Transforming the Social Sector into a Competitive Marketplace

From Community Development Investment Review (Vol. 9, Issue 1, 2013)

Despite our best efforts, the poverty rate today is roughly what it was when the War on Poverty began in 1964.1 We are winning important battles but losing the war. A new social policy paradigm is needed. In their 2010 report, Emily Bolton and Louise Savelle predicted that social impact bonds could someday be “a significant source of finance for effective services addressing a range of social issues, delivering attractive returns to a wide range of investors and improving people’s lives.”2 Their prediction proved prescient. Social impact bonds have become a global phenomenon—now being tested in the United Kingdom, Australia, Canada, and more recently in New York, Massachusetts, and Ohio.3 As they increase in popularity, however, it’s useful to position the bond in a larger context. The “big idea” behind the social impact bond isn’t actually the bond itself; it’s that the social sector should be held accountable through ex post payments for evidence-based results rather than ex ante payments for promising programs. This idea, encapsulated in the phrase “Pay for Success,” promises to transform the social sector into a competitive marketplace that efficiently produces poverty reduction. Pay for Success financing has the potential to improve the social sector’s effectiveness by rewarding programs that work, encouraging innovation, validating progress, and attracting private capital to the anti-poverty cause.

Offering perspectives from 39 contributing authors, this issue of the Community Development Investment Review serves as a comprehensive resource for the most current thinking on the origins, models, and potential implications of Pay for Success while encouraging readers to weigh its exciting potential against its possible pitfalls. Pay for Success is a tantalizing idea but it raises important questions. Are we privatizing important government services that should remain under public control? How can we accurately measure and enforce “success?” Can we guard against fraud? Can we effectively balance our often-conflicting goals of equity, efficiency, and efficacy? Understanding and answering these, and other, questions is a crucial first step before widespread adoption of Pay for Success tools.

1. The official national poverty rate dropped from 17.3 percent in 1964 to 15 percent in 2011. U.S. Census Bureau, Annual Social and Economic Supplement (ASEC) to the Current Population Survey (CPS).

2. Emily Bolton and Louise Savelle, “Towards a New Social Economy: Blended Value Creation through Social Impact Bonds.” Social Finance UK, March 2010.

3. Robert Hahn and Peter Passell, “Bonds, Social Impact Bonds.” US News and World Report Economic Intelligence Blog, November 15, 2012.

The views expressed are not necessarily those of the Federal Reserve Bank of San Francisco or of the Federal Reserve System.