What does intergenerational equity mean for an endowment and how is it measured?

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AcadiFi · Accepted Answer

Intergenerational equity is the principle that each generation of beneficiaries should receive substantially the same real (inflation-adjusted) level of support from the endowment as prior and future generations. It requires that spending consume only the real return, leaving real principal intact.

Mathematically: if Real Return = Nominal Return − Inflation − Fees, then Sustainable Spending Rate ≤ Real Return. An endowment earning 8% nominal with 3% inflation and 0.5% fees has 4.5% real return — implying max sustainable spending of 4.5%.

**Measurement approaches**:

1. **Real value per student/beneficiary**: track endowment value per unit of demand (per student for universities, per grantee for foundations) in constant dollars. If this declines over time, equity is breached.

2. **Spending-rate vs real-return gap**: positive gap (spending > real return) erodes corpus; negative gap accumulates surplus.

3. **Rolling-window tests**: compare 10-year trailing real growth of corpus vs institutional cost inflation (HEPI for universities ~3.5% vs CPI ~2.5%).

Example: The Wynholm College endowment was $400M in 2016 with $12,000 per student. By 2026, nominal value grew to $560M (+3.4%/yr), but student count grew from 33,000 to 38,000 and HEPI cumulative inflation was 42%. Real value per student = ($560M / 38,000) / 1.42 = $10,373 in 2016 dollars — a 13.6% decline. Wynholm breached intergenerational equity despite absolute growth.

Boards should publish intergenerational equity dashboards alongside returns, because nominal growth masks real decline during inflationary episodes.

What does intergenerational equity mean for an endowment and how is it measured?

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