Big jar, little jar

I got to attend a luncheon presentation this afternoon at WorldVenture. Greg Ringer, co-founder and CEO of PhilanthroCorp, spoke.

Everyone who attended had signed up weeks ago, but, to make his talk seem more relevant, I think, he retitled it to, “The Impact of the ‘Bailout’ on Philanthropy.” After the title, last week’s $700 billion federal bailout was never mentioned again. But the bailout did provide a slick way to talk a bit about the current state-of-affairs in American philanthropy.

Specifically, Ringer referred to a Wall Street Journal article called Nonprofits Brace for Slowdown in Giving. The third paragraph in the article says that, due to the slowdown in the economy, “Charities . . . are gearing up to tap their wealthy board members and other well-off supporters for extra cash.”

Ringer focused on this sentence and objected to the idea of tapping donors in the manner suggested. First, he objected to the idea of “extra” cash. “Who has ‘extra’ cash?” he asked.

But more saliently, he noted that only 9% of the average person’s wealth is in the form of cash or near-cash (checking and savings accounts, certificates of deposit, money market accounts, and so forth); 91% is in relatively illiquid forms: primarily, equity in homes, IRA and 401(k) balances, and life insurance.

He calls cash the “Little Jar.” And illiquid assets are the “Big Jar.” And the wealthier you are, the higher percentage of your wealth is going to be in the form of Big Jar assets.

So, considering these realities, “Why do philanthropies keep going after the Little Jar? It’s time to begin thinking how to release the Big Jar assets for philanthropic purposes.” In other words, quit worrying about cash and look at how to release funds for philanthropic purposes through otherwise illiquid assets.

Just to give an idea of how significant this piece of advice could be: Paul Schervish and John Havens of the Social Welfare Research Institute of Boston College developed “a simulation model to project the transfer of wealth from the 1998 adult population via their final estates (estates with no surviving spouse) during the 55-year period from 1998 through 2052.” They suggested that, during that time, using constant 1998 dollars, a minimum of $41 trillion will pass from one generation to the next.

The $41 trillion figure was based on an assumption of an annual growth rate within the entire economy over those 55 years of only 2%. If one uses a moderate 3% growth figure, we’re looking at $73 trillion. And if growth should improve somewhat over what it has been in the last half-century, i.e., if we should assume a 4% growth rate, then, Schervish and Havens conclude, we may be looking at a $136 trillion transfer of wealth between 1998 and 2052.

Schervish and Havens published their results in the report Millionaires and the Millennium: New Estimates of the Forthcoming Wealth Transfer and the Prospects for a Golden Age of Philanthropy.

In a January 2003 follow-up to that report, Why the $41 Trillion Wealth Transfer Estimate is Still Valid, Schervish and Havens say,

After its release, Millionaires and the Millennium was informally assessed by government economists at the Bureau of Labor Statistics, who concluded that the $41 trillion projection was a reasonable lower bound. Furthermore, statistics from the report have been used by staff economists at the Congressional Budget Office in analysis related to wealth transfer. [Emphasis added. --JAH]

Dare I say it? Whether we’re looking at $41 trillion or $136 trillion, that’s a lot of money! And whether we think of ourselves as philanthropists or not, all of us, especially the wealthy, will become philanthropists at our deaths. So, said Ringer, the question prospective donors need to ask themselves is this: Do I want to determine where those charitable contributions will go? Would I like to do this myself and contribute to causes that I believe in? Or would I rather leave the determination of where to give to the federal government?

“The United States enjoys the most generous tax policy in the world toward charitable contributions,” said Ringer. “You can eliminate all your long-term capital gains taxes and eliminate–or almost eliminate–all your estate taxes through proper use of charitable giving opportunities within your broader estate plan.”

Ringer shared a number of illustrations of how people have done this. –But the details are probably best covered in another post.

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