Following up on my recent post about life insurance, this latest issue had the following statement in bold on the wrap-around cover:
"Protect rivers and create streams of income: Support the natural world you love while also providing yourself with income and significant tax savings!"
The gist of this is that they are offering an alternative form of charitable giving. Rather than giving a standard donation of "X" amount of money, you can give it as an annuity so that they will pay you a return on your donation as long as you're alive and then when you die, they keep the money. This is the same way most pensions and Social Security work. It's kind of a compelling argument: why buy an annuity from an insurance company and let them keep the profits when you could instead have the profits go to your favorite charity? The answer of course is that you have to accept a somewhat lower return from the charity than you would from a for-profit business, but still. Now, I suspect that some of my friends and colleagues will find this a bit unsavory as it stradles the line between altruism and profit maximizing behavior. However, it also has a bit of "win-win" feel to it as well.
It turns out this is not at all a new idea - the oldest charitable annuity was invented by the American Bible Society and it has been in operation since 1843, so apparently I'm new to party in discovering these. Gift annuities are issued by all kinds of charitable organizations ranging from colleges to hospitals to the arts to religious organizations. (The Nature Conservancy one has been around for decades as well, but this was the first I'd seen it overtly advertised). However, they remain a small part of the overall financial market - the IRS estimated in 2008 that about $9Billion was 'invested' this way.
As you might expect, many of these funds took a beating from the stock market dip the last few years, but they are rebounding now and I guess they are making a new pitch to attract new investors (is "investors" the right word or "donors"? Kind of an awkward grey area).
Now, again I'll make the caveat that I'm not really an economist who specializes in finance, but I do study risk and uncertainty as well as longevity issues, and I've always found annuities interesting because in essence, you are betting that you're going to survive while the insurance company is betting you'll die. To me, this kind of seems like a no-lose situation ... you either outlive expectations and make a nice return on your investment, or you die and at that point, who cares? (Presumably, I suppose I should be worrying about leaving something to my son, but I'm betting on him being a rock star or curing cancer so he'll probably be fine). Surprisingly though, annuities (outside of pensions which are also quickly disappearing) have been relatively unpopular savings vehicles for Americans.
The thing I find interesting about this is that the Nature Conservancy seems like one of the worst charities to be involved in this area. If I had to bet, I would guess that the average NC donor is relatively outdoorsy and thus probably in slightly better health than the general population. If that's true, the charity stands to lose their shirt in the annuity bet. Hopefully they have good actuaries working for them who take this into account but in order for that to be worthwhile they would need to have a pretty substantial annuity program. The charities that should really be pushing annuities are things like a "Twinkie Appreciation Society" or some sort of Smoker's Rights organization ... they would probably clean up.
While I don't think I'll be sinking all my money into charitable annuities as a retirement strategy, I do like it better than my wife's idea for us to invest in "space tourism" ... but that's a topic for another post.
TNC (The Nature Conservancy) does get huge amounts of money from this strategy. Most of it is from old people, ironically enough, who want to leave a legacy and have a lot of money saved up already. Basically, it sounds like it works well. 10-15 years ago they even moved into conserving internationally and changed their logo to a globe for that reason. I guess their annuity investments increased (probably because people who used to give to WWF because they were interested in saving exotic species in rain forests see the donation to TNC as a better route because they see some of that money come back to them with the same- at least in their minds- kind of return on their investment in terms of altruistic "saving nature"). I think most conservationists have issues with TNC not because of the annuity free-market strategy but because of the "fortress conservation" strategy of buying up land like Ted Turner so no one else can use it. I guess TNC takes a more sustainable use strategy now (I honestly am not an expert on TNC- these are all my impressions upon talking with others more familiar with TNC). However, from an economic efficiency perspective I imagine sustainable use is less desirable compared to protectionism for the best conservation outcomes (see trophy hunting...for another blog post I guess).
ReplyDeleteIt's kind of an odd cognitive/behavioral phenomenon - rationally I bet if you gave a smaller regular donation and separately purchased a regular annuity from an insurance company with a higher return, probably everyone would end up better off. But, if you *want* to donate to charity but want to hedge your bets just in case this is kind of a compromise solution. The tax implications are interesting too and I think are the main thing letting this be possible.
ReplyDeleteThese marginal "nudges" are crucial for all kinds of charitable giving from PBS tote bags to bricks with your name inscribed on them. It's not that you necessarily value the tote bag (or for that matter the annuity payment) but it's s little extra push to entice people, even if it's seemingly somewhat irrational. Students, remember this when you're fundraising for your clubs and organizations ... Sometimes badly baked cookies or a poorly performed car wash can be enough to get people to donate to something - it's a way of helping people to internalize a small part of the positive externalities they are creating. At least that's the economist explanation.
Would love to hear some more takes on sociology of altruism at work here, etc
ReplyDeleteSociology of altruism depends on who is teaching it. I would teach it from a rational choice perspective which assumes that humans are not inherently altruistic. Others would teach it without making that assumption, or even suggesting that humans inherently do look out for one another and it's the structure of society that makes us act against our instincts. I think cognitive psychology offers us a nice balance- we have a reciprocity reflex, so we are eager to respond generously to others when a gift is given to us first (even if the original gift is not all that great). So we do inherently want to look out for others, but also we want to make sure the other person is not just a blood-sucking leech taking advantage of our kindness.
ReplyDeleteBut of course that's just coming from the meta-theoretical level...
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