Key Takeaways
- There are two kinds of national debt: intragovernmental and public. Intragovernmental is debt held by the Federal Reserve and Social Security and other government agencies. Public debt is held by the public: individual investors, institutions, foreign governments.
- After intragovernmental holdings, the next largest category is national debt held by foreign governments. Of those, Japan has the most, followed by China.
- The Federal Reserve also invests in U.S. national debt as it added liquidity to the economy during and after the Great Recession, and more recently during the pandemic.
The Social Security Trust Fund owns a significant portion of U.S. national debt, but how does that work and what does it mean? Learn more about actually owns the U.S. national debt and how that impacts you.
Two Types of National Debt
TheU.S. national debt reached the debt ceiling of $31.41 trillion in January 2023. The U.S. Treasury manages the U.S. national debt through its Bureau of Public Debt. The bureau classifies that amount into two broad types: intragovernmental holdings and debt held by the public.
Intragovernmental Debt
The Treasury owes this part of the debt to other federal agencies. Intragovernmental holdings totaled more than $6.89 trillion in January 2023. Why would the government owe money to itself? Because some agencies, like the Social Security Trust Fund, take in more revenue from taxes than they need. These agencies then invest in U.S. Treasurys rather than stick this cash under a giant mattress,
This transfers the agencies' excess revenue to the general fund, where it's spent. They redeem their Treasury notes for funds as needed. The federal government then either raises taxes or issues more debt to raise the required cash.
Which agencies own the most Treasury notes, bills, and bonds? Social Security, by a long shot. The U.S. Treasury publishes this information in its monthly Treasury statement.
Social Security trusts, including the Federal Old-Age and Survivors Insurance and Federal Disability Insurance Trust Funds, held $2.71 trillion in Treasurys as of December 2022. The next largest agency was the Military Retirement Fund at $1.36 trillion. Other large holders of debt include the Office of Personnel Management Retirement, Medicare (which includes the Federal Supplementary Medical Insurance Trust Fund), then cash on hand to fund federal government operations.
Public Debt
The public holds over $24.53 trillion of the national debt, as of January 2023. Foreign governments hold a large portion 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 holders of savings bonds.
The Treasury breaks down who holds how much of the public debt in a quarterly Treasury bulletin. Foreign and international investors held over $7.4 trillion, according to its December 2022 bulletin, which included data through June 2022. State and local governments held $1.55 trillion and mutual funds had $2.84 trillion.
Other holders of the public debt include insurance companies, U.S. savings bonds, private pension funds, and other holders, including individuals, government-sponsored enterprises, brokers and dealers, banks, bank personal trusts and estates, corporate and non-corporate businesses, and other investors.
Note
The national debt held by the public is not only in Treasury bills, notes, and bonds. It's also in Treasury Inflation-Protected Securities and special state and local government series securities.
If you were to 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 retirement. Current and future retirees would be hurt the most if the U.S. ever defaulted on its debt.
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 does it?
The Federal Reserve actually tripled its holdings between 2007 and 2014. The Fed had to fight the 2008 financial crisis, so it ramped up open market operations by purchasing bank-owned mortgage-backed securities. The Fed began adding U.S. Treasurys in 2009. It owned $1.6 trillion, by 2011, maxing out at $2.5 trillion in 2014.
Thisquantitative easing(QE) stimulated the economy by keeping interest rates low and infusing liquidity into the capital markets. It gave businesses continued access to low-cost borrowing for operations and expansion.
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.
Note
The Fed ended quantitative easing in October 2014. 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 as a result.
The Federal Open Market Committee (FOMC) said the Fed would begin reducing its Treasury holdings in 2017. But it purchased Treasurys again just a few years later.
On March 15, 2020, the Federal Reserve announced that it would purchase $500 billion in U.S. Treasurys and $200 billion in mortgage-backed securities over the next several months in an effort to stimulate the economy and support financial markets during the pandemic. The FOMC expanded QE purchases to an unlimited amount on March 23, 2020. Its balance sheet peaked at $8.96 trillion in April 2022.
InMarch 2022, the Fed announced it would start reversing these purchases to remove money from the economy and combat inflation. The balance sheet had shrunk to $8.85 trillion by August 2022.
Current Foreign Ownership of U.S. Debt
Japan owned $1.08 trillion in U.S. Treasurys in November 2022, making it the largest foreign holder of the national debt. The second-largest holder is China, which owned $870 billion of U.S. debt. Both Japan and China want to keep the value of the dollar higher than the value of their own currencies. This helps to keep their exports to the U.S. affordable, which helps their economies grow.
China replaced the U.K. as the second-largest foreign holder in 2006 when it increased its holdings to $699 billion.
The U.K. is the third-largest holder with $645.8 billion. Its holdings have increased in rank as Brexit continues to weaken its economy. Luxembourg is next, holding $332.9 billion.
The Bottom Line
The U.S. national debt is the sum of public debt that is held by other countries, the Federal Reserve, mutual funds, and other entities and individuals, as well as intragovernmental holdings held by Social Security, Military Retirement Fund, Medicare, and other retirement funds.
Many people believe that much of the U.S. national debt is owed to foreign countries like China and Japan, but the truth is that most of it is owed to Social Security and pension funds right here in the U.S. This means that U.S. citizens own most of the national debt.
Frequently Asked Questions (FAQs)
Is the national debt a problem?
Economists and lawmakers frequently debate how much national debt is appropriate. Most agree that some level of debt is necessary to stimulate economic growth and that there is a point at which the debt can become a problem, but they disagree about where that point is. If the debt does get too big, it can result in cuts to government programs, tax hikes, and economic turmoil.
How are the deficit and the national debt related?
The deficit and the national debt are directly related. When the U.S. government spends more than it receives in tax revenues, it has a budget deficit, which must be met by borrowing more money, which further adds to the debt.
Which U.S. president paid off the national debt?
In 1835, Andrew Jackson paid off all of the national interest-bearing debt. He is the only president to have ever done so.
