The blogs on this website advocate using the power of compounding small seed funds for decades and centuries to establish financial independence for charities and governments. This approach is technically possible using a non-profit (actually a for-profit that contributes all profits) investment fund but faces practical hurdles.
This month I want to discuss the impact and costs of setting aside money today. Funding the future means investing seed funds in investments to pay back to charities after a very long wait. That same seed money is sorely needed today and would face many potential risks in an investment program lasting for ages.
Today the lack of money situation worsens as the number of donors making tax-deductible donations declines, even as younger generations facing huge mortgages and lower wages fail to similarly participate. Government budgets are tight and already fund 51% of annual charitable funds[i]. Foundations are not large enough to payout to meet today's needs consistently. The result is that increasing service demands drive a forecasted ten-year shortfall is $25 B by 2026.[ii]
As this choice to save seed funds for the deep future is a debatable topic, I will present my thoughts on the subject in two broad 'Pros and Cons' categories: 'Why' and 'Why Not', but address them in reverse order.
We start with the 'Why Not' category.
Why we should not save money for the future
Costs – such a program takes away from spending today. Every dollar matters to someone hungry, homeless, hurt, or suffering.
Impacts – reducing the money available today means fewer problems are solved promptly, aggravating the situation and leading to the growth of those and other problems.
Takes too long - sizable payoffs require waiting 75+ years and really big payoffs aren't likely for 150+ years. Who can afford to wait that long?
Too risky – investing in the stock market is risky, especially over the short term. Waiting over decades and centuries may reduce the investment risk. Still, it increases the costs of managing the funds and the risks of funds being diverted away from the desired charitable intent.
People die - how will this be managed for two hundred years? This approach requires detailed resilient and effective succession plans, necessitating a set of complex and costly steps.
None of our business – future charity is not our responsibility today to finance. The future can raise its own funding.
Situations change over time - funds raised for the far future could finance out-of-date needs or processes.
Not done elsewhere – why aren't others already building up such funds using the proposed for-profit model? Perhaps other as yet unknown reasons exist not to set aside funds.
Already happening – philanthropic foundations can limit annual spending to grow their funds available over time to provide ever-increasing funds, albeit at much slower growth rates. All charities in Canada must spend 3.5% to 5% of their yearly investment totals, called the Disbursement Quota (DQ). The DQ slows the growth of funds within foundations dramatically compared with a for-profit model.
Why we should save money for the future
Chronic money shortages – can be eliminated by creating a new funding infrastructure that grows so that all charities and governments are eventually financially independent. The continuous growth of funds means an ever-increasing payout is possible.
The future will need the money - after Ben Franklin's two-hundred-year experiment ended in 1990, all his invested money was to be dispersed. This money was of great interest to many groups. Unless some other form of long-term funding, such as sovereign funds, raises sufficient money to address the problems for our future society, we can be sure the future will need the money.
Creating hope - a solution to ensure permanent and increasing charitable funding could change the perception today that the future for charity and the world looks bleak. Hope is a significant driver of human activity, happiness and development[iii]. We have the power to give hope to all by setting aside seed funds.
Offers a new approach - which is free from growth slowing disbursement (DQ) requirements and only asks for a small portion of today's donations to go to seed funds. By saving for the future 100+ years from today, we can ensure charities are fully financed and able perpetually to finance their needs. We need a new approach that utilizes the full power of compounding.
Small donations can generate huge impacts – the power of compounding can magnify the benefit of a donation over time to incredible size. The longer you wait the larger the benefit. We do not have to significantly adjust our current financial status to give seed funds. A small amount will do a great deal. For example, 5% of annual charitable revenues, currently over $250 B per year, is around $13 B (5% of $250 B). To generate ongoing donations of $250 B per year, savings must reach 25 times more, $6.25 Trillion. Raising six trillion dollars may seem insurmountable today, but by using the power of compounding over centuries, this requires only a one-time donation of $13 B that grows over 154 years at a 5% net after-inflation growth rate. The required seed funds can take very little away from today, for example, if $1.3B (0.5% of $250 B) were set aside for ten years, then charitable sector revenues are available forever after 164 years. This is huge!
Leave the world a better place – by funding future financial independence for charities. Leaving money to create a financially independent charitable sector is an affordable way to enable individuals to make the world a better place. Donors sometimes lament they wish they could do more. One study found that 72 % would give more if their financial situation permitted.[iv] This new approach could allow these donors to participate further without altering their financial situation significantly.
We give in other ways to the long-term future – why not this one? Many examples exist where benefits first require waiting long or unknown periods, such as building a cathedral over centuries, planting forests that take 40+ years to mature, funding basic research with unknown benefits, and exploring the depths of the ocean and outer space. All these things we undertake with faith and hope good things will result. We base our faith upon the fact that many similar actions have proved beneficial.
Speaking of similar actions, we permit and encourage financial independence for individuals - why not institutions? Individuals are encouraged to put money aside for the future to prepare for retirement. Consider putting money aside for a longer timeframe for charity, not individuals. The investment mechanisms are the same. Just the organizations to operate the funds are new.
The grandchildren of our grandchildren would be the first to benefit – in about 75 years. While a span of 75 years may seem too long to affect anyone we know, the reality is that our grandchildren will be happier knowing that their grandchildren will have a brighter future because we donated today to that long-term vision. In 75 years, we can design a payout program to grow a 5% donation to about 135% and have funds remaining to continue to repeat the same or higher amounts every 25 years.
Creating immediate benefits via jobs and taxes – in several ways. Firstly, the seed fund gifts are not tax-deductible (as this requires using a for-profit), which immediately saves the government about 40% of the gift. Plus, an average of 1.8% from the growth in the funds runs the operations, investment management and pays taxes. Over the first ten years, society-at-large has recouped 58% (40% + 10 x 1.8%) of the donations through spending and savings. Eventually, as the fund grows, the cumulative annual taxes paid on the income from the investment portfolio grows to exceed the total given as original seed funds.
Payout periods and amounts paid can vary. An infinite variety of timeframes and portions paid from the fund balance can satisfy the donor's wishes and respect that the future must have control. An example schedule for the payouts from the fund generator to the charities is to have some fraction of the seed fund passed over every 25 years. The first payout in the twenty-fifth year could match the original donation with an approximate payout of one-quarter of the funds. The remaining fund will have three-quarters of the seed donation to grow into the next gift, another 25 years later. Future fund managers must completely control how often and how much to pay out during their time. However, these future managers will be encouraged to keep the funds growing and stick to the donor's original wishes.
Sovereign funds do exist - so why can't an initiative start new ones? Norway is a prime example of creating its fund by wisely setting aside a portion of the earnings from North Sea oil. Today their fund is a source of national pride, not unlike the healthcare system in Canada is a source of pride among Canadians. The Norwegians' public pride staunchly protects the fund from being misused or overspent.
Because we can - and the future can't. We hold the power today to make a vast difference via setting in motion funding of enormous perpetual value for the future. The future simply can't return that perpetual favour, even though we greatly impair their future by saddling them with debt and using up natural resources. We have a moral obligation to help our descendants, one we honour every day in raising our families. This is but another way, and I believe a worthwhile one.
In conclusion
Some will say these arguments sway them to set a portion aside for the future, and some will decide the opposite. This variable conclusion perhaps reflects personal values and risk tolerance.
Some readers may feel neutral on this issue, assessing the arguments for and against as balancing out. If I encounter a close decision, I conclude either is a good way forward.
I hope some donors may see the possibility that allowing a small portion of their charitable funding could establish financial independence for charities in the future.
Where would you stand?
Footnotes: [i] Figure 13. Charities, Sustainable Funding and Smart Growth | Imagine Canada
[iii] …more hopeful people were more satisfied with life, maintained high-quality interpersonal relationships, and were also healthier. Perceived hope and meaningfulness turned out to be the two main independent (negative) predictors of depression. The results also show that people who participate in volunteering and charity activities can be significantly happier than other people. They tend to have more optimistic expectations for the future and experience greater meaningfulness and spirituality in their lives. Our findings suggest that the paths to happier life include hopeful and others-oriented mindset, genuine concern for the welfare of others, and altruism. Hope seems to be a driving force of optimal human development and a valuable key to the flourishing of both the individual and the whole society. (PDF) Hope – A Driving Force of Optimal Human Development (researchgate.net)
Photo by Hadija Saidi on Unsplash
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