conventional annuity which is purchased with cash; hence, the term housing-annuity.

*See statement, p. 792.

The plan is proposed to accomplish these two primary obectives: (1) increasing currently spendable incomes by converting home equity into cash; and (2) widening the options of housing accommodations that would be available to aged persons. The theoretical basis of the plan is the comprehensive measure of economic circumstances, a measure which combines the current flow of money receipt and a portion of the stock of net worth (assets less debts, inclusive of liquid and nonliquid assets) as determined by life expectancy. The practical consideration of the plan relates to the prevalence of homeownership among the aged (with the seeming preference by many for independent living in their homes) and their generally low (and often inadequate) levels of current income.

This paper is divided into the following parts. (1) A theoretical measure of economic status; (2) homeownership and income circumstances among the aged; (3) advantages and disadvantages of homeownership by the aged; (4) questions concerning the feasibility of a housing-annuity; and (5) suggestions for additional research.

I. A THEORETICAL MEASURE OF ECONOMIC STATUS

All too often the economic welfare of aged persons is measured by the amount of money income they currently receive. Thus, many of the aged are found to be in low-income and poverty categories. On the other hand, the aged as a group have a higher ratio of net worth to current money income when compared with other age groups. (1) In other words, even though the current money income of the aged may be low, their economic circumstances, when the measurement includes asset-holdings (less debts), may be considerably improved. (2)

Theoretically, a comprehensive assessment of the economic welfare of an aged person (indeed of a person of any age) in a given year should combine the current flow of money income receipt (which contains current yields of income from assets) and a portion of the stock of net worth (all assets less debts, inclusive of liquid and nonliquid assets) as determined by his life expectancy. The total income of an aged person in a given year, according to the comprehensive measure of economic welfare (incorporating current money income and potential income from net worth), as it applies to homeownership, may be expressed mathematically as follows:

CY

current money income

PY potential income from home equity

HE present value of home equity to the insurance company as discounted for mortality and interest

t=index of years: 1, . . ., w

w=infinity

v=age of retirement or age at issue of housing-annuity

i=rate of interest (or discount rate)

P. probability that the annuitant life age x survives to tth year (or age x+t)

This theoretically sound concept would have little practical significance, however, if the net worth cannot or will not be converted into currently spendable income, because the contribution by net worth to the economic welfare of the asset-holder is only limited to the imputed income. (4) When this "income plus net worth" measurement is applied to the aged, a particular set of considerations arises since a significant portion of the asset-holding of older persons consists of

homeownership. The advantages and disadvantages of homeownership by the aged will be discussed in Section III. In Section II homeownership and income circumstances of the aged will be described.

II. HOMEOWNERSHIP AND INCOME CIRCUMSTANCES AMONG THE AGED

According to the latest U.S. Census information, in 1960 there were more than 9.2 million dwelling units with households (defined to include either families or individuals) headed by a person age 65 or over. Of these units, some 6.4 millions or 68.8% were owner-occupied. (5)

In this paper attention will be focused on nonfarm 1-unit structures owned and occupied by the aged. As shown in Table 1, there were in 1960 more than 4.7 million nonfarm, single-unit dwellings. Of these dwellings, approximately one out of five (21.04%) belonged to households with incomes less than $1,000; another one out of five (20.51%) to those with incomes between $1,000 and $1,999; one out of seven (14.38%) to those with incomes between $2,000 and $2,999; one out of six (16.84%) to those with incomes between $3,000 and $4,999; and more than one out of four (27.23%) to those with incomes $5,000 or more. These proportions serve to suggest that dwellings headed by the aged were fairly evenly distributed among the five income classes.

In terms of the estimated market value of these dwellings, slightly over onefifth (20.45%) were valued at less than $5,000; more than one-half (53.17%) at less than $10,000; and almost one-tenth (9.94%) at more than $25,000, as demonstrated in Table 2.

It would be instructive to look at the relationship between the value of these dwellings and the income of these households.

Tables 3 and 4 are presented for such a purpose. While households with higher incomes tended to own homes worth over $10,000 more often than those with lower incomes, it is nonetheless significant that of the households with income less than $1,000, more than one-fourth (27.45%) had homes valued at over $10,000; over 10% owned homes worth more than $15,000; and more than 4% had homes worth $25,000 or higher.

One interesting aspect of homeownership and income of the aged relates to the mortgage debt status. In 1960, more than 80% of the nonfarm, single-unit dwellings owned by the aged were free of mortgage. To the extent they were mortgaged, the average outstanding debt (first and junior mortgages) per homeowner property was in the neighborhood of $4,400. (6)

III. ADVANTAGES AND DISADVANTAGES OF HOMEOWNERSHIP

Housing is one of chief amenities of life. The high incidence of homeownership among the aged is often used as a measure of their economic and psychological welfare. Homeownership gives rise to a degree of security and pride in old age. Economic security stems from "rent-free" shelter in the case of mortgage-free homes or "low-rent" shelter when the home carries a small mortgage. From the statistics analyzed in the previous Section, a majority of aged homeowners apparently do enjoy this type of security (imputed rental income). Economic security of a different sort relates to treating home equity as reserve funds for emergency use. Psychological pride in homeownership arises out of the visible sign of a lifetime accumulation. There is often strong sentimental attachment to the home. Attachment to the home also may be due to convenience and inertia. While such advantages as the above exist, there may be disadvantages as well. Aged homeowners may find the task of maintaining their home a burden. The burden may be physical or financial. Physical burden is associated with declining strength as age advances. Financial burden is felt when income is reduced or insufficient. A recent analysis shows that older homeowners have low expenditures for maintenance, repairs, and improvements, even though one would expect them to spend more considering the age of their homes. (7) They may find that their homes are in a substandard condition.

Another problem may be that their homes are too spacious for their needs after families have grown and left. Still another difficulty with owning a home relates to residential property taxes.