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Aaron Dorfman

Aaron Dorfman

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Why We Should Dial Down Our Enthusiasm for the Giving Pledge

Posted: 12/15/10 03:26 PM ET

Last week, 17 more billionaires signed on to the Giving Pledge and declared their intention to give away to charitable organizations at least 50 percent of their wealth. The initiative is being spearheaded by Warren Buffett and Bill and Melinda Gates.

I've been following this effort since it was launched earlier this year with a cover story in Fortune magazine. Let me say clearly that I think it's fantastic for billionaires to give money to charity instead of buying expensive toys they don't need or giving it all to their heirs. And I applaud the Gates family and Mr. Buffett for being willing to challenge their peers and to lead by example. Their effort will surely lead to an increase in giving among billionaires and others. I do, however, have some concerns.

I don't want to be a Grinch about it in the middle of the holiday season, but there are three important reasons to keep our enthusiasm for the Giving Pledge in check. First, the pledge is likely to have an extremely small impact on total giving, especially in the first few years. Second, little of the money is likely to benefit the most under-served populations. And third, giving by billionaires has typically been limited in its effectiveness and has dangerous implications for democratic decision-making.

I'll explore the first two concerns in greater detail now; I'll share my thoughts on the third point in a second posting later in the week.

The amounts being given are actually quite small.

Early news reports about the Giving Pledge hyped estimates that if the Forbes 400 of 2009 signed on, it would mean $600 billion for nonprofits. The problem is, the money is going to trickle out over a very long period of time, and it will represent only a very small upward tick in total charitable giving.

Billionaires who take the pledge commit to giving half their wealth to charity at some point during their lifetimes, or at their deaths. Some people on the list are quite elderly, but others are likely to spread their giving out over the next 50 years.

The biggest issue to consider, however, is endowments. My guess is that most of the money will wind up in university or foundation endowments, with only about 5 percent of the asset base getting spent on charitable purposes each year in perpetuity. The corpus will be invested in the stock market or other vehicles intended to earn a financial return, and only a tiny fraction of the assets will be working to advance a charitable goal.

How slow will the trickle be? Let's do some math. Assume every billionaire signs the pledge and the $600 billion windfall that was predicted actually materializes. Now assume the money is given out in even installments over the next 40 years as billionaires clarify their charitable goals and have life events that trigger giving. Those assumptions get us to $15 billion per year. Since total United States giving is about $300 billion annually, you might think we are looking at a respectable 5 percent increase in charitable giving. But you would be wrong.

Assuming I'm correct that most of the money will be put into endowments with 5 percent payouts, we're looking at $0.75 billion in new money for social purposes the first year, $1.5 billion the second year, $2.25 billion the third year, etc. It won't be until the 20th year that we'll hit even $15 billion annually in new money actually reaching nonprofits doing the important work that needs to be done. Clearly, the Giving Pledge will not be a major factor in sparking a much hoped-for rebound from the drop in giving that has decimated many nonprofits these last two years.

Warren Buffett is a noble exception here. In his pledge letter, he is clear that none of his giving is to go into endowments. He notes, "I want the money spent on current needs."

I hope others who take the pledge follow his lead and spend now to address urgent problems. If they do, we'll all be better off and the Giving Pledge will have more impact sooner.

Another option available is for billionaires to begin using the assets in their endowments, in addition to the grants payout, to achieve a social purpose -- a practice known as "mission investing." While mission investing is growing in popularity, it remains disappointingly uncommon, so I don't hold much hope that signers of the pledge will begin using this approach in great numbers. Any pledge signer who does want to learn more about mission investing should get involved with More for Mission, a group of foundation leaders dedicated to building the mission-investing field. Or check out this white paper by the Nathan Cummings Foundation on shareholder activism.

Little of the money will likely reach under-served populations.

Wealthy donors don't tend to prioritize lower-income communities, communities of color or other marginalized groups as beneficiaries of their giving. Instead, they tend to give to nonprofits that they patronize, such as cultural institutions and their alma maters.

Former Labor Secretary Robert Reich pointed out in an op-ed in the LA Times that wealthy donors give to places "where they spend their leisure time" and that only 10 percent of charitable contributions actually benefit the poor. And a 2009 study by the organization I lead found that only 33 percent of giving by foundations is intended to benefit under-served populations, even when very broadly defined.

So if billionaire donors recruited for the Giving Pledge act like most of the wealthy donors who have come before them, groups working with and on behalf of those with the least wealth, opportunity and power shouldn't expect a very large slice of the pie.

Bill and Melinda Gates are an exception, not the rule, in this regard. They -- admirably -- have made it explicit that they want the vast majority of their philanthropy to benefit the world's poor. If more of the billionaires taking the pledge shared that commitment, I'd be more excited. The question of who benefits from philanthropy matters.

Watch out for the continuation of this posting in the coming days, where I'll discuss the real limits and risks of billionaire philanthropy.