COVID-19 Pandemic

It’s Not Torah From Sinai: Historicizing the 5% Payout Orthodoxy in the midst of the Covid-19 Crisis

Editors’ Note: HistPhil co-editor Benjamin Soskis argues that the Covid-19 crisis is a moment to challenge the 5% payout orthodoxy by appreciating its historical contingency. For HistPhil’s other posts on the crisis, see here.

Over the last decade, as the public has confronted a steady stream of crises—economic, political, ecological—advocates have steadily called on foundations to increase their spending and to get money in the hands of operating charities as fast as possible. With the arrival of the Coronavirus, those appeals have, appropriately enough, reached fever pitch. As Aaron Dorfman and Ellen Dorsey eloquently insisted in the Chronicle of Philanthropy, “for philanthropy, it is the time to spend more.” “Foundations, I am begging you,” urged nonprofit commentator Vu Le. “If there was ever a time for you to increase your payout rate and get more money out the door, this is it.” And in a recent presidential address—delivered virtually, of course—Andrés Spokoiny of the Jewish Funders Network gave this theme a biblical gloss. “We need to cease regarding the 5 percent payout as Torah from Sinai…If there’s a time to dig deeper in our endowments, this is it.”

So what’s holding funders back from doing so? Spokoiny’s remarks point to one answer: a nearly religious devotion among some of them to perpetuity, staked to a 5% annual payout rate. It’s a commitment that sits at the center of philanthropic institutional identity. Yet like many orthodoxies, the veneration of perpetuity is often less a product of careful reflection on moral or civic responsibility than a substitute for it. But also like many orthodoxies, what seems timeless and axiomatic is really a product of a particular historical moment. Understanding how perpetuity became the default for the philanthropic sector can help funders rethink their attitudes toward “Giving in Time,” towards the trade-offs between giving now and giving later, and towards the responsibilities of foundations at moments of crisis.


The first generation of philanthropic foundations, at the turn of the last century, exhibited a range of approaches toward lifespan and payout. On the one extreme, you had Andrew Carnegie. Perpetuity was, as one early historian noted, a “characteristic basal to Mr. Carnegie’s concept of philanthropy” and a feature of all the philanthropic institutions he established. “My desire is that the work which I hav been carrying on…shall continue during this and future generations,” Carnegie wrote in his 1911 letter of gift to the Carnegie Corporation, using his distinctive phonetic spelling. “My chief happiness as I write these lines lies in the thot that even after I pass away the welth that came to me to administer as a sacred trust for the good of my fellow men is to continue to benefit humanity for generations untold.”

Carnegie’s embrace of perpetuity was shared by many of those who he chose to head up his philanthropic institutions, most notably by Henry Pritchett, the first president of the Carnegie Foundation for the Advancement of Teaching. Pritchett was adamantly opposed to dipping into principal. He warned against the tyranny of current exigencies and against “surrendering the capital of a great trust to the real, or imaginary, demands of the present moment.” Foundations leaders must scan the field with a wider temporal lens. “Some causes hang on the long result of time. Their contribution to human progress is cumulative. In the service of such causes the continuing trust will find its justification.”

On the other pole, there was Julius Rosenwald, the longtime head of Sears, Roebuck, who became the nation’s preeminent critic of endowments and whose foundation, established in 1917, became—in 1948—as his biographer writes, the first to go out of existence “voluntarily in accordance with the expressed wishes of its founder.” In an announcement to the foundation’s board in 1928 detailing the spend-down plan, he wrote, “My experience is that trustees controlling large funds are not only desirous of conserving principal but often favor adding to it from surplus income. I am not in sympathy with this policy of perpetuating endowment and believe that more good can be accomplished by expending funds as trustees find opportunities for constructive work than by storing a large sum of money for long periods of time.” And as he explained in an article in the Atlantic, part of his motivation for embracing limited-life philanthropy was his appreciation of the urgent needs of the time. “[T]he crying demands of Negro schools and colleges are reasons for throwing all available resources into these present needs and leaving to coming generations the meeting of future requirements, which are certain to be different from those of to-day.”

Somewhere in the middle were the Rockefeller philanthropies. The statement often attributed to Standard Oil titan John D. Rockefeller—“Perpetuity is a pretty long time”—might be apocryphal, but it is clear that Rockefeller had a much more profound sense of the dangers of perpetuity than did Carnegie, as did his many of Rockefeller’s chosen philanthropic associates. Rockefeller was not necessarily an enthusiast of the spend-down model, like Rosenwald. But the various Rockefeller boards, and the philanthropic leaders that directed them, exhibited a broad range of attitudes toward ideal philanthropic lifespans and the corresponding payout practices. In 1909, Rockefeller, for instance, released the trustees of the General Education Board, the first of the foundations he created, from any commitment to maintaining perpetual life, and the foundation closed its doors in 1964. As a final report issued by the GEB on its dissolution states, “the Trustees deliberately chose to meet the challenge of worthy causes rather than preserve the funds at their disposal for some indefinite future.”

Rockefeller did not insist on the spend-down model, though he was willing to accept for the Rockefeller Foundation a life-time limit of 100 years as a concession to receive a federal charter. Instead, he left decisions on lifespan and payout up to the trustees of the foundations he established. There was in fact an indeterminateness toward the question of foundation lifespan that governed much of the first half century of Rockefeller philanthropy. At any given moment, the urgency of a particular crisis or opportunity—the aftermath of the First World War, for instance—might goad foundation leaders into spending from principal. But they continued to put off a decisive resolution to the question of philanthropic timespan.

That does not mean they ignored the question; they just never settled it. In 1946, when the Rockefeller Foundation board was polled, a majority expressed support for terminating the Foundation within the next quarter-century, and all the trustees were willing to tap the principal fund “if opportunities develop for meeting needs and wants of importance and urgency.” In the next decades, the board continued discussing the issue, pushing aside the possibility of a total spend-down but remaining open to the spending of principal. The matter of lifespan, they stated in 1964, “should be reviewed frequently in the light of changing financial conditions and world needs.” Just two years later, McGeorge Bundy, president of the Ford Foundation, echoed these sentiments, declaring in his first annual report that “A foundation should regularly ask itself if it could do more good dead than alive.”

This open-ended approach was common practice at mid-century, reflecting fluid attitudes toward foundation lifespan and spending rates that had not congealed into definite sector-wide norms. In 1946, two scholars of philanthropy detected a trend in “the direction of allowing at least discretionary liquidation” and a 1952 Congressional investigation of foundations determined that a majority of the larger foundations it probed had charters featuring “optional” or “discretionary” perpetuity. A survey conducted in the early 1960s by the Foundation Library Center confirmed this finding. Of the 32 responses it received from foundations regarding lifespan decisions, 13 reported a commitment to perpetual life, while another 17 reported a status of some version of discretionary perpetuity (8 of which wrote that a substantial amount of capital had already been expended). Only one foundation reported an explicit commitment to limited life, with an actual date of termination set by the donor.


So how did perpetuity get established as philanthropy’s default setting? How did the 5% payout rate become holy writ? It’s a long, complicated story, but a major factor was the Tax Reform Act of 1969. During deliberations over the bill, some foundation critics sought to impose a lifetime limit on foundations (proposals to do so had been a part of previous Congressional investigations in the 1950s). That danger rallied foundation allies—both around mandated spending requirements, seen as an alternative to lifetime limits, and also around a defense of the right to perpetuity, which became a stand-in for the defense of foundation independence more generally. Ultimately, that defense transformed into a full-throated championing of perpetuity itself—attached to fealty to a 6% (and later a 5%) payout rate.

Yet as it increasingly became regarded by many as the default foundation practice, the indeterminacy which had promoted an open-ended engagement with the question of foundation spending practice and the varying responsibilities to the present and the future hardened into orthodoxy. On top of this, with its slew of regulations, the Tax Reform Act empowered tax lawyers and accountants—foundations’ legal and accounting expenses nearly doubled between 1968 and 1970—who often regarded the prudent stewardship of philanthropic resources as their chief professional responsibility. Backed by their guidance, foundation leaders insisted that, based on the real rate of return of foundation assets, anything beyond a 5 percent payout would eat into the corpus (a claim which recent research has challenged). Congress had meant the payout requirement to serve as a substitute for a foundation lifetime limit, one that instituted a conditional authorization of continued institutional life based on a minimum responsibility to the current moment; but it ultimately became more commonly regarded as a guarantor of perpetuity. On top of this, the economic recession of the 1970s cut into many foundations’ endowments and spooked some foundation leaders, such as the Rockefeller Foundation’s Richard Lyman, into a more explicit devotion to perpetual life.


Of course, the default toward perpetuity that developed in the final decades of the century was never absolute. At around the same time that it was coalescing, a host of conservative foundations formed committed to the sanctity of donor intent and which embraced the spend-down model. Perpetuity has also lost its luster among a new surging crops of engaged living donors, many of them in their 30s and 40s, who are devoted to an ethic of “Giving While Living.” A recent survey of 150 foundations by Rockefeller Philanthropy Associates, for instance, found “a clear upward trend in the number of organizations adopting a time-limited model,” with 44 percent of organizations established in the last decade doing so.

With no clear timeframe decision now in ascendance, the moment is ripe for funders to exercise their discretion with respect to payout rates. Does this mean that the Coronavirus crisis should prompt all funders—or at least those unconstrained by a charter specifying perpetuity—to embrace spending-down? Of course not. But it should push foundations leaders and individual donors more generally to reconsider the trade-offs between spending now versus spending later, to think hard about their responsibilities to the present and their responsibilities to the future—and how those two imperatives are related—and to ensure that decisions about payout rates are closely aligned with philanthropic purpose. For some, this sort of reflection might actually bolster a commitment to perpetuity. In the midst of World War II, Rockefeller Foundation trustee Owen D. Young argued that, although he had initially favored being “liberal with the expenditure of capital funds,” Europe’s devastated condition, and “the great need during the years ahead for relatively small grants which may bring extraordinary results” convinced him that the endowment should be “jealously safeguarded to ensure perpetuation.” It’s possible that some foundations today will follow a similar logic, believing that ensuring they’re around for the next crisis, and the one after that, and the one after that, trumps any call to dramatically increase spending to address the current one. But many others, in Dorfman and Dorsey’s words, will determine “it is the time to spend more.”

The point is, this is no time to rely on settled practice, on defaults, on unexamined institutional traditions. Even if foundations stop short of taking McGeorge Bundy’s advice to “regularly ask [themselves if they] could do more good dead than alive,” they should fully recognize that, at this moment, grappling with the temporal dimensions of philanthropy is a matter of life and death.

-Benjamin Soskis

Benjamin Soskis is the co-editor of HistPhil and a research associate at the Urban Institute’s Center on Nonprofits and Philanthropy.

3 thoughts on “It’s Not Torah From Sinai: Historicizing the 5% Payout Orthodoxy in the midst of the Covid-19 Crisis

  1. As usual, an excellent analysis by Ben. Leaving aside whether any foundations SHOULD exist in perpetuity, it may be helpful to focus on the link between perpetuity and payout. The 5% required payout is an approximation of what’s needed to maintain the real value of a foundation’s endowment constant over time. It assumes investment returns of 8% and an inflation rate of 3%. I don’t think anyone would argue that this is precisely the right number. Ben’s citation to “recent research” is to Brian Galle’s thoughtful article arguing that the payout rate could be considerably higher and still avoid decapitalization. But, as I think Brian would acknowledge, there’s considerable controversy about that.


  2. A crisis, in Rahm Emanuel’s phrase, may be “a terrible thing to waste,” but really, is it necessary to reopen the payout debate now? First of all, it’s not as though the matter has not been discussed in the past 40 years. A major campaign to change the rules was waged in the first decade of this century to no avail. There is no reason to believe the outcome would be different if the debate resumed. Second, there is no evidence that foundations are limiting themselves to their required payout in responding to the coronavirus crisis and at least some anecdotal evidence to the contrary. Perhaps the Lilly Family School of Philanthropy or CANDID could get a monitoring project underway to see exactly what foundations are doing. Finally, the question of how much foundations spend obscures the more important issue of what they spend the money for. A higher payout rate would be of no value — and conceivably, even some harm — depending on how grantmakers used their funds.


Leave a Reply

Fill in your details below or click an icon to log in: Logo

You are commenting using your account. Log Out /  Change )

Google photo

You are commenting using your Google account. Log Out /  Change )

Twitter picture

You are commenting using your Twitter account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )

Connecting to %s