The U.S. debt is $20 trillion. 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.
Intragovernmental Holdings. This is the portion of the federal debt owed to 230 other federal agencies. It totals $5.6 trillion, almost 30 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. Here s the detailed breakdown as of December 31, 2016.
Debt Held by the Public. The public holds the rest of the national debt ($14.7 trillion). Foreign governments and investors hold nearly half of it. One-fourth is held by other governmental entities. These include the Federal Reserve, as well as state and local governments. Fifteen percent is held by mutual funds, private pension funds and holders of savings bonds and Treasury notes. The remaining 10 percent is owned by businesses, like banks and insurance companies. It s also held by an assortment of trusts, companies, and investors.
Here s the breakdown of holders of the public debt as of December 2016:
This debt is not only in Treasury bills, notes and bonds but also 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, nearly 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.
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.
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 usually 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. F
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. For more, see FOMC Meeting Statement Summary.
In August 2017, China owned $1.2 trillion of U.S. debt. It s the largest foreign holder of U.S. Treasury securities. The second largest holder is Japan at $1.1 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. That s why, 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.
Ireland is third, holding $307 billion. Brazil is the fourth largest holder at $274 billion.
The Cayman Islands is fourth, at $260 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 Luxembourg ($213 billion) and Belgium ($97 billion).