The U.S. debt was $20.5 trillion as of December 31, 2017. 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, aka your retirement money, owns most of the national debt. How does that work and what does it mean?
The U.S. Treasury manages the U.S. debt through its Bureau of the Public Debt. The debt falls into two broad categories: intragovernmental holdings and debt held by the public.
This is the portion of the federal debt owed to 230 other federal agencies. Intragovernmental holdings total $5.7 trillion, 28 percent of the debt. 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 buy U.S. Treasurys with it.
By owning Treasurys, they transfer their excess cash to the general fund, where it is spent. Of course, one day they will redeem their Treasury notes for cash. The federal government will either need to raise taxes or issue more debt to give the agencies the money they will need.
Which agencies own the most Treasurys? Social Security, by a long shot. The U.S. Treasury published a report as of December 31, 2017. The data is in the Monthly Treasury Statement, Table 6. Schedule D-Investments of Federal Government Accounts in Federal Securities. It’s updated quarterly.
As of December 31, 2017, the intragovernmental debt was $5.7 trillion. Here is the breakdown:
- The Social Security Trust Fund and Federal Disability Insurance Trust Fund – $2.820 trillion.
- Office of Personnel Management Retirement – $884 billion.
- Military Retirement Fund – $742 billion.
- Medicare, which includes the Federal Hospital Insurance Trust Fund and the Federal Supplementary Medical Insurance Trust Fund – $202 billion.
- All other retirement funds – $415 billion.
- Cash on hand to fund federal government operations – $606 billion.
The public holds the rest of the national debt of $14.8 trillion. Foreign governments and investors hold almost half of it. Close to one-fourth is held by other governmental entities. These include the Federal Reserve, as well as state and local governments. Sixteen percent is held by mutual funds, private pension funds, and holders of savings bonds and Treasury notes. The remaining seven percent is owned by businesses, like banks and insurance companies. It’s also held by an assortment of trusts, companies, and investors.
The U.S. Treasury published the breakdown of holders of the public debt as of December 31, 2017. At that time, the public debt was $14.8 trillion. Here is the breakdown:
- Foreign – $6.285 trillion. At that time, China owned $1.184 trillion and Japan owned $1.061 trillion. That’s more than one-third of foreign holdings.
- Federal Reserve – $2.463 trillion.
- Mutual funds – $1.788 trillion.
- State and local government, including their pension funds – $934 billion.
- Private pension funds – $385 billion.
- Banks – $633 billion.
- Insurance companies – $344 billion.
- U.S. savings bonds – $160 billion.
- Other holders such as individuals, government-sponsored enterprises, brokers and dealers, bank personal trusts and estates, corporate and non-corporate businesses, and other investors – $1.831 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.
As you can see, if you add up 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 double its holdings between 2007 and 2014?
That’s when it ramped up its open market operations by purchasing $2 trillion in Treasurys. 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? Yes, that’s one of the effects. The Fed purchased Treasurys from its member banks, using credit 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 1.442 percent in June 2012 to around 2.17 percent by the end of 2014.
On September 29, 2017, the Federal Open Market Committee said the Fed would begin reducing its Treasury holdings in October. Expect long term interest rates to rise as a result. 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.
Current Foreign Ownership of U.S. Debt
In August 2018, China owned $1.17 trillion of U.S. debt. It’s the largest foreign holder of U.S. Treasury securities. The second largest holder is Japan at $1.03 trillion. Both Japan and China want to keep the value of the dollar higher than the value of their currencies. That helps keep their exports affordable for the United States, 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 on May 31, 2007.
That’s when it increased its holdings to $699 billion, outpacing the United Kingdom’s $640 billion.
Brazil and Ireland are third and fourth respectively, each holding around $315 billion. The United Kingdom owns $273 billion while Switzerland owns $232 billion.
Luxembourg is seventh at $224 billion. The Bureau of International Settlements believes it is a front for sovereign wealth funds and hedge funds whose owners don’t want to reveal their positions. So are the Cayman Islands, holding $198 billion, and Belgium at $154 billion.
After Luxembourg, the next largest holders are Hong Kong, Saudi Arabia, Taiwan, and India. They each hold between $141 billion and $194 billion.