Analysis: Charities Suffer if Foundations Are Forced to Pay Out Faster

Thousands of generous Americans positively impact their communities by contributing to charities through private foundations. This week, Philanthropy Roundtable released a new paper detailing how higher payout requirements for private foundations would hurt the most vulnerable in our society and harm nonprofits. Currently, foundations are required to pay out 5% of their assets to charities every year.  

That 5% mandate was selected because it promotes short-term giving, while also allowing for creative, long-term work on the issues our nation faces today and tomorrow. Some argue the annual 5% payout rate isn’t high enough or fast enough but our analysis indicates forcing a higher rate will mean fewer dollars winding up with charities.  

With about 125,000 private foundations distributing over $100 billion each year to nonprofits, the United States’ charitable sector increasingly relies on foundation support to fund its charitable operations. Foundation grantmaking bolsters various societal, environmental and educational initiatives nationwide.  

We all share the goal of encouraging giving and supporting charitable organizations and the work they do for communities in need. A higher payout rate is a misguided approach to reaching this shared goal.  

To test the concept of a higher payout requirement, the Roundtable ran a simulation comparing the 5% payout rate to a steeper 12% rate. What would happen if a large foundation were forced to pay out at that higher rate? The analysis found that over the course of 50 years, charities would receive $21 billion less under a 12% payout rule. That’s a loss of $21 billion for essential aid that propels our nation’s vibrant charitable sector.  

Raising the payout requirement for private foundations would be detrimental for charities and the communities they support who depend on this reliable and consistent source of funds. The current payout rate has a successful track record of bolstering our nation’s charitable sector and, as the Roundtable’s new paper points out, “has demonstrated its efficacy in striking a delicate balance between addressing immediate charitable needs and ensuring the long-term sustainability of philanthropic endeavors.”  

A sharp incline in payout requirements will result in an equally sharp decline in future charitable dollars. The existing 5% minimum regulatory framework maintains a balance that maximizes immediate philanthropic impact with sustained support for addressing long-term societal challenges.  

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