Larry Kramer’s sharp analysis will be read as a controversial and impassioned plea for caution amidst recent calls to increase foundation payout rates. But at heart it amounts to a reminder of a rather simple point. In philanthropy, as in life, we confront reasonable disagreement over worthy ends, and reasonable disagreement over means to accomplish any given end. As a result, pluralism is the coin of the realm in philanthropy, with respect both to ends and the means to accomplish them. In light of multiple ends and means, there is no singular answer to the question of how much a foundation ought to spend in any given year from its endowment. So it’s appropriate to resist calls for uniform increases in foundation spending.
I’d go still further. The appropriate rate of spending is not a matter of first principle. Spending is just a mechanism for accomplishing the goals of a foundation, for powering its strategy to attain those goals. Discussions about payout should be derivative of decisions about goals and strategy.
The fundamental question, then, is about appropriate goals. In my 2018 book, Just Giving: Why Philanthropy is Failing Democracy and How It Can Do Better, I argue that big philanthropy can support rather than subvert democracy when it serves as a source of capital for long-term experiments in social problem solving that we should not expect to see take place in the marketplace or through public dollars. Different foundations will tackle different problems, with different strategies. Once again, pluralism. When things work well, the result is an enhanced capacity for a democratic society to confront the inevitable social challenges it faces.
Kramer notes that some foundation goals seem to call for high levels of spending. If you think you can create a vaccine to eliminate malaria, or you wish to bring about marriage equality, then spending more now to accomplish these goals is the right approach. Other social problems are more endemic and perhaps not amenable to definitive scientific or policy solutions. Here spending down quickly might compromise the capacity to mitigate the problem in the future.
Nothing here seems to me remotely controversial. Nevertheless, I understand why we are seeing calls for higher spending these days. Given the pandemic, which intersects with at least four other large and systemic crises (climate change, racial injustice, rising inequality, and democratic fragility), it’s understandable why many are calling for higher payout rates to meet these considerable challenges. We face something akin to an emergency, not just a constellation of ordinary social problems. And unless we confront these intersecting problems soon, preserving philanthropic assets for future problems may be a moot concern.
That observation is important, for it illuminates an assumption in Kramer’s essay that I find peculiar. Kramer defends plural approaches to payout rates, as do I. But he seems to assume that foundation payout rates in the real world actually vary significantly. This is not true. The calls for increased spending from endowments come against the backdrop of very modest variation in US foundation payout rates, with median payout at 5.8 percent (in 2007-2009) and few foundations spending more than 10 percent in any year. It’s fine to defend pluralism, but the critics calling for higher payout are right to think that foundations are risk averse when it comes to spending. And if something akin to an emergency is upon us, then we should see a greater risk tolerance in spending. In this, Kramer’s critics have the upper hand.
A final point goes unaddressed in Kramer’s essay. He meticulously documents how it’s a simple matter of math that spending more today comes at the cost of doing more later. The reason is that average returns to foundation endowments are not that impressive, barely keeping pace with inflation and the mandatory 5 percent payout requirement. But this point applies only to legacy foundations where the principal donor is no longer living and no significant resources are likely to be added to the endowment.
Many of today’s largest donors are still alive and increasing the amount of money they have pledged toward philanthropic purposes. Such donors have seen their fortunes rise dramatically over the past three decades, the growth so large that it eclipses even the most aggressive philanthropists. For all of his largess, Bill Gates, for example, remains the third wealthiest person in the world with a net worth of about $129 billion, well above his net worth (roughly $60 billion) when he created the largest foundation in the world—the Bill & Melinda Gates Foundation—which at the start of 2020 had an endowment of about $50 billion.
MacKenzie Scott is the most recent example. She’s proven that it’s not all that difficult to give away a billion dollars, but has yet to prove that it’s possible to put a dent in a large fortune. Scott donated more than $6 billion in the last year, instantly catapulting her near the top of all US donors (The William and Flora Hewlett Foundation’s total 2019 giving was roughly $450 million, and the Ford Foundation’s $350 million). Despite this extraordinary generosity, Scott is almost certainly much wealthier today than she was at the start of the year before her record giving. Her wealth is chiefly in the form of Amazon stock, which has skyrocketed in value. A similar pattern is true for signatories of the Giving Pledge, most of whom are wealthier today despite their considerable philanthropic activity.
Foundations might vary in their payout. But for living donors who wish to give the bulk of their money away, they had better start moving money out the door more quickly, lest they be crushed by the mountain of wealth that is accumulating.
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