The outlook for charitable giving

After the unprecedented events of the past year, fundraisers, researchers, and nonprofit leaders have many questions about what the upcoming years will look like for charitable giving. In this post, we will explore the outlook for charitable giving in 2021 and 2022 using our forecasting model, and by providing information about how broad economic conditions may alter the philanthropic landscape.

Before we get started, it is important to note that no forecast model can project future conditions with absolute certainty, and all models have a margin of error. While the predictions below are based on scientific methodology, there are limits to the use of such methodology to predict future outcomes.

As multiple studies have shown, forecasts are affected by at least three conditions: the number of future predictions made, unpredictable events or shocks, and the stability of the underlying variables used in the model. By working with relatively stable variables and limiting the number of predictions made, we have created the best possible conditions to calculate these changes.

However, it should also be noted that we are still in unprecedented times, with higher levels of uncertainty than we have seen in the past. No model can factor in certain unforeseeable future events, such as natural disasters and sweeping legislative changes that could arise.

What is the outlook for charitable giving?

After the highly unusual 2020, existing data indicate that Americans should expect broad philanthropic growth in the coming years as long as the Gross Domestic Product (GDP) in 2021, with a slight tapering in 2022, as is currently expected. Many experts and government organizations such as the Federal Open Market Committee have agreed that the GDP is likely to grow in 2021 as long as vaccines continue to be administered as planned.

The nonpartisan Congressional Budget Office (CBO) also suggested that the GDP is on track to recover to levels seen before the pandemic by midyear of 2021, although the high levels of unemployment ushered in with the pandemic are likely to decline more slowly.

The growth in GDP in 2021 is expected for certain sectors such as equipment and software, technology, e-commerce, and healthcare—an extension of the K-shaped recovery that started in 2020.

In order to achieve the highest level of accuracy in our forecast, we partner with the University of Pennsylvania Wharton School of Business, which provides data using the Penn Wharton Budget Model for select economic variables used in producing the estimates.

Conditional on economic growth in 2021, here are the projections for charitable giving in 2021 and 2022, according to our models. We emphasize that charitable giving projections may vary depending on the underlying economic conditions.  If the U.S. economy grows more slowly in 2021 and there is continued uncertainty regarding health conditions, this will likely lead to a less favorable outlook for giving.

• Total giving is anticipated to rise 4.1 percent in 2021 and 5.7 percent in 2022.
  

• Giving by American individuals and households is predicted to increase by 6.0 percent in 2021 and by 3.9 percent in 2022. Giving by individuals/households includes cash and non-cash donations to U.S. charities contributed by all American individuals and households—including those who itemize their charitable contributions on their income taxes and those who do not.

• Giving by foundations is predicted to decline slightly by 1.0 percent in 2021 and then grow by 8.8 percent in 2022. Giving by foundations includes grants to U.S. charities made by all U.S. foundations. Community, private (including family), and operating foundations are among the types included in this prediction.

• Giving by estates is predicted to increase by 1.1 percent in 2021 and by 11.9 percent in 2022. Giving by estates includes cash and non-cash donations (estates) to U.S. charities contributed by all American estates—including those that itemize their charitable contributions on their estate taxes and those that do not. Giving by estates can vary greatly from year to year. This volatility is mostly due to very large bequests made by a few estates in a given year. Therefore, a significant increase in giving by estates one year will suppress the rate of growth in giving the following year. The projected increase in estate giving in 2021 and 2022 will hold unless substantially large gifts are made in 2020 or 2021.
  

• Giving by corporations is predicted to increase by 4.3 percent in 2021 and by 6.4 percent in 2022. Giving by corporations includes all IRS itemized cash and non-cash donations to U.S. charities contributed by all American corporations and businesses and their foundations.
  

What is driving this growth?

Charitable giving is driven by economic factors such as growth in the GDP and in the Standard & Poor’s 500 Index (S&P 500) for all four sources of giving.

Individual and household giving is influenced by growth in the S&P 500, especially giving by those with median and higher levels of income. A large body of work demonstrates, with few exceptions, that as income and wealth increase, so do the amounts that households give to charity.

Estates are also impacted by the health of the stock market. The amount that an estate bequeaths largely depends on asset health at the time of the donor’s passing. If the growth in assets held by estates grows quickly, more will be given in the form of estates.

In addition, giving by foundations is impacted by current and preceding years’ GDP and S&P 500. Since foundations typically budget their giving based on asset growth, trends in the prior year’s S&P 500 impact giving in the current year. Finally, corporations are impacted by the growth in the GDP and S&P 500, which represent the health of many of the largest corporations.

Factors that could potentially influence the forecast

The availability of vaccines for COVID-19 and the timeline for when they will be received may have an impact on the economic outlook. For instance, the International Monetary Fund improved their economic outlooks for 2021 in January 2021 as compared with October 2020, based on the hope that vaccines would largely be distributed in advanced economies by summer 2021 and the rest of the world by the end of 2022.

However, experts from the IMF acknowledge that the coming years bring increased uncertainty, including new variants of the virus that causes COVID-19, and policy challenges as countries await an end to the pandemic.

Market volatility could also have an impact on the forecast. However, some experts think that rapid changes to the market similar to those seen in early 2021 are unlikely in the future, especially given new tools that hedge funds may use to identify unusual market activity.

In addition, a statement by the U.S. Securities and Exchange Commission addressed recent volatility in the stock market and announced a plan to partner with regulatory organizations to review the recent events and investigate any potential wrongdoing.

In 2021 and 2022, donors may respond to potential policy changes ushered in by newly elected federal and state representatives. At the federal level, President Biden’s tax plan, first presented during his 2020 campaign, aims to increase federal revenue by increasing taxes on high-income households and corporations while simultaneously reducing the tax burden on lower- and middle-income households.

The plan focuses on increasing tax revenue by increasing the tax rate for the highest income bracket, increasing social security taxes, changing capital gains taxes, capping itemized deductions for high-income households, and expanding the estate and gift tax.

Some analysts estimate that the changes in Biden’s tax plan would dampen charitable giving, while others contend that aspects of the law such as the increase on capital gains taxes would be an incentive for individuals to give more to charity.

The plan also proposes repealing provisions of the 2017 Tax Cuts and Jobs Act that were estimated to negatively influence charitable giving such as the $10,000 cap on state and local taxes. However, the lower cap on itemized deductions and the return of the Pease amendment would lower the value of the charitable deduction for some high-income itemizers, and may dampen giving.

New legislation may also have an impact on charitable giving in the coming years. For instance, in October 2020, philanthropist John Arnold and professor Ray Madoff launched the Accelerate Charitable Giving initiative, which advocates for changes to tax law to encourage private foundations and donor-advised fund account holders to give more to charity each year, and recommends a non-itemizer deduction for charitable giving.

Other organizations, such as the Minnesota Council for Nonprofits and the Institute of Policy Studies, are also arguing for new regulations and government incentives to encourage charitable giving. These proposed changes to policy could shift charitable giving in 2021 and 2022, making this an important area to watch.

Note: All growth rates are based on predictions for giving in inflation-adjusted 2019 dollars using 2020 as the base year.