An Emergency Fund for Effective Altruists

post by bice · 2019-12-28T18:02:38.449Z · score: 9 (5 votes) · LW · GW · 8 comments

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, since the risk would be spread and only some would go on to become sick or unemployed.

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 alternative to insurance I propose is 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 recoup 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 more money than they originally spent, so there is little opportunity for fraud.

The numbers above work 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.

Because the idea of an emergency fund for donors is so simple, I'd say there's a good chance this has already been done or it's not feasible. This is quite far out of my ballpark, so don't hesitate to school me on this stuff. Some details that definitely have to be worked out:

8 comments

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comment by Vaniver · 2019-12-28T19:00:50.714Z · score: 10 (5 votes) · LW · GW

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. 

comment by gbear605 · 2019-12-28T21:58:17.104Z · score: 1 (1 votes) · LW · GW

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.

comment by remizidae · 2019-12-28T22:57:26.608Z · score: 1 (1 votes) · LW · GW

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

comment by G Gordon Worley III (gworley) · 2019-12-29T17:31:13.239Z · score: 2 (1 votes) · LW · GW

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.

comment by korin43 · 2019-12-31T19:11:00.585Z · score: 1 (1 votes) · LW · GW

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%.

https://www.investopedia.com/ask/answers/052515/what-usual-profit-margin-company-insurance-sector.asp

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).

comment by remizidae · 2019-12-28T22:31:19.023Z · score: 1 (1 votes) · LW · GW

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.

comment by gbear605 · 2019-12-28T22:11:19.420Z · score: 1 (1 votes) · LW · GW

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.