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TAX CONSEQUENCES OF CONTRIBUTIONS TO NEEDY

OLDER RELATIVES

WEDNESDAY, JUNE 15, 1966

U.S. SENATE,

SPECIAL COMMITTEE ON AGING,

Washington, D.C.

The committee met, pursuant to notice, at 10 a.m., in room 6202, New Senate Office Building, Senator George A. Smathers (chairman of the committee) presiding.

Present: Senators Smathers, Young, and Miller.

Also present: J. William Norman, staff director; and John Guy Miller, minority staff director.

Senator SMATHERS. The meeting will come to order.

Today we open hearings on "Tax Consequences of Contributions to Needy Older Relatives."

There is a general impression among the public that adults in their working years today shamefully ignore their obligations to assist older relatives who have hit rockbottom financially.

We of the Special Committee on Aging have encountered much evidence indicating to the contrary; that there are throughout the Nation many younger adults who quietly and without fanfare make significant financial contributions, sometimes at considerable personal sacrifice, to meet the economic needs of older family members. It is my personal belief that young and middle-aged adults of today love their elders just as much as those of any other time in history and, in fact, are doing as much to assist them.

Just since we announced these hearings, the Committee on Aging has received a number of communications regarding young and middle-aged adults, and even senior citizens, who are contributing to the support of older relatives.

A Florida teacher of mentally retarded children wrote1 that she is divorced with one child, and that she is the sole support of her child and of her father and mother, both of whom are approximately 80 years of age; that her salary for 1965 was slightly less than $6,000; that she has contributed thousands of dollars in recent years to her parents; that she has been unable to claim her father as a dependent since he receives an annuity amounting to slightly more than $600 per annum; that she has even had trouble claiming her mother as a dependent, since the Internal Revenue Service has demanded strict proof of her expenditures in behalf of her mother.

2

A 74-year-old retired Florida widow wrote that her retirement

1 See appendix, p. 33.

See appendix, p. 35.

income is so low that it must be supplemented by her only child, a son 44 years old, who is married and has four children. She wrote, and I quote:

He is very glad to help me all he can afford and I do have to accept his help. If he could deduct this expense from income tax, I would not feel so reluctant to take it.

An attorney in Iowa advised the committee of a client who is herself retired on a small Federal civil service annuity, who supports her aged mother, but who cannot claim her mother as a dependent because her mother receives retirement benefits of over $600 a year.

A 79-year-old Florida widow wrote that her 48-year-old daughter is a secretary who has been contributing substantially to her support, but that she has been unsuccessful in claiming her mother as a dependent. She said that this committee's interest in this subject "hits our home like a streak of lighting."

A young professional man in Nebraska wrote 5 that he is contributing over $1,000 a year as supplemental support of his parent and the parents of his wife. He says he is 31 years old, has three children, and has an annual income of approximately $13,000 a year. While he says he is happy, of course, to contribute to the support of his older relatives, he says that doing so places "binds on a young family man and his family."

A man in New York City, who seems to be a small business man, wrote the committee as follows:

6

I have been blessed with parents now in their nineties who I have been supporting for many, many years. I am sincerely grateful that I am able to do SO. However, the normal deduction is nowhere near the amount of money I spend every year. I have taken the responsibility of paying their mortgage and interest as well as their gas, electricity, telephone, et cetera. I also pay for their food for the year as well as their doctor bills, medical payments, et cetera.

The picture presented by these letters is of younger individuals of modest means contributing willingly and joyfully to the support of needy older relatives, but being squeezed between their obligations to their elders, their obligations to their children, and their own needs. These and other letters from many States will be reproduced in the appendix of the transcript of these hearing.

That a substantial number of younger American taxpayers contribute to the support of elderly relatives is also shown by the results. of the 1963 Survey of the Aged, conducted by the Social Security Administration. Statistics based upon that survey will be included in the appendix of the transcript of this hearing."

These statistics show that at least 586,138 elderly U.S. individuals during 1962 received contributions from persons not in the recipients' homes. The Social Security Administration advises that it considers this estimate on the conservative side, since it does not reflect the number who received such contributions but who did not cooperate in the survey. Furthermore, it must be noted that the 586,138 total does not include elderly U.S. individuals who received contributions only from persons who were in their homes.

Another significant fact derived from these statistics is that those receiving contributions were predominantly in the low-income category. In reporting the results of this survey, the Social Security Administration divided the older persons represented in the survey results into three groups: those who were in the third with the highest income, those who were in the third with the lowest income, and those in the middle third.

The Social Security Administration found that a higher percentage of the older persons in the third with the lowest incomes received contributions from persons not in their homes than the percentages in the middle third and high third.

These statistics might well be considered as laboring the obvious, inasmuch as it is axiomatic that most younger family members are willing to sacrifice by contributing to older family members only when their elders are in need.

In these hearings, we shall be interested in any additional information which might be presented on the extent to which younger Americans presently contribute to their needy older relatives, the extent to which the recipients of such assistance are, in fact, needy, and depend upon this assistance to maintain a minimum standard of dignity and decency, the fairness or unfairness of present Federal tax statutes to those who contribute to needy older relatives and, if unfair, what tax changes are needed to bring about a fairer result.

Now, as our first witness this morning we are happy to have the Director of the Office of Tax Analysis of the Treasury Department, Mr. Gerard M. Brannon.

Mr. Brannon, if you will come up and bring with you whomever you would like, we will proceed to hear you.

STATEMENT OF GERARD M. BRANNON, DIRECTOR, OFFICE OF TAX ANALYSIS, U.S. TREASURY DEPARTMENT; ACCOMPANIED BY WILLIAM GIBB, OFFICE OF THE TAX LEGISLATIVE COUNSEL, TREASURY DEPARTMENT; AND GABRIEL RUDNEY, OFFICE OF TAX ANALYSIS, TREASURY DEPARTMENT

Mr. BRANNON. Senator, I am accompanied on the right by Mr. William Gibb from the Office of the Tax Legislative Counsel of the Treasury, and on the left by Mr. Gabriel Rudney, who is on the staff of the Office of Tax Analysis in the Treasury Department.

Senator SMATHERS. Fine.

Mr. BRANNON. We appreciate this opportunity to state the views of the Treasury Department on the tax consequences of contributions to needy, older relatives.

The ultimate objective of this hearing is presumably to improve the economic status of the aged. The release announcing the hearing goes on to specify a means to obtain the objective; namely, tax incentives to encourage the contributions by the young for the support of older relatives.

First, as to the objective, it is clear that this administration is concerned about improving the economic status of the aged. This is, for example, precisely what Medicare does. As Medicare will operate this

year, benefits will be provided to most of the existing aged; and these will in large measure be paid out of increased current payroll taxes on the working population.

The Social Security framework offers an eminently sound means of pursuing the objective of improving the welfare of the aged. Social Security, along with other Government retirement programs and the old-age assistance program, offers means of assuring benefits to all in the older generation.

What is at issue, then, in the present hearing is not the objective of helping the aged but whether modifications of the tax law offer an efficient means of achieving this objective.

Before turning to the matter of amendments to the present tax law, it might be useful to review the special provisions in present law providing tax benefits for the aged.

TAX BENEFITS TO THE AGED

It is estimated that the aged enjoy roughly $2.3 billion of tax savings under present law due to the presence of special provisions. Some of the history of these provisions along with some description of their operation would be pertinent to this committee's current project.

The exemption of Railroad Retirement income was enacted in the 1920's when the income tax contained high personal exemptions and only applied to a small portion of the population. It made little practical difference at that time whether Railroad Retirement income was excluded. The exclusion for Railroad Retirement, incidentally, was not adopted by a tax committee of Congress but by the labor committees.

Social Security benefits were exempted from tax not by law but by revenue ruling on the theory that they were gifts a theory inconsistent with the treatment of pension income and with the general view of OASDI as a contributory pension system. In the 1930's, it was still true, however, that the income tax applied only to the moderately high-income people; and it still did not make much practical difference whether Social Security payments were excluded. For both Social Security and Railroad Retirement, the usual tax rules would indicate that the recovery of the employee's own contribution should be tax free. For people retiring in 1966, this would at most result in about 89 percent of OASI benefits being included in income for tax purposes and 78 percent of Railroad Retirement benefits; that would be the result if they were treated like other kinds of pensions.

The double personal exemption for the aged was enacted in 1948. The committee report explains that for many old people retirement savings had been accumulated at pre-World War II price levels, and the result of the World War II inflation was to make these retirement pensions less adequate, in terms of current purchasing power, been expected. Taxation of retirement income, it was held, had to be modified to offset some of the loss of purchasing power from inflation.

than had

In the early 1950's, there was increasing complaint about the apparent discrimination against other kinds of retirement income, compared to tax-free Social Security and Railroad Retirement benefits.

In 1954, Congress enacted the first retirement income credit. This provided something like the exemption of Social Security income for