Playing the Percentages

Ah: the end of the year! Donors are racing to register their charitable contributions before January first. Nonprofits are counting on a December bounty. But what, besides tax advantages, is driving the giving?

For donors, the process boils down to two basic decisions: Which charities are deserving of their contributions, and how much should they give each one. And that leads to some larger questions: How much should each of us give in total? And how does our level of philanthropy compare to others?

Overall, Americans donate about 2% of their income. That percentage hasn’t risen or fallen much through the years. And fundraising consultants and others eagerly offer suggestions for how to raise that average.

I agree that there is both the need and the capacity for increased charitable giving. I’m a big believer in the nonprofit sector. More money would help more good organizations meet more needs. But we are focusing on the wrong data point, because I don’t think an overall average is much of a guide to how individuals should give. That 2% average includes Bill Gates and your kids’ pediatrician and the plumber next door and the cashier at Walmart. Should the same charitable expectation apply to all? Of course not.

In a recent New York Times article, ethicist and philosopher Peter Singer suggests a table for appropriate giving, where there is essentially a sliding scale. Those with modest incomes should give 5% of their incomes. Those with higher incomes should donate a significantly higher proportion. I think Singer is right about this – that those with more should give at a much higher rate – but he misses a couple of key points.

First, the ability to give to charity is largely about one’s personal financial circumstances, which involve much more than income levels. A couple with a $100,000 income, a paid-off mortgage, and grown children who are all self-sufficient are in a vastly different position from a couple with a $100,000 income, a $2,000/month mortgage payment, a child with a severe disability, and two other kids in college.  The first couple can give away $10,000 to charity more easily than the second couple can give away even $1,000. The fact that they have the same family income obscures their vastly different circumstances and ability to donate.

Second: we place too much emphasis on donations as a percentage of income, without factoring in the size of individuals’ overall financial assets. Take those two families I described above, each of which earns $100,000 a year. Let’s say that the second couple – the one with the mortgage and the child with disabilities and the two kids in college – had all of $2,500 in the bank. Not much of a cushion. And let’s say that the other couple, the one without debt, had $5 million invested in stocks, bonds, real estate, and various bank accounts. Not only is there a substantial safety net for that family, but there are also some significant assets, many of which are no doubt growing in value. If the better-off couple gives away $10,000 a year – 10% of their income – that now seems rather paltry, as it’s such a very tiny portion (2/10 of one percent) of their total net worth.

Claude Rosenberg, the noted financier and philanthropist, was struck by this failure of the affluent to take their overall wealth into consideration when they make their charitable decisions. Rosenberg came to this realization because each year he donated to his favorite charitable organizations at the maximum level requested, but at the end of the year his total worth nevertheless was higher than the year before. He wasn’t giving away enough, he realized. He consequently started a nonprofit in the 1990s called New Tithing, which among other things put out an on-line calculator that individuals could use to figure out what they could actually afford to give based on their income and assets. (Unfortunately, as Rosenberg grew ill, New Tithing shut its doors and its website. Rosenberg died in 2008.)

Rosenberg was definitely on to something. People have a very hard time understanding how much money they genuinely require to support their lifestyle and to ensure their independence. They spend a lifetime working to earn and accumulate money. For many, it’s a sudden and disquieting shift to start giving money away in large bunches. They underestimate what they can give away. But it’s possible to help them see the light.

An accountant friend of mine tells about an elderly client of his. The client was in her mid-eighties and was worth about thirty million dollars. My friend was urging her to give generous gifts to charity. She was reluctant: she was afraid of outliving her assets. So my friend called up the Ritz Carlton in Boston, the most luxurious hotel in New England. He asked how much it cost to stay in their most expensive suite – at the time, about $2,000 a night. He took out his calculator, pushed a few buttons, and announced: “Well, Ethel: if you stayed in the Ritz Carlton’s most expensive suite every night the rest of your life and lived to 120, you’d still have about $10 million left over.” At which point Ethel became a philanthropist. She now understood that she could afford to give away her money.

The bottom line: it would be great if overall charitable giving rose above 2%, but urging people, regardless of circumstances, to give, say, 3% of their incomes, won’t raise that overall average effectively or efficiently. Some people honestly can’t and shouldn’t give even 2%. Some – those with high incomes and great wealth and few debts – should give vastly more. If each and every person gave to what was truly his or her capacity, the overall percentage of charitable giving would rise markedly, and we would be a better society for it.

Copyright Alan Cantor 2013. All rights reserved.

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