Comments on: Negative Discount Rates & Peter Singer

By: Aaron Dorfman

Aaron Dorfman — Thu, 12 Mar 2009 10:43:59 +0000

This is a great discussion. There are many foundations that seek to exist in perpetuity yet who choose to pay out above 5%, and there are also studies that show this is possible. Reasonable people disagree about this, and the various studies are contradictory. But it is critally important that leaders of foundations consider these discounting issues you raise when making their payout decisions. There are real costs to keeping payouts low.

In NCRP’s recently-released Criteria for Philanthropy at Its Best, we devoted a whole section to this issue and we call for foundations to pay out 6% in grants. We trace the policy history of payout, and we cite the various relevant studies. It’s chapter IV of the book–pages 81 to 100–for anyone interested. (Full disclosure — I’m the ED of NCRP.)

Free downloads at http://www.ncrp.org/paib

By: Sean Stannard-Stockton

Sean Stannard-Stockton — Wed, 11 Mar 2009 17:55:13 +0000

Not that I've seen. But there's tons of studies that look at the more generic question of how much can you withdraw from an investment account without risking depleting the account (this is the exact same issue foundations face). The rule of thumb is 5% (which is where the payout rate comes from), but lots of studies suggest that only 3% or 4% is viable if you look at longer term asset price performance instead of focusing on the relatively strong returns from the 1950-2000 period. It is basically a probability question where the more you take out, and the longer you take it out for, the higher the chance that you deplete the account (spend down). Here's a collection of studies. Here's a bunch more links.

By: Renata Rafferty

Renata Rafferty — Wed, 11 Mar 2009 17:17:33 +0000

Are there any studies available that evaluate the relative efficacy and financial “health” of foundations that regularly exceed the 5% requirement?

By: Sean Stannard-Stockton

Sean Stannard-Stockton — Wed, 11 Mar 2009 15:19:26 +0000

I agree that negative discount rates argue for giving more now. So does the (unproven, but probably true) idea that social problems compound (grow) faster than asset prices appreciate.

But the problem is that if endowed charitable entities give at levels higher than 5%, they will extinguish themselves. That’s not automatically a bad thing. But it would be terrible if they all adopted this mindset.

Imagine a gun slinger in a battle, no matter how bad things get you don’t want to use your last bullets.

But individual giving (non-endowed) is different. An individual’s main source of new income is through working, so they can give at high levels and still replenish their ability to give. But endowed entities endowments are both their fuel for giving and their only source of new income. This creates a tension that I think too many people ignore when they announce support of a higher payout requirement.

By: Pete Manzo

Pete Manzo — Tue, 10 Mar 2009 23:12:09 +0000

Great post, Sean. I’ve always found discount rates and the time value of money very intriguing when applied to philanthropy. In Porter & Kramer’s landmark article on strategic philanthropy, they use the time value of money to argue that foundations must be many times more effective than typical donors to justify the fact that they only spend as little as 5% of their portfolio values each year in grants, by pointing out that it can otherwise take 100 years in giving out $5 each year to match the value of a well placed $100 gift today. I’ve often thought that, perhaps accidentally, the time value of money is a comparative strength of United Ways, for example, which raise and distribute almost all their funding ever year. (Full disclosure: I now work for United Ways of California.) Doesn’t the discount rate argue for Chuck Feeney’s “give while you live” approach?

Let’s hope we’re not headed for a deflationary spiral, but even if we were, I actually think the argument for spending more philanthropic dollars gets even stronger.

Singer’s argument seems to be that we can all afford to do more to save lives in being today, and it is very compelling. The counter argument is usually based on the notion of intergenerational equity – the concept that funding should be available for our children to use to solve the problems they want to address in the future. This argument really only makes sense for institutions, not for individuals. The point you’re making seems to be, though, that by spending more today, we may in fact be helping avoid problems our children would otherwise need to address, and I agree. – I’ve always thought that really undercuts the intergenerational equity issue. Also, if we’re optimistic, we believe that more wealth will be created and put into foundations in the future, so with that, plus the time value of money, plus an assumption that we make smart giving decisions, why wouldn’t we want to spend more in the current day?