Who Owns the US National Debt?
The Biggest Owner Is Not Foreign Entities, but U.S. Taxpayers
The U.S. debt was $26 trillion as of July 25, 2020. Most headlines focus on how much the United States owes China, one of the largest foreign owners. What many people don’t know is that the Social Security Trust Fund, also known as your retirement money, owns most of the national debt. How does that work and what does it mean?
The Debt Is in Two Categories
The Treasury owes this part of the debt to other federal agencies. In July 2020, intragovernmental holdings totaled $5.9 trillion. Why would the government owe money to itself? Some agencies, like the Social Security Trust Fund, take in more revenue from taxes than they need. Rather than stick this cash under a giant mattress, these agencies invest in U.S. Treasurys.
This transfers the agencies' excess revenue to the general fund, where it is spent. They redeem their Treasury notes for funds as needed. The federal government then either raises taxes or issues more debt to raise the cash.
Which agencies own the most Treasurys? Social Security, by a long shot.
The U.S. Treasury publishes this in the Monthly Treasury Statement. The most recent data is from June 2020. Here's the breakdown:
- The Social Security Trust Fund and Federal Disability Insurance Trust Fund: $2.93 trillion
- Office of Personnel Management Retirement: $929 billion
- Military Retirement Fund: $913 billion. This has become a big issue in funding our nation's defense and is only expected to grow.
- Medicare, which includes the Federal Hospital Insurance Trust Fund and the Federal Supplementary Medical Insurance Trust Fund: $226 billion
- All other retirement funds: $253 billion
- Cash on hand to fund federal government operations: $671 billion
The public holds $20 trillion, or 77%, of the national debt. Foreign governments hold about a third of the public debt, while the rest is owned by U.S. banks and investors, the Federal Reserve, state and local governments, mutual funds, and pensions funds, insurance companies, and savings bonds.
The Treasury breaks down who holds how much of the public debt in the monthly Treasury Bulletin. Here are highlights for December 2019 (the latest figures as of July 2020):
- Foreign: $6.78 trillion (in May 2020, Japan owned $1.26 trillion and China owned $1.08 trillion of U.S. debt, which is more than a third of foreign holdings)
- Federal Reserve: $2.3 trillion
- Mutual funds: $2.3 trillion
- State and local governments, including their pension funds: $1 trillion
- Private pension funds: $740 billion
- Insurance companies: $207 billion
- U.S. savings bonds: $151 billion
- Other holders such as individuals, government-sponsored enterprises, brokers and dealers, banks, bank personal trusts and estates, corporate and non-corporate businesses, and other investors: $2.7 trillion
This debt is not only in Treasury bills, notes, and bonds but also in Treasury Inflation Protected Securities and special state and local government series securities.
If you add the debt held by Social Security and all the retirement and pension funds, almost half of the U.S. Treasury debt is held in trust for your retirement. If the United States defaults on its debt, foreign investors would be angry, but current and future retirees would be hurt the most.
Why the Federal Reserve Owns Treasurys
As the nation's central bank, the Federal Reserve is in charge of the country's credit. It doesn't have a financial reason to own Treasury notes. So why did it triple its holdings between 2007 and 2014?
The Fed needed to fight the 2008 financial crisis. In 2008, it ramped up open market operations by purchasing bank-owned mortgage-backed securities. In 2009, the Fed began adding U.S. Treasurys. By 2011, it owned $1.6 trillion, maxing out at $2.5 trillion in 2014. This quantitative easing stimulated the economy by keeping interest rates low. It helped the United States escape the grips of the recession.
Did the Fed monetize the debt? In a way, yes. The Fed purchased Treasurys from its member banks, using credit that it created out of thin air. It had the same effect as printing money. By keeping interest rates low, the Fed helped the government avoid the high-interest-rate penalty it would incur for excessive debt.
In 2017, the Federal Open Market Committee (FOMC) said the Fed would begin reducing its Treasury holdings. That put upward pressure on long-term interest rates. The FOMC meeting statement summary is a report of FOMC’s discussion regarding the nation’s economic outlook. It also includes the resulting vote on the interest rates and the monetary policies the Fed plans to follow.
On March 15, 2020, the Federal Reserve announced it would purchase $500 billion in U.S. Treasurys and $200 billion in mortgage-backed securities over the next several months. On March 23, 2020, the FOMC expanded QE purchases to an unlimited amount. By May 18, its balance sheet had grown to $7 trillion.
Current Foreign Ownership of U.S. Debt
In May 2020, Japan owned $1.26 trillion in U.S. Treasurys, making it the largest foreign holder. The second-largest holder is China, which owns $1.08 trillion of U.S. debt. Both Japan and China want to keep the value of the dollar higher than the value of their currencies. That helps keep their exports to the United States affordable, which helps their economies grow.
Despite China's occasional threats to sell its holdings, both countries are happy to be America's biggest foreign bankers. China replaced the United Kingdom as the second-largest foreign holder in 2006 when it increased its holdings to $699 billion.
The United Kingdom is the third-largest holder with $394 billion. Its holdings have increased in rank as Brexit continues to weaken its economy. Ireland is next, holding $334 billion. It's followed by Brazil with $264 billion.
Luxembourg is fifth at $263 billion. The country has earned a reputation for being a front for sovereign wealth funds and hedge funds whose owners don't want to reveal their positions.
The Bottom Line
Many people believe that much of U.S. debt is owed to foreign countries like China and Japan. The truth is, most of it is owed to Social Security and pension funds. This means U.S. citizens, through their retirement money, own most of the national debt.
U.S. national debt is the sum of these two federal debt categories:
- Public debt (held by other countries, the Federal Reserve, mutual funds, and other entities and individuals)
- Intragovernmental holdings (held by Social Security, Military Retirement Fund, Medicare, and other retirement funds)
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U.S. Department of Treasury. “Bureau of the Public Debt.” Accessed April 10, 2020.
U.S. Department of the Treasury. “Monthly Treasury Statement," Table 6. Schedule D-Investments of Federal Government Accounts in Federal Securities, Pages 30-31. Accessed July 25, 2020.
U.S. Department of the Treasury. "Major Foreign Holders of Treasury Securities." Accessed July 25, 2020.
U.S. Treasury. "Treasury Bulletin: Current," Download Ownership of Federal Securities. Accessed July 25, 2020.
Federal Reserve Bank of St. Louis. "Assets: Securities Held Outright: U.S. Treasury Securities." Accessed April 10, 2020.
Board of Governors of the Federal Reserve System. "Press Release." Accessed April 10, 2020.
Board of Governors of the Federal Reserve System. "FOMC Statement." Accessed April 10, 2020.
U.S. Department of the Treasury. "Daily Treasury Yield Curve Rates." Accessed April 10, 2020.
Board of Governors of the Federal Reserve System. "Federal Reserve Issues FOMC Statement: March 15, 2020." Accessed June 1, 2020.
Federal Reserve Board of Governors. "Federal Reserve Issues FOMC Statement: March 23, 2020." Accessed June 1, 2020.
Board of Governors of the Federal Reserve System. "Credit and Liquidity Programs and the Balance Sheet: Recent Balance Sheet Trends." Accessed June 1, 2020.
Congressional Research Service. "China’s Holdings of U.S. Securities: Implications for the U.S. Economy," Page 2. Accessed April 10, 2020.
The Guardian. "Luxembourg Tax Files: How Tiny State Rubber-Stamped Tax Avoidance on an Industrial Scale." Accessed June 1, 2020.