Charitable Giving – Why Do People Give?
Colorado Gives Day is on December 8th this year and we work closely with a number of local nonprofits as an investment advisor, as board members, and as volunteers. Our clients also ask us about charitable giving every year as the holidays approach. It’s only natural to launch a series of posts over the coming weeks to cover key topics for individual philanthropy. There is a treasure trove of information available online these days, but we hope this series serves as a useful starting point.
Anecdotally, this is a fascinating topic to explore. I was an economics major in college, and while economics in general has been typecast as the “dismal science”, the once obscure field of behavioral economics is endlessly fascinating and experiencing a true renaissance.2
“When I do good, I feel good; when I do bad, I feel bad; and that’s my religion.” – Abraham Lincoln
Reasons people give
A summary piece from the St. Louis Fed outlines three economic theories for charitable giving:
1. Altruism – Donors value the social good done by the organization and donate to see the mission succeed. If the spending needs of the charity are met by other donors or the government, then the donor wouldn’t make any further donations. This theory also implies that giving would be dominated by large donors and government grants, which is not what we see in practice. Another factor must be at play.
2. Impure Altruism – This theory focuses on the extra feel-good benefit a donor feels when giving, or as economist James Andreoni called it in his 1990 paper, the “warm-glow” effect. A economics paper mentioning the warm and fuzzies – not exactly dismal.
3. Prestige – There is a certain level of social signaling that comes from making large, public donations. Why are donor plaques and giving tiers with special category names so popular? Surely hedge fund manager John Paulson didn’t make a $400 million donation to Harvard’s engineering school because the endowment was short of funds. 3.
Not all charitable giving comes in the form of donations. Many people volunteer their time as well. If time was equal to money, then the best way for many people to give would be by working an extra hour and donating the proceeds versus helping at a soup kitchen’s lunch hour. Yet 25% of Americans report spending time on volunteer activities. The warm fuzzies strike again!
How much to give
There are numerous studies showing that income has a positive effect on happiness (perhaps plateauing around $75,000, although satisfaction continues to climb with higher income), and recent research also corroborates the importance of how that income is spent. In short, spending more on other people (charity, gifts, experiences, etc), leads to greater happiness than spending on yourself.
Here in Boulder, the Chronicle of Philanthropy indicates that we have a “giving ratio”4 of 2.72%, below the state average of 2.87%.
The Community Foundation Serving Boulder County put out their excellent annual TRENDS Report recently and summarized additional findings on local giving. Of note, Colorado in general lags behind its neighboring states in giving.
I was frankly shocked by this given the above average incomes in Boulder County and the commitment to social causes. After looking at where charitable gifts go nationwide, perhaps I shouldn’t be.5
Needless to say, there is an opportunity for Boulder County residents to explore ways to catch up with the state and the surrounding areas. Boulder was ranked the happiest city in a Gallup poll back in 2010, including top marks for health and job quality, but emotional health was much lower. The fastest way to boost that emotional health? Try giving!
I would be remiss in not mentioning another benefit of giving in the US, as well as a key element for many financial plans — tax deductions. We’ll dive into how to maximize your tax savings in the next post.6
Let us know why you give in the comments.
- Naysayers might point out that is only 2% of GDP, but the US still came in at #2 in the CAF World Giving Index for 2015. ↩
- A Nobel prize winner with a bestseller and a dynamic duo with a book/podcast empire will do that. ↩
- Harvard’s endowment was over $36 billion for FY 2014 ↩
- Giving ratio: The percentage of AGI given to charity as determined using the charitable deductions reported on the income-tax forms. ↩
- Only 17% of residents in Boulder are “very religious” versus 40% nationwide. ↩
- While some may argue that taxes are a form of forced charitable donation from the haves to the have nots, that’s a political discussion and outside the scope of the post. We might have more to say as we approach the 2016 elections. ↩