Many of these problems would be removed if incomes of the aged could be increased. What is the income potential from homeownership? The ability and willingness of an older homeowner to make use of his home equity to augument his regular current income poses a dilemma under existing circumstances. If home equity is not converted into current income, homeownership's contribution to the economic well-being of the older person would consist entirely of the imputed rental income which is not subject to current allocation as is money income. Yet, coversion of a home into cash normally requires its sale. This solution may not be agreeable to some, for there are often psychological adjustment problems when older persons move into a new physical as well as a new social setting. In addition, when they sell their homes, they become renters paying rent with the proceeds from the sale of their home. (Doubling-up with young members of the family-thus avoiding rental payments-is becoming more the exception than the rule.) Another solution would be to borrow against home equity. But conventional modes of financing homeownership would, for the most part, preclude borrowing by older persons against their homes as collateral. (8) Even if funds become available from either sale of the house or through a loan, the stream of future income thus made available may not be dependable or certain, relying on the changing fortune of their investment incomes. Or if the proceeds were deposited in the banks or savings and loan associations subject to periodic withdrawls, the possibility of exhausting the funds looms greater as life spans on. Old age is already a period full of uncertainty, to heighten the degree of uncertainty is hardly advisable. In order to provide the kind of security or certainty that older individuals need, the proceeds had best be put into an annuity purchase. Under the institutional arrangements now prevailing, in order to purchase an annuity with his home equity, the aged homeowner would be required to sell the home. However, there exists a strong resistance to this financial move. The force of resistance may be substantiated from causal empirical observations as to how older persons view this proposition. It also may be inferred from the very high incidence of homeownership by the aged. What, then, could be done so an older person may utilize his lifetime saving in the form of home equity without sacrificing his preference to live in his owned home? As an attempt to resolve the disadvantages and advantages associated with homeownership, a combination of home sale and annuity purchase may be possible if a housing-annuity program were adopted. IV. A PLAN TO MAKE THE THEORY WORK: IS IT FEASIBLE? The theory of a comprehensive measure of economic status (current income plus net worth as described in Section I) would have little significance if there is no practical plan to implement it. The housing-annuity is such a plan. When a young person purchases a home, he is mortgaging his future income to acquire an asset; when an old person buys a housing-annuity, he is mortgaging his home to acquire currently spendable income. To paraphrase (half in ject) a popular saying (in a reverse context), a housing-annuity makes it possible for elderly householders "to have their house and ‘eat' it too." A housing annuity program combines home sale and annuity purchase. Assured of lifetime occupancy of the house, an older homeowner would put his home in escrow to convey the property title to a financial intermediary (possibly an insurance company or a pension fund or some other source of funds; referred to as the insurer) at his death or that of his spouse if later in exchange for a monthly annuity income for life (9). The amount of the annuity would be based on a number of economic, actuarial, and cost accounting considerations, such as rate of interest, rate of appreciation of property value, rate of depreciation of the house, percentage of property value attributable to the lot. the homeowner's sex, age, and marital status, the net equity in the property, and expense loading. The effects on annuity income of all these factors (except expense loading) have been discussed elsewhere (10). Once the voluntary contract is entered into, the homeowner (called housingannuitant) will receive income for life. If he is married, annuity income will continue until the second death. If the owner wanted to change his residence after entering into such a contract, he would have the option of selling his home to a third part (thus paying back to the insurer the sum of total annuity payments received to date plus interest) or the option of conveying title to the insurer (thus receiving additional annuity payments). Any outstanding mortgage on the house would be deducted from the house value and the annuity computed on the net equity. 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 (11). 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 housing-annuitant would not face the prospect of reduced annuity incomes. Briefly stated, a housing-annuity has these merits. The 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 regarding housing accommodations and sources of income. Widening possibilities of option in the field of housing appears highly desirable, since individuals differ in tastes and preferences. If the creation of a housing-annuity would enable homeowners to remain in their homes when they otherwise might be forced to move by financial considerations, 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 (12). Widening possibilities of option in the source of income also is of critical importance. The plan would become another source of current income in addition to social security, private pensions, and other forms of receipts. It would reduce the dependancy 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 suggested plan would offer a degree of flexibility in planning retirement income. The flexibility extends to the choice of housing as well, since provision is made for those who wish to change residence for whatever reason. 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, the proposal would bring forth larger increments of income (13). So much for the merits. There are also 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 the desire to bequeath would not take precedence, under normal circumstances, over the need for income 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 (14). The problems associated with appreciation and depreciation of property value 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. Differing opinions on these questions among actuaries and economists could be resolved once interested professional are drawn together for the task. There is an important consideration as to which financial intermediary would undertake such a program. Since the proposal is for an annuity plan, life insurance companies appear to be the logical institutions. Since the proposal involves homes, savings and loan associations may seem to be the organizations that would be concerned. Since the proposal is intended as a source of income in retirement, pension funds might be likely source of funds as well. Because the "premium" is paid at the end instead of at the beginning of the contract, the cost of 32-346-70-7 this type of "lending" would be high, and it would either result in a low return to the insurer or a small monthly payment to the housing-annuitant. Neither prospect augurs well for the proposal, and this appears to be the reservations some life insurance carriers have about the proposed housing-annuity. However, if loan funds may be available from the government in order to start the plan, the inclination of insurance carriers and other possible insurers would be different. Once the plan gets under way, turnover in houses would occur within a reasonably short period of years, and the loan from the government would be repaid with interest. Then, the plan would be expected to carry forward on its own. In terms of initial funding, pension funds, of the three sources mentioned earlier, appear to be in the best position to handle. Unlike the other two financial intermediaries which are restricted by investment practices and legal requirements, pension funds are relatively free of legal restrictions. In addition, pension funds usually are not concerned with liquidity and high returns as these other two possible sources. Since there is a definite social purpose implicit in the housing-annuity proposal, the use of pension funds for a socially desirable enterprise is compatible with their basic purpose of existence. Perhaps it should be said that given proper institutional arrangement, life insurance carriers and savings and loan organizations also may be very interested in programs that would further worthy social causes. V. SUGGESTIONS FOR ADDITIONAL RESEARCH Many lines of research seem indicated. Some of the topics directly pertain to the housing-annuity proposed here, with others broadly relating to it. These topics include: 1. What would be the best source of funds for the plan, life insurance company, savings and loan associations, pension funds, or some other intermediary? 2. What would be the necessary changes in State and Federal legislation that would make it possible for any financial intermediary to undertake such a new business venture? 3. What is the role of government, especially the Federal government, in this? (Government as a lending agency to start the program; as a guaranteeing agency much like FHA and VA activities; or as an "insuring" agency directly handling this plan.) 4. Speaking actuarially, it would be of interest to investigate the differential mortality experiences, if any, between homeowners and renters. 5. What are the experiences with market price changes of residential property over time in a variety of different parts and locations in the country? 6. The attitudes of people towards this plan need to be explored in terms of (a) their acceptance of the idea of a (conventional) annuity, (b) their feeling about inheritance, (c) their housing preferences in light of the widened range of choice provided by housing-annuity (d) ethnic and cultural backgrounds, among others. 7. The mobility experiences of older persons and their implications for the proposed plan. As a rule, the aged have the highest geographical and residential stability of all age groups. It is conceivable that the geographical and residential mobility may increase among the aged over the next several decades. Increased mobility would not, however, make the housing-annuity less applicable any more than it makes the conventional mortgage less applicable. It is known that only about one family in 10 lives in the home and pays up the full loan during the 25-year mortgage period. But the question of mobility and its implications for the proposed plan warrants exploration. 8. More studies need to be done on the difficulties with homeownership by the aged. Issues such as maintenance costs, space requirements, and property tax burdens would require added research. 9. Since housing-annuity is intended to be an additional source of retirement income, the whole array of income maintenance measures for old age needs to be examined in terms of their distributional effects on the aged. 10. It should be emphasized that research along the lines suggested above does not necessarily involve collection of new statistical information. Existing data collected for a variety of studies could well be reused to shed light on the questions indicated. The White House Conference on Aging and the proposed Aging Research Commission would be the organizations naturally suited for sponsoring further research on questions relating to housing-annuity. REFERENCES The author is associate professor, Department of Economics, University of California, Los Angeles. As a summary of a larger study, this statement does not contain detailed documentation of references. It does include, however, a few detailed tables of statistical information and an appendix which are of particular interest. He wishes to acknowledge the financial assistance by the Institute of Industrial Relations, Research Committee of the Academic Senate, Bureau of Business and Economic Research (now defunct), and the Campus Computing Network, all at U.C.L.A. Some of the data were developed when he was a Brookings Research Professor in residence at the Social Systems Research Institute (SSRC) at the University of Wisconsin, acknowledgment is made of support by the Brookings Institution and SSRC at Wisconsin. Many individuals have given help in various ways, and they will be individually mentioned in the full report of the project. (1) See Tables 4 and 4a in Appendix. (2) See Tables 5 and 6b in Appendix. This observation does not deny the fact that there are aged persons with low current incomes who has very little or no assets. The heterogeneous nature of their economic circumstances among the aged also was emphasized in Appendix. (3) This formula assumes a fixed amount of a straight-life annuity contract for one annuitant. Modifications will be made to this formula if other types of contract (such as joint and last survivor for a couple) are considered. (4) See Benjamin Bridges, Jr., "Imputed Income from Owner-occupied Housing", Research and Statistics Note No. 3, Office of Research and Statistics, Social Security Administration, January 23, 1967; and also, James H. Schulz, "Some Economics of Aged Home Ownership", The Gerontologist, vol. 7, No. 1, March 1967, pp. 73-74 and 80. (5) Herman B. Brotman, "A Fact Sheet" on Homeownership Aspects of the Economics of Aging", July 1969 (Administration on Aging, Department of Health, Education, and Welfare). (6) Computed from U.S. Census of Housing, 1960, Vol. V, Residential Finance (Part 1, Homeowner Properties). (7) Brotman, op. cit. (8) There are several reasons for this. (1) The lender's requirement of periodic repayment of principal, as well as interest on the debt, would reduce or even exceed the income from the use of the borrowed funds (either annuity purchase or otherwise). (2) The homeowner usually would receive no more than eighty percent of the appraised value of the property. (3) The persons with the greatest need (i.e., those with very low current incomes) would not be served because their curtailed incomes (due to retirement, for example) might not qualify them for even an eight percent loan. And (4) many lending institutions are unwilling to make loans to the older (retired) homeowner because of (a) the possibility of the borrower's inability to properly maintain the property; (b) the financial difficulties which might be encountered when the borrower dies; (c) the problems associated with a default and the undesirable situation of having to foreclose and ultimately evict the borrower; and (d) the probability of becoming involved in the settlement of the estate to obtain the funds to repay the debt. (9) The mechanics as well as the rationale of such a plan was expressed earlier in Yung-Ping Chen, "Potential Income from Homeownership: An Actuarial Mortgage Plan," A Compendium of Papers, Part II: The Aged Population and Retirement Income Programs, Subcommittee on Fiscal Policy, Joint Economic Committee, 90th Congress, 1st Session (Washington: U.S. Government Printing Office, 1967). (10) Yung-Ping Chen and L. Timothy Giles, "A Note on Estimating Potential Income from a Housing-Annuity" in this volume. (11) The reasonable degree of appreciation and depreciation would have been taken into account in computing the size of annuity at the start of the contract, since the computational formula has in it estimated rates of appreciation and depreciation. See ibid. (12) It is not often recognized that difficulties surround a sale transaction by an older homeowner. His bargaining position is weak for various reasons, so his house may often fetch a price below its current market value. Another problem arises in inflationary times with tightened supply of loanable funds. A mortgage-free (or low-mortgage) homeowner may find it difficult to get a buyer who can borrow sufficient sums from a lending institution to supplement his downpayment because the loan would be a new one instead of an existing mortgage changing the name of the mortgagor. The author is aware of several instances of this kind in Los Angeles recently. (13) The increments in income provided by this plan are not intended for meeting property tax obligations as such, although the plan does increase the current resources of older householders. The plan is offered independently of tax liabilities. Property tax reductions of course are to be welcomed, but such reductions must result from reasonable considerations. (14) Harold W. Gutherie, "Intergenerational Transfers of Wealth and the Theory of Savings", the Journal of Business of the University of Chicago, Vol. XXXVI, No. 1, January 1963, pp. 97-108. (15) FHA report, as quoted in U.S. News and World Report, August 18, 1969, p. 76. TABLE 1.-NUMBER AND PERCENT OF NONFARM 1-UNIT DWELLINGS OWNED AND OCCUPIED Source: Compiled from U.S. Census of Housing, 1960, vol. VII, Housing of Senior Citizens, table A-7, p. 52. TABLE 2.-NUMBER AND PERCENT OF NONFARM 1-UNIT DWELLINGS OWNED AND OCCUPIED BY AGE OF HEADS 65 OR OVER, BY ESTIMATED VALUE OF DWELLINGS: 1960 Source: Compiled from U.S. Census of Housing, 1960, vol. VII, Housing of Senior Citizens, table A-7, p. 52. |