Who Owns the US National Debt?

The Biggest Owner Is Not Foreign Entities, but U.S. Taxpayers

federal agencies who own the most treasuries: Medicare, Military Retirement Fund, Office of Personnel Management Retirement, and Social Security trusts

The Balance / Nusha Ashjaee

The U.S. debt reached a new high of $28.1 trillion as of March 31, 2021.

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 U.S. Treasury manages the U.S. debt through its Bureau of the Public Debt. The debt falls into two categories: intra-governmental holdings and debt held by the public. 

Intragovernmental Debt

The Treasury owes this part of the debt to other federal agencies. In February 2021, intragovernmental holdings totaled more than $6 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. Treasuries.

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 Treasuries? Social Security, by a long shot.

The U.S. Treasury publishes this in the Monthly Treasury Statement. Here's the breakdown from the February 2021 data:

  • Social Security trusts, including the Federal Old-Age and Survivors Insurance and Federal Disability Insurance Trust Funds: $2.90 trillion
  • Office of Personnel Management Retirement: $955.1 billion
  • Military Retirement Fund: $1.01 trillion. This has become a big issue in funding our nation's defense and is only expected to grow.
  • Medicare, which includes the Federal Supplementary Medical Insurance Trust Fund: $304.4 billion
  • Cash on hand to fund federal government operations: $723 billion

Public Debt

The public holds over $21 trillion, or almost 78%, 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, 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 from the March 2021 report (September 2020 data unless indicated otherwise):

  • Foreign: $7.07 trillion (in September 2020, Japan owned $1.28 trillion and China owned $1.06 trillion of U.S. debt, which is more than a third of foreign holdings)
  • Federal Reserve and government: $10.81 trillion (December 2020)
  • Mutual funds: $3.5 trillion
  • State and local governments, including their pension funds: $1.09 trillion
  • Private pension funds: $784 billion
  • Insurance companies: $253 billion
  • U.S. savings bonds: $147 billion (December 2020)
  • Other holders, including individuals, government-sponsored enterprises, brokers and dealers, banks, bank personal trusts and estates, corporate and non-corporate businesses, and other investors: $2.28 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 Treasuries

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. Treasuries. By 2011, it owned $1.6 trillion, maxing out at $2.5 trillion in 2014. This quantitative easing (QE) stimulated the economy by keeping interest rates low and infusing liquidity into the capital markets, giving businesses continued access to low-cost borrowing for operations and expansion.

Did the Fed monetize the debt? In a way, yes. The Fed purchased Treasuries 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.

The Fed ended quantitative easing in October 2014. As a result, interest rates on the benchmark 10-year Treasury note rose from a 200-year low of 1.43% in July 2012 to around 2.17% by the end of 2014.

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. Treasuries 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 20, its balance sheet had grown to $7 trillion.

Current Foreign Ownership of U.S. Debt

In January 2021, Japan owned $1.28 trillion in U.S. Treasuries, making it the largest foreign holder. The second-largest holder is China, which owns $1.10 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 $439 billion. Its holdings have increased in rank as Brexit continues to weaken its economy. Ireland is next, holding $314 billion. It's followed by Luxembourg with $281 billion and Brazil with $260 billion.

Luxembourg 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