PBGC’s Net Financial Position

A Guide to Understanding the

Pension Benefit Guaranty Corporation

CONGRESS OF THE UNITED STATES

CONGRESSIONAL BUDGET OFFICE 

SEPTEMBER 2005

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The Congress of the United States O Congressional Budget Office

CBO

A Guide to Understanding the 

Pension Benefit Guaranty Corporation

September 2005

A

PAPER
Notes

Numbers in the text and tables may not add up to totals because of rounding.

Unless otherwise indicated, all years referred to in this paper are fiscal years.

All dollars referred to are nominal.
Preface

Although the federal government’s Pension Benefit Guaranty Corporation (PBGC) 

has been providing pension insurance for nearly 30 years, the agency’s financial situation has 

been particularly volatile over the past decade and has deteriorated significantly during the 

past several years. At the end of 2000, the total value of assets held by PBGC exceeded the 

estimated present value of its liabilities by $10 billion. But by the end of 2004, the agency’s 

estimated liabilities were $23.5 billion more than the value of its assets. 

As attention focuses on that situation, the Congressional Budget Office (CBO) has prepared 

this paper, which aims to provide a basic understanding of federal pension insurance, the 

operations of PBGC, and the financial condition of and the outlook for the agency over the 

next 10 years. In accordance with CBO’s mandate to provide impartial analysis, the paper 

makes no recommendations.

Geoffrey Gerhardt of the Budget Analysis Division wrote the paper under the supervision of 

Paul Cullinan, Bob Sunshine, and Peter Fontaine. Bruce Vavrichek, Marvin Phaup, Wendy 

Kiska, and Arlene Holen provided valuable comments.

John Skeen edited the paper, and Janey Cohen proofread it. Allan Keaton prepared the paper 

for publication. Lenny Skutnik produced the printed copies of the paper, and Annette Kalicki 

and Simone Thomas produced the electronic version for CBO’s Web site (www.cbo.gov). 

Douglas Holtz-Eakin

Director

September 2005

Summary and Introduction 1

Background 2

The Enactment of the Employee Retirement Income Security Act 2

The Basics of Pension Insurance 3

Funding Requirements for Pension Plans 4

The Operations of PBGC 8

Premiums 8

Terminations of Pension Plans 10

PBGC’s Trust Funds 11

Benefits Paid by PBGC 12

The Multiemployer Program 12

PBGC’s Financial Condition and

Outlook 14

PBGC’s Net Position 14

PBGC’s Cash Flows 15

CBO’s Baseline Projections 16

Uncertainties About PBGC’s Future 18

Glossary 21

CONTENTS
CONTENTS vi

Tables

1. PBGC’s Net Financial Position, 2000 to 2004 15

2. PBGC’s On-Budget Outlays and Offsetting Collections, 

2001 to 2004 17

3. CBO’s Baseline Projections for the Pension Benefit 

Guaranty Corporation, 2005 to 2015 18

Figures

1. PBGC’s Net Financial Position, 1980 to 2004 2

2. The Number of Pension Plans and Participants Insured 

by PBGC, 1980 to 2004 4

3. Work Status of Participants in Single-Employer Plans 

Covered by PBGC, 1980 to 2002 5

4. PBGC’s Operations 9

5. Portion of Variable-Rate Premium Paid in 2003 

by Size of Plan 10

6. The Multiemployer Program’s Assets and Liabilities, 

1990 to 2004 13

7. The Single-Employer Program’s Assets and Liabilities, 

1980 to 2004 15

8. Annual Change in the Single-Employer Program’s 

Assets and Liabilities, 1981 to 2004 16

9. PBGC’s Outlays and Receipts, 1976 to 2004 16

10. Income from Premiums Compared with Total Benefit 

Payments in the Single-Employer Program, 

1985 to 2004 19

Box

1. How Plans’ Full-Funding Limit Is Calculated 7
A Guide to Understanding the 

Pension Benefit Guaranty Corporation

Summary and Introduction

The Pension Benefit Guaranty Corporation (PBGC) is a 

wholly owned government corporation that insures the 

pension benefits of more than 44 million people. Established by the Employee Retirement Income Security Act 

(ERISA) in 1974, PBGC insured more than $1.7 trillion 

worth of pension benefits by the end of 2004. That year, 

it paid $3 billion in benefits to more than 514,000 annuitants whose single-employer pension plans had been terminated, and the agency is responsible for making payments to another 440,000 individuals when they retire. 

In addition, PBGC provided financial assistance to multiemployer plans that made payments to approximately 

100,000 beneficiaries.

Since the enactment of ERISA, the sponsors of taxdeferred, defined-benefit pension plans have been required to have their plans insured by PBGC. Such plans 

provide retirement annuities based on a formula that usually depends on participants’ length of service and salary 

history. Sponsors are supposed to contribute enough to 

the plans to ensure that promised benefits, which are deferred compensation, can be paid; the participants are 

usually not required to make contributions.

PBGC administers two distinct insurance programs: one 

for single-employer plans and one for multiemployer 

plans, in which the benefits usually are negotiated as part 

of a labor agreement. For the single-employer program, 

PBGC collects premiums from active plans. When plans 

have been terminated because they do not have enough 

assets to cover their pension liabilities, PBGC assumes all 

of their assets, pays participants’ retirement benefits 

within statutory limitations, and is responsible for benefits to vested employees and former employees when they 

reach retirement age. When plans with adequate assets are 

terminated, PBGC oversees that process but does not pay 

the pension benefits. For the multiemployer program, 

PBGC collects premiums from covered plans and provides financial support (mostly in the form of loans) to financially troubled plans.

Although PBGC has been providing pension insurance 

for nearly 30 years, the agency’s financial situation has 

been particularly volatile during the past decade and has 

deteriorated significantly during the past several years. At 

the end of 2000, the total value of assets held by PBGC 

exceeded the estimated present value of its liabilities by 

$10 billion. But by the end of 2004, the agency’s estimated liabilities were $23.5 billion more than the value 

of its assets (see Figure 1). 

The sharp deterioration in PBGC’s financial health can 

be attributed mainly to the fact that, over the past several 

years, the agency has assumed responsibility for, or “trusteed,” numerous large pension plans that were significantly underfunded—primarily from the airline and steel 

industries. From 2001 through 2004, PBGC’s singleemployer program took on more than $13 billion in 

claims, which constitutes over 71 percent of all claims assumed by the agency. (Claims are the net cost of terminating a pension plan—the gap between its assets and its 

liabilities.)

PBGC’s liabilities have been growing much faster than its 

income from premiums. In some cases, those liabilities 

have been the result of bankruptcies. In others, struggling 

companies have shifted their plans’ liabilities to PBGC in 

an effort to lower costs. In addition, the drop in the value 

of stocks after 2000 caused many well-funded pension 

plans to become seriously underfunded and more costly 

to PBGC at their termination. Finally, increases in life expectancy mean that PBGC is paying benefits to retirees 

for a longer period of time.

PBGC depends on premiums paid by the sponsors of 

defined-benefit plans to cover the shortfall between assets 
2 A GUIDE TO UNDERSTANDING THE PENSION BENEFIT GUARANTY CORPORATION

Figure 1.

PBGC’s Net Financial Position, 1980 to 2004

(Billions of dollars)

Source: Pension Benefit Guaranty Corporation, Pension Insurance Data Book, 2004, no. 9 (Spring 2005).

and liabilities of terminated plans. But those premiums 

are set in statute and are not adjusted to compensate for 

either changes in plans’ participation or for PBGC’s 

claims experience. 

PBGC also is facing challenges arising from long-term, 

systemic changes to the pension system itself.1

 Many employers have come to consider the defined-benefit plans 

that PBGC insures to be costly and cumbersome to 

maintain. Instead, employers are increasingly turning to 

defined-contribution plans as an alternative form of retirement benefits for their workers. Under definedcontribution plans, employers and/or employees make 

deposits to individual accounts, and the benefits depend 

on the total assets accrued at the time of retirement—

instead of promised amounts established up front by formula.

Background

For more than 30 years, PBGC has provided pension insurance to thousands of privately sponsored definedbenefit pension plans. Over the period, it has paid out 

more than $17 billion in benefit payments and is obligated to pay billions more in the future.

The Enactment of the Employee Retirement Income 

Security Act

ERISA was signed into law in September 1974 by President Gerald Ford. Before then, the funding of retirement 

benefits and pension plans’ operations were largely left up 

to the discretion of individual employers. If an employer 

did not adequately fund its pension plan and then went 

out of business, the firm’s employees and retirees could be 

left with little, if any, pension benefits. The most notable 

instance occurred in 1963, when the Studebaker Company failed and more than 4,000 employees lost 85 percent of their pension benefits.2 By enacting ERISA, the 

1. For a discussion of the financial risks and costs posed by PBGC, 

see Congressional Budget Office, The Risk Exposure of the Pension 

Benefit Guaranty Corporation (September 2005).

2. See Steven E. Schanes, “ERISA Insights: Voices from the Early 

Days” (Brookfield, Wisc.: International Foundation of Employee 

Benefit Plans, 2001).
A GUIDE TO UNDERSTANDING THE PENSION BENEFIT GUARANTY CORPORATION 3

Congress moved to protect workers’ financial interests in 

the retirement system.

Although ERISA covers several types of employee benefits, it is primarily designed to protect participants in and 

beneficiaries of private-sector pension plans. Employers 

are not required to provide their employees with pension 

benefits, but if they do, ERISA requires the employers to 

purchase insurance from PBGC and establishes funding 

standards for the plans. In addition, the law specifies who 

must be covered by the plans and how long employees 

must work before qualifying for benefits. It operates in 

conjunction with sections of the tax code that also regulate contributions to employer-sponsored pension plans 

and their operations. To make tax-deferred contributions 

to a pension plan, employers must meet the requirements 

of both ERISA and the tax code. Pension plans that meet 

the requirements of both are often referred to as “qualified.”

The Basics of Pension Insurance

By insuring retirement benefits, PBGC provides a minimum level of pension benefits to participants in a qualified defined-benefit pension plan in the event that the 

plan cannot pay benefits. PBGC shares regulatory and 

enforcement responsibilities over private-sector pension 

plans with the Internal Revenue Service in the Treasury 

Department (concerning participation, vesting, and 

funding standards) and the Department of Labor (concerning fiduciary standards and reporting and disclosure 

requirements). If a plan’s sponsor does not meet its obligations to pay premiums to PBGC or fails to meet the 

minimum funding standards contained in ERISA, PBGC 

has the power to place a lien on the sponsor’s assets. 

PBGC’s activities are limited to defined-benefit plans; the 

agency does not insure or regulate defined-contribution 

pension plans.

The most common defined-benefit plans are those sponsored by a single employer. A particular employer may 

sponsor several different plans, but each of those plans is 

considered a single-employer plan. In contrast, under a 

multiemployer plan, several employers who are involved 

in the same type of business collectively bargain with a 

union to provide a pension plan for employees who work 

for those firms. Multiemployer plans are most common 

among certain industries in which workers often move 

from firm to firm, such as the construction and transportation industries.

While the number of plans covered by PBGC has fallen 

substantially over the past 20 years, the number of participants in those plans has grown modestly (see Figure 2). 

In 1980, PBGC covered more than 95,000 singleemployer plans and 2,244 multiemployer plans, whereas 

in 2004, those figures had dropped to fewer than 30,000 

and 1,600, respectively. Despite the decline in the number of plans, the number of participants in singleemployer plans grew from about 27.5 million to more 

than 34 million, and in multiemployer plans, from about 

8 million to 9.8 million.3

The sharpest decline in the number of defined-benefit 

plans has been among small firms. In 1980, plans covering fewer than 100 participants accounted for about 

76,000 of the more than 95,000 single-employer plans 

covered by PBGC. In 2003, those small plans made up 

18,000 of the 29,500 single-employer plans. Similar declines also occurred in plans with between 100 and 1,000 

participants. In contrast, the number of large pension 

plans and the participation in them grew. Between 1980 

and 2003, the number of single-employer plans with 

5,000 or more participants grew from 714 to 1,133. At 

the same time, overall participation in those plans 

roughly doubled, from about 13 million to nearly 26 million.

The fall in the number of plans is most easily explained 

by the general shift that is occurring between definedbenefit and defined-contribution pension plans. A growing number of firms have replaced their traditional 

defined-benefit plans with defined-contribution plans, 

and most new firms choose to establish definedcontribution plans.4

 The reasons behind those decisions 

vary from firm to firm, but some cite the growing costs of 

financing future benefits, the administrative burdens of

3. Participants include current workers who are vested and former 

employees who will someday receive a deferred benefit, as well as 

all retirees, spouses, and survivors who are currently receiving benefits.

4. See Leslie Papke, “Are 401(k) Plans Replacing Other EmployerProvided Pension? Evidence from Panel Data,” Journal of Human 

Resources, vol. 34, no. 2 (1999), pp. 346-368. ERISA provides several ways for employers to voluntarily terminate a defined-benefit 

plan and replace it with either a defined-contribution plan or no 

pension plan at all.
4 A GUIDE TO UNDERSTANDING THE PENSION BENEFIT GUARANTY CORPORATION

Figure 2.

The Number of Pension Plans and Participants Insured by PBGC, 1980 to 2004

(Thousands) (Millions)

Source: Pension Benefit Guaranty Corporation, Pension Insurance Data Book, 2004, no. 9 (Spring 2005).

complying with ERISA, and the increased mobility of the 

American workforce.

In recent years, many employers have attempted to deal 

with those issues by converting their traditional definedbenefit plans into what are referred to as cash-balance 

plans. Under cash-balance plans, also called hybrid plans 

because they share certain characteristics with definedcontribution plans, employers make regular contributions 

to hypothetical accounts on behalf of their employees. Individual account statements track employers’ contributions and hypothetical interest earnings for each participant. In actuality, however, contributions to cash-balance 

plans are not deposited into individual accounts and remain the property of the sponsors. Technically, the plans 

are considered a type of defined-benefit plan (and are 

subject to ERISA in the same ways that other definedbenefit plans are), but converting traditional definedbenefit plans into cash-balance plans has raised legal challenges. The main issue is whether such conversions violate age discrimination laws in how they treat the benefits 

of long-time employees. Given the disagreement over 

their legality, further conversions to cash-balance plans 

are effectively on hold.

The number of participants in single-employer plans covered by PBGC who were not actively employed by the 

sponsoring firms almost tripled from 1980 to 2001, 

growing from 6 million to almost 17 million. So while 

about 78 percent of PBGC’s covered participants were active employees in 1981, just 51 percent were in 2001 (see 

Figure 3). That trend does not present problems to plans 

that are fully funded because benefits for current and future retirees have been fully paid in advance. But it can 

present significant financial challenges to underfunded 

plans.

Funding Requirements for Pension Plans

Both ERISA and the tax code require that qualified plans 

meet minimum funding standards, which are designed 

primarily to protect the interests of both plans’ participants and PBGC. The standards are intended to ensure 

that each employer-sponsored plan has enough assets to 

pay promised benefits in the event that the sponsor voluntarily terminates it or the sponsor is unable to continue 

making deposits toward the plan. ERISA and the tax 

code also establish limits on the tax-deductible contributions that sponsors may make to their plans. Many of the

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A GUIDE TO UNDERSTANDING THE PENSION BENEFIT GUARANTY CORPORATION 5

Figure 3.

Work Status of Participants in Single-Employer Plans Covered by PBGC, 

1980 to 2002

(Percentage of total participation)

Source: Pension Benefit Guaranty Corporation, Pension Insurance Data Book, 2004, no. 9 (Spring 2005). 

funding rules are intended to minimize volatility in the 

funding requirements for sponsors and to limit losses of 

federal revenues. The net result of current funding rules is 

that many plans have become badly underfunded over 

the past several years, thus exposing PBGC to substantial 

potential losses.

Minimum Funding Standards. The rules that govern 

plans’ funding begin with a concept known as a funding 

standard account (FSA). Each plan has an FSA, which is 

an accounting mechanism used to determine whether the 

pension plan is adequately funded. In general, if the value 

of a plan’s assets equals the present value of its current liabilities, the plan has an FSA balance of zero.5 Each year, 

that balance is adjusted to reflect any increases or decreases in the plan’s assets and liabilities.

Charges to an FSA include normal accruals of benefits 

and investment losses on the plan’s assets, as well as 

amendments to the plan’s benefit structure and changes 

in actuarial assumptions that result in higher liabilities. 

Credits include normal contributions by the employer, 

investment gains on the plan’s assets, and changes to the 

plan’s benefit structure and actuarial assumptions that reduce liabilities. Most of the charges or credits are amortized over a period of time, depending on the particular 

item. For instance, gains or losses on a plan’s assets are 

amortized over five years, and changes in a plan’s actuarial 

assumptions that result in an increase or decrease in liabilities may be amortized over 10 years. Although amortizing decreases volatility in the funding requirements, it 

can also lead to a mismatch between assets and liabilities 

in the short term. 

A sponsor of a plan that has a large balance in its FSA is 

generally not required to make additional contributions. 

However, the presence of such a balance does not preclude underfunding because balances in an FSA do not 

reflect current market values. If a plan had a balance because of past overpayments but the assets representing 

those overpayments had since lost value, the loss in value 

would not affect the FSA’s balance. But under those cir1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002

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Active Retired Former Employees Who Are Vested

5. Current liabilities reflect benefit obligations that are based on current pay and service to date.
6 A GUIDE TO UNDERSTANDING THE PENSION BENEFIT GUARANTY CORPORATION

cumstances, the plan could be underfunded, and the 

sponsor would not be required to make additional contributions.

ERISA also provides a method for obtaining a funding 

waiver in the event of business hardship. The Secretary of 

the Treasury may waive the normal funding requirements 

for a period of one year for a sponsor who can demonstrate that it is experiencing a temporary hardship and 

that requiring normal contributions would be “adverse to 

the interests of plan participants.” A hardship waiver cannot be granted for more than three out of 15 consecutive 

years, and the sponsor is required to make up any missed 

payments in later years. For multiemployer plans, 10 percent of the participating sponsors must demonstrate business hardship, and the waivers cannot be granted for 

more than five out of 15 consecutive years. 

Deficit Reduction Contributions. In single-employer 

plans with more than 100 participants, when the value of 

assets compared with current liabilities (known as the 

funding ratio) falls below 90 percent, sponsors are required to make additional payments. Amortization periods for such “deficit reduction contributions” (DRCs) 

vary depending on when the liabilities were incurred and 

the degree to which the plan is underfunded. A plan with 

unfunded liabilities that were incurred prior to 1988 has 

18 years to amortize those liabilities. A plan with unfunded liabilities incurred after that date must contribute 

enough to reduce the underfunding by 30 percent annually. The 30 percent annual payment is reduced by 0.4 

percent for every percentage point that the plan’s funding 

ratio is above 60. Therefore, a plan that has an 80 percent 

funding ratio must reduce its unfunded liabilities at a rate 

of 22 percent annually. 

Although deficit reduction contributions are intended to 

ensure that badly underfunded plans return to adequate 

funding levels over a reasonable period of time, they often 

fall short of that goal. No plan that has a funding ratio of 

90 percent or higher must make a DRC. The rules further exempt plans that have a funding ratio of between 80 

percent and 89 percent and have been above 89 percent 

for two consecutive years of the previous three years. In 

addition, balances built up in a plan’s FSA are applied to 

any required DRCs. Because such balances are not valued 

at current market prices, a plan that has built up large 

balances in past years but has become underfunded in 

subsequent years can remain underfunded without being 

required to make those payments. Finally, the Pension 

Funding Equity Act of 2004, or Public Law 108-218, 

also temporarily eased DRC requirements for sponsors of 

plans in the passenger airline and steel manufacturing industries for plan years 2004 and 2005.

Full-Funding Limit. The full-funding limit (FFL) specified in ERISA places a cap on the contributions that employers are required to make. Once at the limit, sponsors 

are not required to make any additional contributions, 

even if they might otherwise be required to do so. Specifically, the FFL is the actuarial value of a plan’s accrued liabilities minus the lesser of the market value of the plan’s 

assets or the actuarial value of its assets.6

 The law gives 

sponsors some flexibility to determine the interest rate 

used to discount their accrued liabilities in calculating 

their FFL. Choosing a lower interest rate will act to increase the value of a plan’s liabilities, thus raising its FFL, 

while choosing a higher interest rate will act to reduce the 

plan’s FFL.

The law also provides for an alternative calculation 

whereby the FFL cannot be less than 90 percent of current liabilities minus the actuarial value of the plan’s assets. The FFL is based on the larger of the two calculated 

amounts (see Box 1). Unlike the first method of calculating the FFL, the alternative method provides for discounting current liabilities using interest rates that are 

spelled out in statute. With the exception of plan years 

2004 and 2005, when the specified interest rates are 

based on a composite rate for long-term corporate bonds, 

the rate used to discount current liabilities is based on the 

30-year Treasury rate. In general, the interest rates used to 

discount current liabilities are lower than those used to 

discount accrued liabilities, often resulting in a situation 

in which a plan’s current liabilities are higher than its accrued liabilities. 

Maximum Deductible Contributions. In addition to requirements designed to ensure a minimal level of funding, the law also places an upper limit on the annual taxdeductible contributions that employers may make to

6. Accrued liabilities reflect total benefit obligations, including projected increases in benefits from anticipated salary increases and 

other factors. In accordance with ERISA, depending on the purpose, PBGC uses different measures of a pension plan’s liabilities: 

current liabilities and accrued liabilities.
A GUIDE TO UNDERSTANDING THE PENSION BENEFIT GUARANTY CORPORATION 7

Box 1.

How Plans’ Full-Funding Limit Is Calculated

The following examples show how the full-funding 

limit (FFL) is calculated for two different pension 

plans. These examples assume that the market value 

of assets is equal to the actuarial value of assets and at 

first assume that the plans do not have a balance in 

their funding standard account (FSA).

Using the plan’s assets and its accrued liabilities, Plan 

A’s full-funding limit would be zero because the two 

values equal each other. However, using an alternative calculation—known as the full-funding-limit 

override—which subtracts assets from 90 percent of 

current liabilities, the plan has a full-funding limit of 

$900 ($27,900 minus $27,000). Because the FFL is 

based on the larger of the two calculated amounts, 

the FFL for Plan A is $900. 

Using the plan’s assets and its accrued liabilities, Plan 

B’s full-funding limit is $1,000 ($28,000 minus 

$27,000). Subtracting the plan’s assets from 90 percent of the plan’s current liabilities ($28,800 minus 

$27,000) yields a result of $1,800; thus, the fullfunding-limit override applies, and the FFL for Plan 

B is $1,800.

Balances in FSAs also play a role in determining 

FFLs. Plans use the total value of their assets including the balance in their FSA to calculate the fullfunding-limit override but do not include that balance to calculate accrued liabilities.

Assume that Plans A and B both have an FSA balance of $900, bringing the total value of each plan’s 

assets to $27,900. 

Under the full-funding-limit override, Plan A’s original FFL was $900 because 90 percent of its current 

liabilities minus its assets equaled $900. But including the FSA balance of $900 boosts the value of its 

assets to the point that it equals 90 percent of current 

liabilities. Under the other method of calculating the 

FFL, the plan’s accrued liabilities still equal the value 

of its assets not including the FSA balance. Thus, 

both calculations yield an FFL of zero for Plan A.

In the original example, Plan B had an FFL of 

$1,800 based on the fact that 90 percent of its current liabilities was $1,800 more than its assets, 

whereas its accrued liabilities were $1,000 more than 

its assets. Including the FSA balance of $900 increases the value of the plan’s assets so that it is just 

$900 less than 90 percent of the plan’s current liabilities. However, the plan’s assets excluding the FSA 

balance remain $1,000 less than its accrued liabilities. Thus, Plan B’s FFL now stands at $1,000. 

Plan A:

Assets $27,000

Accrued Liabilities $27,000

Current Liabilities $31,000

90 Percent of Current Liabilities $27,900

Plan B:

Assets $27,000

Accrued Liabilities $28,000

Current Liabilities $32,000

90 Percent of Current Liabilities $28,800

Assets Without FSA Balance $27,000

FSA Balance $900

Total Assets $27,900
8 A GUIDE TO UNDERSTANDING THE PENSION BENEFIT GUARANTY CORPORATION

their plans. Once at the limit, an employer may continue 

to make contributions but has to pay regular taxes on 

those contributions plus a 10 percent excise tax.

In general, sponsors are allowed to deduct all contributions needed to cover the normal costs of plans, plus required amortization payments on unfunded liabilities. 

Sponsors may also deduct all contributions that bring 

plans’ assets up to 100 percent of current liabilities, even 

if those contributions are greater than the required contributions.

Interest Rates. The interest rates used to calculate the 

present value of a plan’s liabilities must be within a specified range above or below the weighted average of the interest rates on 30-year Treasury bonds for the previous 

four-year period.7 That range is normally 90 percent to 

105 percent of the weighted average, but the Job Creation and Worker Assistance Act of 2002 (P.L. 107-147) 

temporarily increased the upper bound of the range to 

120 percent for plan years 2002 and 2003. It is to sponsors’ advantage to use a higher interest rate when calculating funding levels because a higher rate lowers the present 

value of plans’ future liabilities.

The Pension Funding Equity Act of 2004 went a step further by temporarily changing the interest rates used to determine the present value of liabilities. The law replaces 

the interest rates on 30-year Treasury bonds with a composite rate on long-term investment-grade corporate 

bonds, as chosen by the Secretary of the Treasury. The 

rates on such corporate bonds are typically 50 to 100 basis points higher than those on 30-year Treasuries, so the 

substitution should reduce the present value of pension 

liabilities below what it would have been otherwise.8

However, the change is in effect only for plan years 2004 

and 2005, after which the rates on 30-year Treasuries will 

again apply. 

The Operations of PBGC

In some respects, PBGC operates like a private insurance 

provider. In exchange for payments of premiums from 

plans’ sponsors, it underwrites certain retirement benefits 

if the plans fail. Sponsors must pay the agency a flat-rate 

premium, depending on how many participants the plans 

cover. Single-employer plans that are not considered fully 

funded pay an additional premium calculated according 

to the extent of their underfunding. In the event that a 

plan is no longer able to pay benefits and PBGC must assume its liabilities, the plan forfeits all of its assets to the 

agency. In addition to collecting premiums and forfeited 

assets, PBGC also receives income from interest payments, dividends, and capital gains on the assets it holds 

(see Figure 4).

Although it resembles a private insurer in some ways, 

PBGC is different in key respects. Unlike a private insurance provider, PBGC does not enter into contracts with 

individual plans but is required to cover all qualified defined-benefit plans, just as sponsors of all such plans are 

required to have their plans insured by the agency. PBGC 

cannot refuse coverage for a plan that it believes is overly 

risky, nor does the law provide PBGC a way to adjust either the benefits it provides or the premiums it charges.

Premiums

Under ERISA, both the flat-rate premium and the premium charged to underfunded single-employer plans are 

set by the Congress in statute. Both are payable to a revolving fund administered by PBGC.

The flat-rate premium is tied directly to the number of 

participants a plan has, including active workers, deferred 

annuitants, and current beneficiaries. The payment itself 

is calculated once a year by multiplying the premium rate 

by the number of participants in the plan, and it is due 

within three months of the start of each plan year. When 

ERISA was enacted, the flat-rate premium for singleemployer plans was $1 per participant, but it has been increased legislatively to its current level of $19 per participant. The flat-rate premium for multiemployer plans 

started at $0.50 per participant and now stands at $2.60. 

In 2004, PBGC collected $677 million in flat-rate premiums from single-employer plans and $25 million from 

multiemployer plans. 

In addition to the flat-rate premium, single-employer 

plans that are considered underfunded must also pay a 

variable-rate premium. In principle, the variable-rate premium is determined by the degree to which a plan’s 

vested liabilities exceed its assets on a net-present-value 

basis. In actuality, however, the formula does not require

7. The Department of the Treasury stopped issuing new 30-year 

bonds in 2002. In cases in which ERISA requires the use of rates 

on 30-year Treasuries to discount pension liabilities, current rates 

on outstanding 30-year Treasuries are used. The department has 

announced that it will again issue 30-year bonds in 2006.

8. A basis point is one-hundredth of a percentage point.
A GUIDE TO UNDERSTANDING THE PENSION BENEFIT GUARANTY CORPORATION 9

Figure 4.

PBGC’s Operations

Source: Congressional Budget Office. 

many plans that are actuarially underfunded to pay the 

variable-rate premium. For plans that owe the variablerate premium, the payment is due to PBGC nine-and-ahalf months after the start of the plan year. 

In general, if a plan has reached the full-funding limit, it 

does not have to pay the variable-rate premium. Designed 

to limit the volatility of required funding and tax revenue 

losses, the FFL also has the effect of exempting many 

underfunded plans from paying a variable-rate premium. 

It has been estimated that the variable-rate premium was 

applied to only 20 percent of total underfunding in 2004, 

10 percent in 2003, and 5 percent in 2002.9

The variable-rate premium for single-employer plans is 

$9 per $1,000 of underfunding. Therefore, the sponsor 

of a plan with $5 million in underfunding would owe 

$45,000 for the variable-rate premium for the plan year. 

Sponsors of multiemployer plans are not required to pay 

the variable-rate premium.

Both ERISA and the tax code specify the same measures 

of assets and liabilities for determining whether sponsors 

of plans have met the appropriate funding requirements 

and can continue to make tax-deductible pension contributions. ERISA uses somewhat different measures of liabilities for determining how much, if anything, sponsors 

owe in variable-rate premiums. Although the provisions 

that govern funding requirements allow sponsors to use a 

range of interest rates to discount current liabilities, 

ERISA’s requirement for premiums specifies 85 percent 

of the 30-year bond rate for the month preceding the 

month in which the plan year begins.10

Of the $1.1 billion that PBGC collected in premiums 

from single-employer plans in 2004, about 40 percent 

was derived from the variable-rate premium. That 

amount was more than double the amount collected the 

year before. Detailed information about 2004 premiums 

is not yet available, but in 2003, more than 13,000 plans, 

representing almost half of all single-employer plans but 

just 17 percent of participants, were required to pay the 

variable-rate premium. Large plans (those with 5,000 or 

more participants) accounted for about half of total payments of the variable-rate premium; relatively small plans

9. See Douglas J. Elliot, “PBGC: Premium Hike Possibilities,” Center on Federal Financial Institutions (April 10, 2005).

10. That formula was temporarily altered by P.L. 108-218, which 

replaces the rates on 30-year Treasury bonds with a composite 

corporate-bond rate for plan years 2004 and 2005 before returning to the Treasury rate. In addition, the rate used to calculate premiums will permanently increase to 100 percent of the 30-year 

bond rate once the Treasury Department issues new pension mortality tables. However, those tables have been repeatedly delayed.
10 A GUIDE TO UNDERSTANDING THE PENSION BENEFIT GUARANTY CORPORATION

Figure 5.

Portion of Variable-Rate Premium Paid 

in 2003 by Size of Plan

(Participants)

Source: Pension Benefit Guaranty Corporation, Pension Insurance 

Data Book, 2004, no. 9 (Spring 2005).

(those with fewer than 1,000 participants) accounted for 

about a quarter of all such payments, even though they 

represented less than a tenth of all participants (see 

Figure 5). 

Terminations of Pension Plans

Terminations of single-employer pension plans fall into 

one of three categories: standard, distress, and involuntary. 

An employer may voluntarily terminate its pension plan 

provided that it gives at least 60 days’ notice to participants, it ensures that the plan has enough assets to pay 

out all future benefits, and the termination does not violate collective bargaining agreements with the firm’s employees. Ending a pension plan in that way is known as a 

standard termination. From 1975 through 2003, about 

164,000 fully funded plans underwent standard terminations. PBGC does not become responsible for paying the 

benefits of such plans because their sponsors are required 

to purchase group annuity contracts from insurance companies or make lump-sum payments to cover all accrued 

benefits, and no further benefits accrue after the termination takes place. 

In cases when a pension plan is underfunded and continuing to fund the plan would cause an employer to go 

out of business, the plan can be terminated by either the 

employer or PBGC. From 1975 through 2004, more 

than 3,400 underfunded plans were taken over by PBGC, 

either as distress or involuntary terminations. Over the 

past several years, nearly 95 percent of the plans trusteed 

by PBGC were the result of involuntary terminations.

A company may conduct a distress termination if PBGC 

determines one of the following conditions has been met:

B A petition has been filed seeking liquidation in bankruptcy court; 

B A petition has been filed seeking reorganization in 

bankruptcy court, and the court has determined that 

the firm cannot be reorganized without terminating its 

pension plan;

B PBGC determines that the firm cannot continue to 

pay its creditors and remain in business unless the plan 

is terminated; or

B PBGC determines that continuing to contribute to 

the pension plan would place an unreasonable burden 

on the firm solely as the result of a decline in the number of employees covered by the plan.

In most cases, PBGC would prefer that terminations take 

place voluntarily, either through standard terminations or 

distress terminations. However, the law also gives PBGC 

the authority to conduct an involuntary termination of a 

pension plan under the following conditions:

B The plan has not met the minimum funding requirements;

B The plan cannot continue to pay benefits when due;

B A lump-sum payment has been made to a participant 

who is a substantial owner of the sponsoring company; or

B The eventual financial loss to PBGC is expected to increase unreasonably if the plan is not terminated.

Under 1,000

 (25%)

1,000

 (14%)

2,500

 (9%) 5,000

 (13%)

10,000 +

 (40%)

Total Paid by All Plans: $294 Million
A GUIDE TO UNDERSTANDING THE PENSION BENEFIT GUARANTY CORPORATION 11

Multiemployer plans generally are not terminated. If 

PBGC determines that a multiemployer plan is insolvent 

and can no longer pay its benefits, the agency provides financial assistance directly to the plan, usually in the form 

of a loan, so that it can continue to make payments to 

beneficiaries. In 2004, PBGC provided 27 multiemployer 

plans with financial assistance totaling about $10 million.

PBGC’s Trust Funds

When an underfunded plan is terminated—either voluntarily or involuntarily—PBGC assumes control of the assets held by that plan. The total value of those assets can 

vary tremendously depending on the plan’s number of 

participants and funding-to-benefits ratio. 

In 2004, PBGC assumed control of 96 single-employer 

plans with a total of $2.8 billion in assets. In addition to 

the pension-related assets, PBGC received $325 million 

in other assets turned over by sponsors of terminated 

plans. Those recoveries not related to pensions, which are 

often the result of bankruptcy agreements, help to offset 

the shortfall between assets and liabilities. But such recoveries are relatively small, totaling less than 5 percent of all 

of the liabilities taken on by PBGC, reflecting the fact 

that the agency has relatively low priority in bankruptcy 

proceedings. Those 96 plans also added more than $5.8 

billion in liabilities to the agency’s balance sheet. Thus, 

the trusteed plans had an average funding ratio of about 

49 percent when terminated. 

Over its entire history, PBGC has assumed more than 

$22 billion in assets from terminated plans against $42.6 

billion in total liabilities, providing an average funding 

ratio of about 52 percent.

Once a plan is terminated, assets are transferred to 

PBGC’s control and deposited into a nonbudgetary account held at a custodian bank. Those assets do not appear on the federal balance sheet, and the transfer of such 

assets is not considered a receipt to the government. Assets in the nonbudgetary trust fund are commingled and 

no longer identified as originating with particular plans. 

At the end of fiscal year 2004, the assets in PBGC’s nonbudgetary trust fund were valued at nearly $23 billion.

PBGC has broad authority to oversee and administer 

pension assets held in its trust fund. In a legal sense, those 

assets are treated as nonpublic in nature, and PBGC is 

free to invest and expend the funds as if it were a private 

fiduciary of the trust fund’s holdings. PBGC can invest 

the assets in whatever way it chooses, as long as it acts in 

the best financial interest of beneficiaries.

In addition to the nonbudgetary trust fund, PBGC has 

several on-budget revolving funds. Payments of premiums and transfers from the trust fund for both benefit 

payments and administrative expenses are deposited to 

the revolving funds. Unlike the trust fund, the revolving 

funds appear on the federal government’s balance sheet 

and provide PBGC with permanent spending authority 

to carry out its activities. ERISA specifies the various programs and activities for which PBGC may use its revolving funds and the types of income that may be credited to 

each fund. Although technically there are seven revolving 

funds, PBGC uses only three, and their activities are 

combined into one fund for reporting purposes. Any assets held in the revolving fund that are not used to pay 

benefits are considered unobligated balances and are 

available for expenditure in the next year. By law, all assets 

in the revolving fund must be held in Treasury securities 

and can earn interest income, which totaled $1.2 billion 

in 2004. As of the end of 2004, the unobligated balance 

of the revolving fund was $17 billion.11

PBGC transfers funds from the nonbudgetary trust fund 

(that is, the accumulated assets of terminated plans) to its 

on-budget accounts to pay a portion of retirement annuities and certain administrative costs. Such transfers are 

referred to as reimbursements and are recorded as offsetting collections (that is, offsets to outlays) in the budget. 

Generally, the proportion of benefit payments that is reimbursed from the trust fund depends on the aggregate 

funding level among the plans that PBGC has taken over 

and is adjusted periodically. In other words, if the average 

funding ratio of all plans taken over by PBGC is 50 percent, then half of all benefit payments originate from the 

nonbudgetary fund. Assets in the trust fund are liquidated and transferred to the revolving fund by PBGC 

from time to time, depending in part on market conditions. Transfers from the nonbudgetary trust fund can be 

irregular and often do not match when benefit payments 

are actually made. For example, the trust fund will eventually cover about half of the benefit payments made in 

2004, but the reimbursements actually made during the 

course of the year covered less than 30 percent of benefits. 

11. PBGC also has a $100 million line of credit with the Treasury 

Department, which it has drawn on only once—to cover the 

agency's startup costs—and quickly repaid.
12 A GUIDE TO UNDERSTANDING THE PENSION BENEFIT GUARANTY CORPORATION

In addition to financing benefits, proceeds from liquidated trust fund assets are also transferred to the revolving 

fund to pay for PBGC’s administrative expenses related 

to terminations. Those expenses can include the cost of 

valuing, collecting, and managing plans’ assets, paying legal expenses related to plans’ terminations, and determining benefit payments for plans’ participants. PBGC’s 

other administrative expenses are currently paid directly 

from its revolving fund.12

Benefits Paid by PBGC

In the event that a single-employer pension plan undergoes either a distress or involuntary termination and 

PBGC becomes responsible for that plan, the accrual of 

all additional benefits, vesting, and the plan’s other regular obligations cease. PBGC pays benefits according to 

the provisions of each individual pension plan up to the 

limits of the guarantee specified in law. To ensure that ongoing benefit payments are not interrupted, PBGC pays 

active annuitants an estimated benefit while the agency 

examines the plan. Those estimated payments sometimes 

result in overpayments or underpayments, which the 

agency reconciles once it makes its final determination 

about benefit levels.

PBGC’s guarantees cover basic retirement benefits, most 

early-retirement benefits, disability benefits (when the 

disability occurred before the plan was terminated), and 

certain survivor benefits. In most cases, participants in a 

terminated plan receive all of the benefits that they were 

promised under the plan. However, ERISA places a cap 

on how much each participant in a terminated plan can 

receive, so some annuitants does not receive their full 

benefits. In other instances, PBGC is able to recover 

enough assets during a termination so that annuitants 

whose plan entitled them to benefits above the cap are 

able to collect more than the maximum guarantee.

For plans assumed by PBGC in 2005, the statutory limit 

on guaranteed benefits in the single-employer program is 

$45,614 ($3,801 monthly) for a single-life annuity beginning at age 65. The maximum guarantee is adjusted 

downward for those who retire before the age of 65 and 

upward for those who retire later. For example, the maximum guarantee for a participant who retires at age 62 is 

$36,035 a year (or $3,003 a month) for a single-life annuity—a reduction of roughly 20 percent. For a person 

who retires at age 70, the maximum guarantee is $75,719 

a year (or $6,310 a month). For a beneficiary who is already retired, the age used to determine the maximum 

amount guaranteed is the participant’s age as of the date 

of the plan’s termination. The maximum is adjusted each 

year for wage growth, but once PBGC determines an individual’s benefits, they remain constant. 

As specified in ERISA, PBGC places some additional 

limits on benefits. For instance, changes to a plan that increased benefits and that were made within five years of 

the plan’s termination are not fully guaranteed. Generally, 

the larger of 20 percent or $20 per month of the increased benefits is guaranteed for each full year that the 

increased benefits were in effect. In addition, benefits 

paid by PBGC are not adjusted for inflation, even if the 

original plan called for such increases. (Few definedbenefit plans provide for automatic inflation adjustments.) Although PBGC pays survivor benefits, they may 

be less generous than those promised by a plan.

Benefits themselves are normally paid on a monthly basis, 

unless the monthly benefit is $50 or less, in which case it 

is paid annually. If the net present value of pension benefits is less than $5,000, the payee usually receives a lumpsum payment, which can be rolled over into a definedcontribution pension account.

All in all, restrictions on benefits normally affect more 

highly paid workers and early retirees the most. PBGC estimates that about 90 percent of payees in the singleemployer program receive all of the benefits that they 

were promised by their former plan.

In 2004, the average benefit payment in the singleemployer program was $475 per month for more than 

530,000 annuitants. In total, the single-employer program paid out $2.9 billion in benefit payments in 2004, 

up from $2.4 billion the year before.

The Multiemployer Program

The smaller multiemployer program provides insurance 

coverage for 9.8 million participants in about 1,600 

plans. The construction and trucking industries represent 

about 60 percent of all insured plans and nearly 40 percent of participants in the multiemployer program. The 

12. Prior to 2004, administrative expenses not directly related to terminations were paid from appropriations, which were then reimbursed by the revolving fund. Legislation enacted in 2003 

eliminated the distinction between moneys covering administrative expenses related to terminations and those unrelated to terminations; now, all administrative spending is considered direct 

spending from the revolving fund.
A GUIDE TO UNDERSTANDING THE PENSION BENEFIT GUARANTY CORPORATION 13

vast majority of participants are in plans with more than 

10,000 people, although data on multiemployer plans are 

limited. 

As required by ERISA, PBGC’s multiemployer program 

is legally distinct from the single-employer program. 

Cross-subsidization between the two programs, including 

mixing assets and premiums, is not permitted. Originally 

under ERISA, the single-employer and multiemployer 

plans received similar treatment by PBGC. However, the 

Multiemployer Pension Plan Amendments Act of 1980 

(P.L. 96-364) recognized that the two types of pension 

plans are fundamentally different. 

The funding rules that govern single-employer plans generally apply to multiemployer plans as well, but multiemployer plans are allowed to amortize increases in liabilities 

over longer periods of time than single-employer plans. 

Contribution levels for multiemployer plans are usually 

set through collective bargaining, which means sponsors 

of such plans usually have less flexibility to change contributions than sponsors of single-employer plans do. 

ERISA establishes a special set of rules for firms that wish 

to discontinue their cosponsorship of a multiemployer 

plan. Employers must pay a “withdrawal liability,” which 

represents the sponsors’ pro rata share of the plan’s unfunded liabilities.

Because multiemployer plans are sponsored by several 

distinct companies, they are more diversified than singleemployer plans and have historically been less likely to 

encounter financial difficulty. For the 10 multiemployer 

plans that failed prior to 1980, PBGC pays benefits directly to beneficiaries, much as it does in the singleemployer program. In 2004, the agency paid benefits to a 

total of 320 beneficiaries from multiemployer plans, 

down from 1,300 beneficiaries in 1995.

Plans that develop financial difficulty are required to pay 

full benefits until they run out of assets. When a multiemployer plan becomes insolvent, benefit payments can 

be reduced or suspended in accordance with PBGC’s 

benefit guarantees.13 PBGC then provides financial assistance to the plan, usually in the form of loans, which the 

plan uses to continue to pay benefits. Those loans continue until the plan recovers or until all vested benefits 

have been paid. If the plan recovers from insolvency, it is 

required to repay all outstanding loans, including interest, to PBGC according to “reasonable terms” set by the 

agency. In most cases, however, the plan never recovers, 

and PBGC writes off the loans. In 2004, PBGC provided 

$10 million worth of financial assistance to 27 multiemployer plans. 

As mentioned, the multiemployer program is financed 

through a premium that is currently $2.60 per participant. Multiemployer plans paid a total of $25 million in 

premiums in 2004. Unlike the single-employer program, 

the multiemployer program does not require a separate 

premium based on the adequacy of a plan’s funding. Although smaller, the multiemployer program is experiencing some of the same problems facing the singleemployer program. The net position of the multiemployer program has declined rapidly over the past several years, from a surplus of $341 million in 1998 to a 

deficit of $236 million in 2004 (see Figure 6).

Figure 6.

The Multiemployer Program’s Assets 

and Liabilities, 1990 to 2004

(Millions of dollars)

Source: Pension Benefit Guaranty Corporation, Pension Insurance 

Data Book, 2004, no. 9 (Spring 2005).

13. The current monthly guaranteed benefit for participants in multiemployer plans is up to $11 per month multiplied by the total 

years of service under the plan, plus 75 percent of the next $33 per 

month multiplied by the total years of service. That guarantee 

level is not indexed to inflation.

1990 1992 1994 1996 1998 2000 2002 2004

-400

-200

0

200

400

600

800

1,000

1,200

1,400

Assets

Liabilities

Net

Position
14 A GUIDE TO UNDERSTANDING THE PENSION BENEFIT GUARANTY CORPORATION

PBGC’s Financial Condition and

Outlook

PBGC’s finances can be assessed in two ways. One approach is accrual accounting, which measures the total 

value of all assets held by PBGC and the total value of all 

liabilities the agency will be responsible for paying. The 

other approach is cash accounting, which tracks how 

much money the agency takes in each year versus the 

amount of money it spends. Accrual accounting is the 

norm within the pension industry and is a useful tool for 

projecting the adequacy of the agency’s funding to cover 

benefits that will be paid decades in the future. However, 

the federal budget generally does not use accrual accounting and mainly operates on a cash basis. The budget also 

does not record the receipt of pension assets assumed by 

the nonbudgetary trust fund when pension plans terminate. The budget recognizes the receipt of those funds 

only when they are liquidated and transferred to the onbudget revolving fund to help pay for benefits and administrative expenses.

PBGC’s Net Position

PBGC’s overall fiscal health is usually measured by looking at its net financial position, which is defined as the 

difference between the program’s assets and the present 

value of its liabilities. Assets include the current fair market value of all cash, bonds, equities, and other holdings 

of PBGC’s trust fund and revolving fund. Liabilities are 

calculated as the estimated present value of all future benefits that PBGC is obligated to pay on behalf of terminated plans, those pending termination, and plans that 

PBGC identifies as likely to terminate. Calculating liabilities in present-value terms is a common practice in the 

pension industry and provides the most accurate longrange picture of PBGC’s fiscal health.

From the time it began operations in 1975 through 1995, 

PBGC’s net financial position was negative; that is, the 

total value of the assets on hand was not enough to cover 

projected future benefit payments. Over the 1975-1995 

period, the agency’s net financial position reached a low 

of -$2.6 billion in 1993. Starting in 1996, however, the 

situation changed and PBGC’s net financial position became positive, reaching a peak of $10 billion in 2000. 

The pendulum swung back in 2002, and a record shortfall of $23.5 billion existed by the end of 2004 (see 

Table 1). 

Fluctuations in the agency’s net position arise mostly 

from changes in the financial condition of PBGC’s 

single-employer program. Until recently, assets and liabilities within the single-employer program have tended to 

move together (see Figures 7 and 8). Both liabilities and 

assets jumped in the early 1990s as PBGC took over several large pension plans in the airline industry. For most 

of next decade, liabilities flattened as the agency took over 

relatively small plans. At the same time, the value of 

PBGC’s assets, much of which was invested in the equities market, surged. The net position of the singleemployer program reached a surplus of $9.7 billion in 

2000.

Starting in 2001, however, liabilities began to swell rapidly as the agency took over several large pension plans in 

the airline and steel industries. From 2001 through 2003, 

PBGC took responsibility for roughly $25 billion in liabilities against $14 billion in assets and recoveries, resulting in claims against the agency of nearly $11 billion. At 

the same time, the stock market began to slump, eroding 

the value of PBGC’s investment assets, while declining 

interest rates boosted the present value of its liabilities. 

The result was a $33 billion drop in the net position of 

the single-employer program from 2000 to 2004. 

In a separate analysis released earlier this month, CBO estimated that the present value of PBGC’s net costs for 

single-employer plans totals about $87 billion for the 

next 10 years—consisting of $23 billion from claims for 

plans that have already terminated or whose termination 

is imminent, and more than $63 billion of prospective 

losses (net of future premiums) for terminations that have 

not yet occurred.14 CBO’s estimate of $87 billion reflects 

the market value of PBGC’s insurance, that is, the price 

that a private insurer would charge to accept the premiums and PBGC’s insurance obligations for currently terminated plans and those that terminate during the 10-

year period. It incorporates a charge for the cost of market risk, a cost that arises because investors demand compensation for the fact that new claims are likely to be 

higher in bad economic times, when more sponsoring 

firms fail, and the value of pension assets is depressed. 

The figure also includes all estimated losses on insured 

plans even though current law limits the government’s 

14. See Congressional Budget Office, The Risk Exposure of the Pension 

Benefit Guaranty Corporation (September 2005).
A GUIDE TO UNDERSTANDING THE PENSION BENEFIT GUARANTY CORPORATION 15

Table 1.

PBGC’s Net Financial Position, 2000 to 2004

(Billions of dollars)

Source: Pension Benefit Guaranty Corporation, Pension Insurance Data Book, 2004, no. 9 (Spring 2005).

liability to those that can financed by the income and assets available to PBGC.

In 2004, PBGC adopted a new investment policy designed to reduce its financial risk by better matching the 

duration of its assets and liabilities. The agency intends to 

increase the percentage of its portfolio invested in fixedincome securities and decrease its holdings in equities. 

Such a strategy means that any change in the value of the 

agency’s liabilities should be closely matched by a change 

in the value of its portfolio. At the end of fiscal year 2004, 

about 30 percent of the agency’s total assets were in equities. According to PBGC’s new investment policy, it will 

eventually invest between 15 percent and 25 percent of 

its total assets in equities. During 2004, PBGC reported a 

$3.2 billion investment gain, $1 billion of which was 

from fixed-income securities and $2.2 billion from equities.

PBGC’s Cash Flows

Prior to 1981, PBGC’s cash flows appeared in the appendix to the federal budget but were not included in federal 

budget totals. Changes to ERISA enacted in 1980 mandated that PBGC’s cash flows be included in the federal 

budget.

From its first full year of operation until 2003, PBGC 

took in more cash each year than it spent. According to 

the government’s cash accounting rules, PBGC ran a cumulative on-budget surplus of more than $12 billion 

from 1981 through 2002. An observer looking at PBGC

only on a cash basis might have concluded that it was on 

a firm financial footing. In running cash surpluses for so 

long, the agency managed to accrue substantial assets, 

both in the on-budget revolving fund and in the nonbudgetary fund.

Figure 7.

The Single-Employer Program’s Assets 

and Liabilities, 1980 to 2004

(Billions of dollars)

Source: Pension Benefit Guaranty Corporation, Pension Insurance 

Data Book, 2004, no. 9 (Spring 2005). 

2000 2001 2002 2003 2004

Single-Employer Program 

Total assets 20.8 21.8 25.4 34.0 39.0

Total liabilities 11.1 14.0 29.1 45.3 62.3

 Net position 9.7 7.7 -3.6 -11.2 -23.3

Multiemployer Program

 Total assets 0.8 0.8 0.9 1.0 1.1

Present value of future benefits and 

nonrecoverable financial assistance 0.4 0.7 0.8 1.3 1.3

 Net position 0.3 0.1 0.2 -0.3 -0.2

1980 1983 1986 1989 1992 1995 1998 2001 2004

-30

-20

-10

0

10

20

30

40

50

60

70

Assets

Liabilities

Net

Position
16 A GUIDE TO UNDERSTANDING THE PENSION BENEFIT GUARANTY CORPORATION

Figure 8.

Annual Change in the Single-Employer 

Program’s Assets and Liabilities, 

1981 to 2004

(Percentage change)

Source: Pension Benefit Guaranty Corporation, Pension Insurance 

Data Book, 2004, no. 9 (Spring 2005).

In 2003, PBGC experienced its first cash deficit, spending $229 million more than it realized in receipts (see 

Figure 9 and Table 2). The deficit was, in part, a reflection of the fact that benefit outlays had risen by more 

than 250 percent over the previous three years, from $1.1 

billion in 2001 to $2.9 billion in 2004. Over the same 

time period, on-budget receipts from the agency’s various 

sources of income did not keep pace, increasing from 

$2.4 billion in 2001 to $3.4 billion in 2004. The 2003 

deficit was also partly the result of an irregular pattern in 

the program’s receipts—especially for trust fund reimbursements. In 2004, the agency once again realized a 

cash surplus of $247 million.

CBO’s Baseline Projections

According to CBO’s projections, PBGC will run cash 

deficits for the foreseeable future, draining its on-budget 

revolving fund. By CBO’s calculations, that fund will run 

out of assets within the next 10 years. 

In its baseline, CBO projects PBGC’s anticipated collections and spending 10 years into the future. Those baseline projections represent CBO’s best estimate as to how 

much money the agency will collect and spend each year 

over the next 10 years, under an assumption that no 

changes are made to the laws that govern its programs.

Although PBGC does not spend any federally appropriated funds, its net cash flow affects the federal budget. 

Because premiums, interest earnings, and other receipts 

are considered offsetting collections, a reduction in those 

receipts results in an increase in mandatory spending. If 

PBGC’s offsetting collections are smaller than what it 

spends in a given year, the effect is to increase the budget 

deficit.

According to CBO’s August 2005 baseline projections, 

PBGC’s spending on retirement benefits and financial assistance to multiemployer plans is estimated to grow from 

about $4 billion in 2005 to more than $10 billion in 

Figure 9.

PBGC’s Outlays and Receipts, 

1976 to 2004

(Billions of dollars)

Source: Budget of the United States Government, Appendix (various years).

Notes: Net outlays represent the surplus (-) or deficit (+) experienced by the program on a cash basis.

Spikes in the program's gross outlays are mostly the result of 

short-term expenses related to terminations or courtordered benefit payments. Spikes in receipts are mostly the 

result of changes in premium rates or plans' underfunding 

(which affects collections of the variable-rate premium) and 

the timing of reimbursements from PBGC's nonbudgetary 

trust fund.

1981 1984 1987 1990 1993 1996 1999 2002

-20

0

20

40

60

80

100

120

Assets

Liabilities

1976 1980 1984 1988 1992 1996 2000 2004

-2

-1

0

1

2

3

4

Net Outlays

Gross Outlays

Receipts
A GUIDE TO UNDERSTANDING THE PENSION BENEFIT GUARANTY CORPORATION 17

Table 2.

PBGC’s On-Budget Outlays and Offsetting Collections, 2001 to 2004

(Millions of dollars)

Sources: Budget of the United States Government, Appendix (various years); Pension Benefit Guaranty Corporation.

Note: A negative net outlay reduces the budget deficit; a positive net outlay increases the deficit.

a. Other offsetting collections consist mainly of payments from the nonbudgetary account to the on-budget account for services rendered.

2015, or an average of about 10 percent per year (see 

Table 3). PBGC’s administrative expenses, including 

spending related to terminations, and certain categories 

of offsetting collections, including sponsors’ payments of 

flat-rate and variable-rate premiums, are projected to remain fairly constant over the period. The interest credited 

on Treasury bonds held by the on-budget revolving fund 

will decline as balances in the fund fall; and reimbursement payments received from the nonbudgetary fund 

will have to increase steadily to cover the rising benefit 

payments.

CBO anticipates that PBGC will record a small surplus 

for 2005. Starting in 2006, CBO projects, the agency will 

begin spending more than it collects, with cash deficits 

growing steadily for the next several years—attributable 

mainly to increases in benefit outlays for the single-employer program. By 2015, benefit payments for the single-employer program will be roughly three-and-a-half 

times larger than what they were in 2004, according to 

CBO’s estimates. Over the same period, PBGC’s premium income—the main form of income covering the 

program’s unreimbursed costs—will remain basically flat.

In CBO’s estimation, PBGC’s on-budget revolving fund 

will be completely exhausted around 2013.While there is 

no precedent for how PBGC will proceed if the revolving 

fund becomes insolvent, CBO assumes that the agency 

will cover its expenses by increasing the percentage of 

benefits and other expenses being paid by the nonbudgetary trust fund, which will still be solvent through at least 

2015, according to CBO’s estimates. Therefore, starting 

in 2013, reimbursements from the trust fund will have to 

increase sharply in order to cover benefit payments and 

administrative expenses.

Projections of on-budget cash flows do not include the 

assets held in or income earned by the agency’s nonbudgetary trust fund, except to the extent that they are transferred to the on-budget account. When a plan fails and is 

assumed by PBGC, the total value of the nonbudgetary 

trust fund tends to increase much more than the initial 

increase in PBGC’s outlays for benefits because the transfer of the plan’s assets takes place almost immediately and 

benefits are paid out over a long period of time. Consequently, the size of the nonbudgetary trust fund can be a 

misleading indicator of PBGC’s financial health. 

Under current law, no substantial source of funds is available to PBGC if it runs out of money. Premium rates are 

set by law and cannot be changed by the agency itself. 

Other than a $100 million line of credit with the Treasury Department, no source of additional funding for the 

agency exists. In the event that PBGC were to exhaust all

2001 2002 2003 2004

Outlays

 Benefit payments and financial assistance 1,101 1,883 2,277 2,883

 Administrative expenses 155 210 252 278

Gross outlays 1,256 2,093 2,529 3,161

Offsetting Collections

Premiums -850 -864 -866 -1,139

Payments received from nonbudgetary account -946 -1,513 -624 -1,063

Interest credited to on-budget account -598 -676 -810 -1,206

Othera -4 -5 0 0

Total collections -2,398 -3,058 -2,300 -3,408

Net Outlays -1,068 -965 229 -247
18 A GUIDE TO UNDERSTANDING THE PENSION BENEFIT GUARANTY CORPORATION

Table 3.

CBO’s Baseline Projections for the Pension Benefit Guaranty Corporation,

2005 to 2015

(Millions of dollars)

Source: Congressional Budget Office.

Note: A negative net outlay reduces the budget deficit; a positive net outlay increases the deficit.

a. According to CBO’s projections, PBGC’s on-budget revolving fund will be exhausted after 2013. See the discussion on page 17.

of its holdings, either benefit payments would be drastically cut or the Congress would have to enact a bailout. 

The Center on Federal Financial Institutions estimates 

that if PBGC’s assets are eventually exhausted, its ongoing income would fund only about 10 percent of its annual benefit obligations.15

Uncertainties About PBGC’s Future

PBGC is an agency that, by its very nature, faces many 

uncertainties. As an insurer, it bears many of the risks incurred by private pension plans. Those risks are influenced by many factors outside of the agency’s control, 

such as investment decisions by plans’ sponsors, the vagaries of the private equities market, the general state of 

the economy, and the financial condition of sponsors. Although large in terms of the agency’s history, the $33 billion swing in PBGC’s net position over the past four years 

is not necessarily an isolated incident, but an example of 

how an economic downturn, low interest rates, and the 

termination of several large plans can produce dramatic 

changes in the agency’s financial picture.

During the late 1990s, the run-up in the stock market 

caused the value of assets held in defined-benefit pension 

plans to swell, so many previously underfunded plans became fully funded according to the measures specified by 

ERISA. In 1996, almost half of all single-employer plans 

were sufficiently underfunded that they had to pay the 

variable-rate premium; by 2000, just 28 percent of plans 

had to. However, as economic conditions deteriorated, 

the financial position of many pension plans suddenly 

changed for the worse. In 2003, about 55 percent of 

plans were required to pay the variable-rate premium.

Since 2000, the extent of underfunding among PBGCinsured plans has measurably increased. Partly a function 

of the drop in the stock market, it is also a result of low 

interest rates. The extended period of low interest rates 

has pushed the present value of pension liabilities upward, causing more plans to become underfunded. Consequently, sponsors faced a twofold financial pressure: 

having to put more money into their plans to reduce 

2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015

Outlays

Benefit payments and financial 

assistance 3,923 5,192 5,690 6,299 6,962 7,522 8,098 8,726 9,254 9,690 10,170

Administrative expenses 353 441 455 472 487 489 486 480 463 436 407

Gross outlays 4,276 5,633 6,145 6,771 7,449 8,011 8,584 9,206 9,717 10,126 10,577

Offsetting Collections

Premiums -1,559 -1,284 -1,259 -1,518 -1,486 -1,430 -1,383 -1,392 -1,403 -1,414 -1,428

 Payments received from 

nonbudgetary account -2,070 -2,882 -3,174 -3,530 -3,921 -4,258 -4,607 -4,989 -6,387 -8,687 -9,123

 Interest credited to 

on-budget account -758 -714 -655 -598 -514 -409 -282 -135 -29 -25 -26

Total collections -4,387 -4,880 -5,088 -5,646 -5,921 -6,097 -6,272 -6,516 -7,819 -10,126 -10,557

Net Outlays -111 753 1,057 1,125 1,528 1,914 2,312 2,690 1,898 0a 0a

15. See Douglas J. Elliot, “PBGC: When Will the Cash Run Out?” 

Center on Federal Financial Institutions (September 13, 2004).
A GUIDE TO UNDERSTANDING THE PENSION BENEFIT GUARANTY CORPORATION 19

Figure 10.

Income from Premiums Compared with Total Benefit Payments in the SingleEmployer Program, 1985 to 2004

(Millions of dollars)

Source: Pension Benefit Guaranty Corporation, Pension Insurance Data Book, 2004, no. 9 (Spring 2005). 

underfunding and making variable-rate premium payments to PBGC because of their underfunding. The need 

to divert more money to funding their pension plans, 

combined with other systemic business problems, helped 

push some companies into bankruptcy.

The prevalence of underfunding may reflect a belief held 

by some sponsors that the performance of their plan’s investments can eventually overcome a shortfall in contributions. They may also feel that, even though contributions are tax-deductible, other activities are more valuable 

to their company’s financial success.

Fluctuations in plans’ funding levels have several effects 

on PBGC’s cash flows. Because the agency's variable-rate 

premium is charged to underfunded plans, as underfunding increases, so too does income from premiums. But 

while greater underfunding may cause premium income 

to increase, it also tends to increase the size of claims to be 

paid by PBGC if and when underfunded plans terminate 

(see Figure 10).

The performance of the stock market, long-term interest 

rates, the pace at which sponsors fund their pension obligations, and bankruptcy rates among plans’ sponsors will 

all play important roles in determining the future financial performance of PBGC. But it appears unlikely that 

the agency will be able to pay all insured benefits for terminated plans in the coming years without substantial 

additional financial resources.

1985 1987 1989 1991 1993 1995 1997 1999 2001 2003

0

500

1,000

1,500

2,000

2,500

3,000

3,500

Flat-Rate Premium

Variable-Rate Premium

Total Benefits

Glossary

Accrual accounting: A way of tracking transactions at the time a liability is incurred or a receivable is 

promised rather than when cash is paid or received.

Annuitant/beneficiary: Someone who is actively receiving regular payments from a pension plan, including retired workers, as well as surviving spouses and children.

Asset value: Total value on the open market of all bonds, 

equities, and other investments held by a plan; also 

termed the mark-to-market value. The Employee Retirement Income Security Act and the tax code allow plans to 

“smooth” asset valuations to avoid fluctuations due to investment gains and losses.

Benefit accrual: The normal increase in benefits 

that results from an increase in covered service or salary. 

Cash-balance plan: A type of defined-benefit pension plan in which the employer makes regular contributions (usually based on salary) to hypothetical individual 

accounts on behalf of its employees. The balance in each 

account grows according to interest credits determined by 

the sponsor. Benefits are based on the total balance in 

each account upon retirement. Although cash-balance 

plans resemble defined-contribution plans in many respects, from a legal point of view they are considered

defined-benefit plans. 

Cash flow: A cash receipt or outlay for a particular period 

of time.

Claim: A present-value measure of the cost to the Pension Benefit Guaranty Corporation for a terminated plan. 

It is the net difference between a plan’s assets and termination liabilities.

Covered plan: A defined-benefit pension plan meeting 

certain criteria contained in the Employee Retirement Income Security Act and the tax code that allow contributions to the plan to be tax-deferred. Such plans are required to have their benefits insured by the Pension 

Benefit Guaranty Corporation.

Deferred annuitant: Someone who is entitled to 

receive retirement benefits from a pension plan but is no 

longer employed by the plan’s sponsor and has not yet 

reached the plan’s required age for collecting benefits.

Deficit reduction contributions (DRCs): Payments by 

sponsors of certain pension plans that are determined to 

be underfunded under the Employee Retirement Income 

Security Act and the tax code. The sponsors must make 

DRCs in addition to normal pension contributions for 

the regular accrual of benefits.

Defined-benefit plan: A type of pension plan under 

which benefits are based on a formula that usually depends on participants’ length of service and salary history. 

Plans’ sponsors are required to contribute enough to ensure that promised benefits can be paid. Employees are 

usually not required to make contributions to definedbenefit plans.

Defined-contribution plan: A type of pension plan under which deposits are made to individual accounts by 
22 A GUIDE TO UNDERSTANDING THE PENSION BENEFIT GUARANTY CORPORATION

employers and/or employees and benefits depend on the 

total assets accrued in each account.

Discount rate: Interest rate used to determine the 

present value of future pension payments. 

Distress termination: A termination of an underfunded 

pension plan initiated by a sponsor in severe economic 

distress or bankruptcy. In order to qualify for a distress 

termination and have the plan assumed by the Pension 

Benefit Guaranty Corporation, the sponsor must meet 

rules prescribed by the Employee Retirement Income Security Act.

ERISA: The Employee Retirement Income Security Act of 1974. Along with the tax code, ERISA is the 

law that governs employee benefits, including pensions. It 

established the Pension Benefit Guaranty Corporation 

and required sponsors of qualified defined-benefit plans 

to insure their pension benefits with the agency.

Flat-rate premium: An annual per-participant premium charged to both single-employer and multiemployer plans covered by the Pension Benefit Guaranty 

Corporation (PBGC). Single-employer plans are charged 

$19 per participant; multiemployer plans are charged 

$2.50 per participant. Those rates are set in law and cannot be altered by PBGC.

Full-funding limit: The maximum amount a sponsor is 

required to contribute to its pension plan in a given plan 

year. Plans that have reached the full-funding limit are 

exempt from paying the variable-rate premium.

Funding ratio: The proportion of assets to liabilities held 

by a pension plan. For example, a plan that has assets of 

$20 million and liabilities of $16 billion has a funding ratio of 125 percent.

Funding standard account: An accounting device used 

to determine the amount of contributions that is due 

from a plan’s sponsor for the normal accrual of benefits as 

well as changes to the plan’s benefit structure.

Group annuity purchase: The sale of pension liabilities to a private insurance provider. Benefits no 

longer accrue to the plan and the insurance provider becomes responsible for paying all remaining pension benefits.

Hybrid pension plan: A defined-benefit pension 

plan that has characteristics similar to those of a definedcontribution plan. Cash-balance plans are a type of hybrid pension plan.

Involuntary termination: The procedure by which 

the Pension Benefit Guaranty Corporation (PBGC) initiates the termination of a pension plan. For PBGC to 

conduct an involuntary termination, the plan must meet 

certain criteria specified by the Employee Retirement Income Security Act. In general, involuntary termination 

must occur when a plan is unable to pay benefits and may 

occur in cases in which PBGC determines that allowing a 

plan to continue will lead to unreasonable increases in 

unfunded liabilities.

Liability: A present-value measure of pension benefits. There are various ways to measure pension liability.

B Under the Employee Retirement Income Security Act, 

accrued liability is the present-value measure of benefits based on current service and projected pay used to 

determine a plan’s funding; it incorporates long-term 

assumptions to reflect expectations about future benefits.

B Under the Employee Retirement Income Security Act, 

current liability is the present-value measure of benefits 

based on current pay and service used to determine a 

plan’s funding; it incorporates assumptions to reflect 

the value of benefits today. 
GLOSSARY 23

B Termination liability is the present-value measure of 

benefits at a particular date after which no more liabilities accrue and no additional contributions are made 

to a plan. The Pension Benefit Guaranty Corporation’s termination liability is adjusted to account for 

any legal limitations that may apply to benefits provided by the plan.

Maximum deductible contribution: The maximum amount a sponsor can contribute to its pension 

plan without paying taxes on its contributions. Contributions above the maximum are subject to regular corporate taxes plus a 10 percent excise tax.

Multiemployer pension plan: A kind of defined-benefit 

pension plan that is sponsored by multiple firms usually 

in a common industry in which employees frequently 

switch employers (such as construction and trucking). 

Contributions to the plan are collectively bargained by 

the employing firms and union representatives; benefits 

are set by a board of trustees, which also administers the 

plan.

Net position: The difference between the Pension 

Benefit Guaranty Corporation’s total assets and liabilities, 

calculated on a present-value basis. Liabilities include the 

claims of plans it considers probable to terminate.

Nonbudgetary trust fund: A fund in which assets, outlays, and receipts are not included in the federal budget. 

In the Pension Benefit Guaranty Corporation’s case, assets and recoveries from terminated plans are placed in a 

nonbudgetary trust fund, where they are managed until 

they are liquidated and transferred to the agency’s revolving fund.

On-budget: The status of outlays and receipts that 

are recorded by the federal budget.

Participant: An individual who is vested in a covered 

pension plan. Participants can be currently employed, 

vested but separated, or former employees who are collecting annuities.

Plan year: A 12-month period of time during which a 

pension plan is required to make certain calculations and 

perform certain tasks. The plan year does not necessarily 

correspond with the calendar year or fiscal year. For example, a particular plan might record its plan year 2005 

as running from July 1, 2005, through June 30, 2006.

Present value: A method of measuring liabilities that involves discounting payments that will be made in the future back to current dollars.

Probable termination: A termination that the Pension 

Benefit Guaranty Corporation believes is likely in the 

foreseeable future. The agency uses these criteria to help 

identify such a plan: the plan’s sponsor is in Chapter 11 

bankruptcy; the sponsor has granted security to an unsecured creditor as part of renegotiation of debt; the sponsor is known to be in default on existing debt; the sponsor’s unsecured debt is rated CCC+/Caa1 by Standard & 

Poor’s or Moody’s, respectively. The Pension Benefit 

Guaranty Corporation may also consider other factors to 

determine how likely a plan is to terminate.

Qualified plan: See “covered plan.”

Reasonably possible termination: A termination 

by a plan that the Pension Benefit Guaranty Corporation 

believes is at high risk in the foreseeable future but that is 

not classified as probable. The agency uses these criteria 

to help identify such a plan: the plan’s sponsor is in Chapter 11 bankruptcy; the sponsor has missed the minimum 

funding contribution; the sponsor’s bond rating is below 

investment grade; the sponsor has no bond rating but the 

ratio of long-term debt plus unfunded benefit liabilities 

to the market value of shares is 1.5 or greater.
24 A GUIDE TO UNDERSTANDING THE PENSION BENEFIT GUARANTY CORPORATION

Recoveries: Nonpension assets that the Pension Benefit 

Guaranty Corporation assumes from a sponsor when its 

plan is terminated.

Reimbursements: Transfers of assets from the Pension 

Benefit Guaranty Corporation’s nonbudgetary trust fund 

to its on-budget revolving fund. These transfers, which 

are recorded as offsetting collections in the budget, are 

used to reimburse the agency for benefit payments and 

certain administrative costs related to terminations.

Revolving fund: A type of federal budget account that 

makes outlays for a specific purpose and is regularly replenished by receipts intended for the same purpose. The 

Pension Benefit Guaranty Corporation (PBGC) has 

seven revolving funds, although only three of them are 

actively used. Interest may accrue on assets held in a revolving fund. For reporting purposes, PBGC combines 

the activities of its revolving funds. 

Single-employer pension plan: A defined-benefit 

pension plan that is sponsored by a single firm.

Sponsor: An employer that establishes a pension plan 

and makes regular payments to it.

Standard termination: A termination in which a singleemployer plan is voluntarily terminated by the plan’s 

sponsor and its assets are adequate to cover its liabilities. 

The Pension Benefit Guaranty Corporation oversees standard terminations but does not become responsible for 

paying benefits. Participants can choose to take lumpsum payments or have their benefits paid through a private insurance company.

Trustee: The Pension Benefit Guaranty Corporation’s status when it assumes legal and financial responsibility for the assets and liabilities of a covered pension 

plan.

Variable-rate premium: A premium charged annually to single-employer pension plans covered by the Pension Benefit Guaranty Corporation (PBGC). The 

variable-rate premium, charged only to plans that are 

considered underfunded under the Employee Retirement 

Income Security Act, is currently $9 per $1,000 of underfunding. Under certain circumstances, plans that are considered underfunded are exempt from paying the 

variable-rate premium. This premium is set by statute 

and cannot be altered by PBGC.

Vesting: The provision of retirement benefits that cannot 

be forfeited, occurring when a participant reaches a plan’s 

particular service requirements and otherwise qualifies.