As part of the changes in the NBA’s new collective bargaining agreement, saving for retirement will be as mandatory as wind sprints (see Bloomberg). Money for players will be siphoned to annuity investments that will pay players a fixed amount starting at some point after each player’s career. This is probably a good thing for a population where an estimated 60% of players are broke within 5 years of retirement (though Libertarians might argue that this is not America), but let’s look on the dark side and see how this will be exploited.
Assuming the investment is low risk, the annuity represents an almost guaranteed stream of payments at some point in the future. Because it is low risk, the return on the investment won’t be great, and players won’t get it until several years into the future. But what if the heroes of the hardwood are under pressure to get the money now??
Those who don’t want to wait until their golden years to cash in on their fame can get the money sooner by issuing bonds that are secured by the stream of future payments. A financial institution will pay the athlete a lump sum now (something less than the expected present value of the series of annuity payments) in return for access to the annuity’s cash flows when occur.
This asset-backed security is similar to Bowie Bonds, debt issued by David Bowie and backed by the future royalties of his songs. In both cases, individuals use their future earnings as a way to access capital sooner rather than later. This is somewhat fashionable in the music business, but not too common in sports. Frank Thomas tried something similar, based on his playing contract, but the payments weren’t “guaranteed enough” for the market.
This isn’t some sort of magic dance around the rules – it’s a legitimate means of acquiring money now instead of having to wait. This is great for individuals who can invest the money now and earn a return that exceeds the PV of the annuity payments. Unfortunately, athletes have a long history of making bad investments, and eschewing the annuity payments could have these young Americans living, not dancing, in the street.