The Employee Retirement Income Security Act of 1974 (ERISA) was enacted to better protect participants in private pension plans. Among other things, it established an insurance program, administered by PBGC, to protect the benefits of participants in most private defined benefit pension plans. PBGC was created as a government corporation under title IV of ERISA to encourage the continuation and maintenance of private pension plans, insure the pensions of participants in defined benefit plans, and maintain pension insurance premiums at the lowest level necessary to carry out PBGC’s obligations. PBGC is financed through premiums paid annually by employers that sponsor plans, investment returns on PBGC assets, assets acquired from terminated plans, and recoveries from employers responsible for underfunded terminated plans. Employers that sponsor plans control how much they contribute to their pension plans (subject to ERISA’s funding standards). These sponsors estimate plan liabilities on the basis of the characteristics of plan participants and assumptions about the anticipated experience of the plan, such as the expected retirement age and anticipated investment return. Each plan is required to file with the Internal Revenue Service (IRS) an annual report (form 5500) that lists, among other items, the value of the assets in the plan’s portfolio and an estimate of the plan’s accrued liabilities (the present value of future pension benefits that have been earned to date). Subtracting the estimated liabilities from assets indicates whether the plan is fully funded or has unfunded liabilities under ERISA’s funding standards. PBGC may terminate a plan with unfunded liabilities if the plan has not met ERISA’s minimum funding standards; if it will be unable to pay benefits when they are due; if it has made a lump sum distribution of $10,000 or more to a participant who is a substantial owner of the sponsoring firm, leaving the plan with unfunded nonforfeitable benefits; or if the possible long-run loss to PBGC is expected to increase unreasonably if the plan is not terminated. PBGC must terminate a plan when it determines a plan is unable to pay current benefits. Generally, a company in financial distress may voluntarily terminate an underfunded plan only if the employer is being liquidated or if the termination is necessary for the company’s survival. When a plan is terminated with insufficient assets to pay guaranteed benefits, PBGC takes over the plan: it assumes the plan’s assets and becomes responsible for paying a guaranteed benefit to participants. To do this, PBGC evaluates the plan’s assets and estimates the liabilities it will be responsible for paying. The unfunded liability calculated by PBGC may exceed the unfunded liability reported by the plan because PBGC uses different actuarial assumptions to value plan liabilities. The plan’s unfunded liability for guaranteed benefits then represents a claim against PBGC’s insurance program. The single-employer premium has two parts: an annual flat-rate premium of $19 per participant and an additional annual variable rate charge of $9 for each $1,000 of unfunded vested benefits. Before 1994, the variable rate premium was capped at $53 per participant. The RPA of 1994 phased out the cap, increasing premiums for many underfunded single-employer plans, and instituted changes to both improve plan funding and to require that more information be provided to plan participants. For single-employer plans terminating in 1998, the maximum guaranteed benefit for participants aged 65 is about $34,570 per year. The Multiemployer Pension Plan Amendments Act of 1980 reformed the multiemployer insurance program. Among the reforms under the 1980 act is the requirement that a firm that withdraws from a plan may be liable for a proportional share of the plan’s unfunded vested benefits—a withdrawal liability. Further, in the event of the bankruptcy of a participating firm, the remaining firms are required to assume the additional funding responsibility. According to PBGC officials, because the remaining employers have this funding responsibility, PBGC rarely takes over a multiemployer plan. Instead, if a multiemployer plan is unable to pay benefits, PBGC’s multiemployer insurance program provides financial assistance in the form of a loan to the plan to pay participants their guaranteed benefits. PBGC does not necessarily expect such a plan to be able to repay the loan. PBGC guarantees a portion of multiemployer plan pensions—up to $16.25 per month times the years of credited service up to a maximum of about $5,850 per year. The multiemployer premium is a flat $2.60 per participant per year. The multiemployer program’s maximum benefit guarantee has remained unchanged since 1980. An increase in the premium rates for either program would require congressional approval. PBGC receives no funds from federal tax revenues, but it is authorized under ERISA to borrow up to $100 million from the federal treasury. ERISA requires that PBGC annually provide an actuarial evaluation of its expected operations and financial status over the next 5 years. In its evaluation, PBGC actually presents three 10-year forecasts for its single-employer program to provide a longer-term view of the financial condition of the program under different scenarios. In addition, ERISA requires PBGC to develop, every 5 years, projections of the potential liabilities the multiemployer insurance program could incur to inform policymakers whether changes in the program’s benefit guarantee or premium might be necessary. PBGC’s financial condition has improved greatly over the past few years, and both of its insurance programs currently have a surplus. However, despite this improvement and increased funding levels among the plans PBGC insures, continued underfunding in some large plans remains a concern. Although the number of single-employer plans has declined, the number of participants has increased slightly. The number of multiemployer participants and plans has remained relatively stable despite a decline in the number of active workers in these plans. The single-employer program’s financial condition has improved significantly since 1993, and PBGC reported that the program achieved its first surplus in 1996. As shown in figure 1, the single-employer program moved from a deficit of $2.9 billion in 1993 to a surplus of $3.5 billion in 1997. Unprecedented returns on investments are a key factor contributing to PBGC’s improved financial condition. As of September 30, 1997, PBGC’s combined insurance programs had about $15.6 billion in assets available for investment—$9 billion from premiums and $6.6 billion in assets from terminated plans. Investment income, primarily from stocks and fixed-income investments, increased from $927 million in 1996 to almost $2.8 billion in 1997. PBGC’s annual rate of return on investments was 21.9 percent for fiscal year 1997 and averaged 14.4 percent over the past 5 years. The financial condition of the single-employer program has also been helped by continued economic growth and the lack of large claims over the past few years. Historically, PBGC’s financial condition has been affected by the financial failure of only a small number of relatively large firms. Claims from terminated underfunded plans and the growth in PBGC’s net liabilities have been concentrated over short periods of time and in specific industries. The largest claims came from 10 firms that terminated 46 plans in the mid-1980s and early 1990s. Claims from these 10 firms accounted for more than half the dollar amount of all PBGC claims from 1975 to 1997. The number of single-employer plans insured by PBGC has declined significantly since the mid-1980s; however, the number of participants has increased slightly. The number of plans fell by more than 50 percent, from about 112,000 in 1986 to about 43,000 in 1997. The decline in single-employer plans resulted mostly from terminations of small plans—those with fewer than 100 participants—and mergers of larger plans. Offsetting the decline in the number of small plans has been growth in the number of plans with 10,000 or more participants. As a result, the number of participants in single-employer plans increased slightly, from about 30 million in 1986 to about 33 million in 1997, despite the decline in the number of plans. The funding level of many single-employer plans has increased but underfunding, especially among a few large plans, continues. Using PBGC termination assumptions, about 45 percent of all plans were overfunded while 55 percent were underfunded as of the end of 1995. However, 70 percent of covered participants and 80 percent of vested liabilities were in plans that were at least 90-percent funded, according to PBGC assumptions. For underfunded plans, the average funding ratio (percentage of assets accumulated to pay vested benefits) increased from 74 percent in 1986 to 87 percent in 1996. Plans with funding ratios under 50 percent have accounted for 76 percent of PBGC’s claims since 1975, while plans with funding ratios of 75 percent or better have accounted for only 3 percent of PBGC claims. The amount of underfunding increased from about $15 billion in 1986 to about $64 billion in 1996, largely because of the decline in discount rates (over 3 percent) used by PBGC. Some plans that had previously been fully funded became slightly underfunded as a result of the decline in interest rates. The strong financial condition of these plans, however, improved the average funding ratio for all underfunded plans. The amount of overfunding in plans declined from $228 billion in 1986 to about $103 billion in 1996. Similarly, the average funding ratio of overfunded plans declined during this period from 165 percent to 117 percent, primarily because of the fall in interest rates and increases in plan liabilities. The enactment of more restrictive full funding limits in 1987 resulted in lower employer contributions to fully funded plans and contributed to the decline in funding ratios. Underfunding remains a concern because the underfunding of a few large plans or underfunding in several plans in certain industries poses a long-term risk to PBGC solvency.