This is a rewrite of an old post of mine, incorporating ideas from Alicorn's earlier post on the same topic.

One of the things stopping people from donating a substantial part of their income to charity is the risk of a future financial downfall, which can be anything from unemployment to illness. Even in a rich country with a solid social safety net, the idea of having no financial buffer at all seems daunting. However, if effective altruists precommitted to helping other effective altruists in need, they could all donate more money, as the risk would be spread.

This sounds a lot like insurance, and effective altruists could indeed insure themselves against a myriad of risks. Unfortunately, insurers will reject claims whenever possible, many risks cannot be easily insured, and insurance requires monthly payment, which requires a stable income. In other words, insurance is no replacement for a personal financial buffer. Insurance is useful to mitigate specific high-cost risks, but that's it.

(Additionally, insurance introduces the overhead of an insurance company. When I asked for a ballpark estimate at the insurer I interned at, I was told that at most one-third of all premium money is put back into payment of legitimate claims.)

I propose an intermediary charity that acts as a shared emergency fund. If a donor spends $100 through this charity, this intermediary charity directly forwards $80 of incoming donations to charities of the donor's choice. The remaining $20 is put in an emergency fund. In situations where the donor would otherwise make use of their financial buffer, they can take up to $95 from the emergency fund.

Crucially, donors cannot recoup as much as they originally spent, so there is little opportunity for fraud. As such, recoupments would not need to be subjected to the same thorough vetting as insurance claims.

The example above works under the assumption that, on average, donors need 20% of their donations back. It might make sense to create different funds for donors with different risk profiles: if a subset of donors think there's a 50% chance they'd need donated money back, they could donate to a fund which puts half of their donation in the emergency fund.

Even so, I would not recommend relying entirely on the emergency fund as a replacement for a personal financial buffer, because it can be drained in times of national and global crisis. However, I believe that the mere existence of such a fund would move people to donate more, not just by donating part of their personal buffer, but also because it makes donations less final. When contemplating giving away large sums of money, some people will always worry they might need the money in the future, even if they are in good shape financially. If they knew they would very likely be able to get the money back, donating large sums of money would be much easier on the psyche.

An issue raised by this comment is that it might be impossible for the emergency fund to be registered as a charity. The donors gain a large entitlement by donating. Tax agencies probably aren't fond of tax-free donations which give delayed monetary benefits to donors. As such, donations may not be tax-deductible.

This structure being entirely theoretical, there are a lot of open questions:

  • Should donors be required to provide reasoning for recouping their donation? My gut says no, unless something akin to a bank run occurs. They should probably only have to tick a box that says "An emergency occurred! Because of this, I really need the money back."
  • Should the right to recoup be limited to X years? Or should there be a lifetime guarantee? Should the right to recoup be inheritable? This would make donating more attractive for those worried about their offspring, but it makes the operation more complex.
  • If recoupments occur sparingly, as I'd expect, where should the remaining funds go?
  • How big is the risk that the fund will be used in illicit ways, such as tax evasion, despite the fact that donors cannot claim more than they spent?
  • What should happen if the fund is close to being drained?
  • Can the emergency fund be registered as a charity? What changes would make its charity status unambiguous? For example, should the fund also provide recoupments to effective altruists who did not donate through the fund but donated directly to e.g. GiveWell, but scrutinize those recoupments more?

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If recoupments occur sparingly, as I'd expect, where should the remaining funds go?

Keep them for "times of national emergency" etc. to hedge against correlated risk.

How big is the risk that the fund will be used in illicit ways, such as tax evasion, despite the fact that donors cannot claim more than they spent?

Modern society strongly incentivizes misusing anything that touches money, so without further evidence, I'd say that the risk is very high (near certainty). If we haven't found a way to misuse it, it is more likely that we are not clever enough than that the way does not exist.

First thought: I put in $100 to an 80% fund. I wait a year to claim the tax break on the 80% donation netting say 30%*$80=$24 in reduced taxes. Then I take out $95. I've made $19 on the trade. Of course, a government would see this right away and not allow tax breaks for such contributions. But this sort of thing seems rife for problems.

Another: I put in $100, $80 goes to a "charity" that gives me a 10% kickback. Then I take out $95 and I've made $3.

You might be able to fix this by requiring that contributors maintain almost all of their assets as property of the fund. Then if I make a withdrawal for "an emergency" I can't keep any profit or buy anything that doesn't go right back to the fund. But that sounds a lot like the "everything in common" schemes that have failed so often in the past. So, we'd need to modify it to make it viable.

Unless they are in a legitimate emergency situation, they are defrauding charity. Unfortunately, this doesn't stop everyone, but if they are caught, they would lose all of the money they donated. If I were the one committing fraud, this would seem very risky to me.

Fraudulent claims usually have different characteristics than non-fraudulent claims. If someone claims the full amount they're entitled to on a large sum of money, the fund should investigate that claim before giving the money.

If an altruist falls on hard times, they can ask other altruists for help, and those altruists can decide to divert their charitable donations if they consider it worth more to help the altruist. If the altruists are donating to the same charities, it is very likely that restoring the ability to donate for the in-need altruist will more than pay for the donations diverted.

If charitable donations cannot be faked, and an altruist's report of hard times preventing their charity can be trusted, then this will work to provide a financial buffer based purely on mutual interest.

Only if most altruists in the network fall on hard times does this fail, as there aren't enough remaining charitable donations to redistribute. A global network of diversely employed altruists would minimize this risk.

Cases where an altruist is permanently knocked out of income (and therefore donation) would lack mutual interest. There would need to be a formal agreement to divert some charity for life to help them out, and this would most likely be separate from the prior network of mutual aid, and count as insurance.

A crowdfunding network is functionally very similar to what I alluded to in my last question:

Can the emergency fund be registered as a charity? What changes would make its charity status unambiguous? For example, should the fund also provide recoupments to effective altruists who did not donate through the fund but donated directly to e.g. GiveWell, but scrutinize those recoupments more?

In a crowdfunding network, the crowdfunders decide for themselves if they consider the situation to be an emergency. In my version, a centralized fund would be the judge. I think the main advantage of my version is that people immediately know which door to knock on if they're in trouble.