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, some risks cannot be 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 an 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.

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

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.

I would not recommend relying solely 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 the fund will move people to donate more, not just by donating part of their emergency fund, but also because it makes donations less final. When contemplating giving away money, some people always worry they might need the money later, even if they are in good shape financially. If they knew they would very likely be able to get the money back, donating would be less of a hurdle psychologically.

Because the idea of an emergency fund for donors is so simple, I'd say there's a good chance this has already been investigated. If anyone knows of existing literature, I'd be happy to hear about it. In particular, I'm interested in the following 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."
  • 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 drained?


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8 comments, sorted by Click to highlight new comments since: Today at 3:24 PM

I don't think you'll be able to incorporate this as a 501(c)(3) or 501(c)(4), which means donations to it will not be tax deductible. That is, I think a social club or church that gave out emergency support to members could be recognized as a charity, but one that gives people 'shares' that entitle them to their money back does not do so.

This, sadly, looks like it knocks out the whole project; instead of giving $20k to charity and reducing my taxes by $4k and putting that $4k in the bank, I give $20k to charity so that $4k of it gets banked so that maybe I (or other users) could use it. 

It would still help people (in the US) who would be donating less than their standard deduction ($12k/yr, so those who earn less than $120k per year), and those are the ones who are most likely to be in the relevant risky situation. It might still be a killer problem though.

Or those who don't itemize deductions (most non-homeowners).

I like the spirit of this. For myself, I feel like I "need" between 1 and 3 million USD so that I will have enough wealth that I can comfortably live off investment income to allow me financial independence to do what I like. Not enough for a lavish lifestyle, just enough to live comfortably, ideally even in the world's most expensive cities since that might be where I want to be to work on the things I want to work on. I would probably not feel like I need this, though, if there were a sufficient safety net such that I would be confident that if I worked on things that did not yield enough money to support me I would be adequately supported such that it would not interfere with my ability to work on projects I consider important.

This sounds a lot like insurance, and effective altruists could indeed insure themselves against a myriad of risks. Unfortunately, this introduces the overhead of an insurance company. (When asking 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.) Besides, coverage will never be 100%, an insurer will reject claims whenever possible, and insurance requires monthly payment, which requires stable income.

The overhead of the insurance company isn't there for fun, it's because if you don't have that overhead, the insurance becomes more expensive. If you decide checking claims is too expensive, so instead you'll just not ever reject claims, I assure you you're not going to save money. To compare how much money you'd save by (effectively) starting your own insurance company, you need to look at profits, and insurance companies are not particularly profitable.

What are insurance sector companies usual profit margins? The insurance industry's net margin in 2017 ranged between 3 and 10.5%. Life insurance had the widest range between quarters, from 3% to 9.6%; property and casualty insurance were at 3% to 8%; and health insurance had the narrowest range of 4% to 5.25%.

It's possible that you could still save money by starting yourself, but my priors say your version sounds cheaper because you're being overly optimistic. You could probably get someone to take your bet though by asking a company to insure against people asking for their money back, with a clause that if payouts ever exceed x% of payments they can stop paying claims (similar to what would happen if your fund ran out of money).

Explain how this would be better than having the effective altruist himself or herself fund an emergency fund before they start donating to charity.

I understand you are saying that pooling the money could mean less money is kept in the fund and more can be donated, but I'm not sure that benefit outweighs the cost. While the amount of an emergency fund is the subject of some debate, IMO $10,000 per person is a decent ballpark. Say you could get that result with only $5000 per person with your proposed pool. Then does that $5000 difference outweigh 1) administrative costs, 2) cost of litigation over payouts, and 3) cost to the altruist of losing the ability to decide how much money is set aside and what happens to it?

The "tick the box" approach would lead to quickly depleting the fund. Instead, you'd have to set limits on what counts as an "emergency," and expect a whole lot of debate (and litigation) over that. A medical procedure, new car, home repair, or adopting a child are all examples of things where people might or might not consider "emergencies," depending on their personal philosophies and circumstances.

The recipient of the fund's donations would have to be constrained to only known-ethical effective charities, since otherwise you could "donate" through it to your personal trust and then withdraw from the emergency fund, or in a more unlikely case, the runners of an effective charity could "donate" through the fund to themselves, and then withdraw from the emergency fund.

Another problem is that if you care only about your chosen effective charity and yourself, you could donate $100 through the fund and then withdraw $95, which effectively means that you pay only $5 to donate $80 to your chosen charity. Someone who is doing this could essentially use the emergency fund as a 16:1 match on donations, which certainly isn't the intended goal of it.

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