Question: Who Owns the U.S. National Debt?
Answer: The U.S. debt is more than $17 trillion. Most news headlines focus on how much the U.S. owes China. And, in fact, China is the largest foreign owner of U.S. debt. However, the biggest single owner of national debt is the Social Security Trust Fund, aka your retirement money. 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 Bureau has broken out the debt into two main categories: Intragovernmental Holdings, at $4.995 trillion, and Debt Held by the Public, at $12.122 trillion (as of October 24, 2013)
Intragovernmental Holdings - Just under one-third of the Federal debt is owed to about 230 other Federal agencies. How does this happen? Some agencies, like the Social Security Trust Fund, take in more revenue from taxes than they need right now. Rather than stick this cash under a giant mattress, these agencies buy U.S. Treasuries with it.
This effectively transfers their excess cash to the general fund, where it can be 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 cash they will need.
Which agencies own the most Treasuries? Social Security, by a long shot. Here's the detailed breakdown (as of August 30, 2013):
- Social Security (Social Security Trust Fund and Federal Disability Insurance Trust Fund) - $2.764 trillion
- Office of Personnel Management (Federal Employees Retirement, Life Insurance, Hospital Insurance Trust Funds, Postal Service Retiree Contributions) - $826.8 billion
- Military Retirement Fund - $419.5 billion.
- Uniformed Services Retiree Health Care Fund - $189 billion.
- Dept. of Health and Human Services (Federal Hospital Insurance Trust Fund, Federal Supplementary Medical Insurance Trust Fund) - $260 billion
- Department of Energy - $54.8 billion.
- Federal Deposit Insurance Corporation - $33 billion
- Department of Labor (Unemployment Trust Fund) - $30 billion
- Department of the Treasury (Exchange Stabilization Fund) - $26 billion
- Other Programs and Funds - $260 billion. (Source: Treasury Bulletin, Monthly Treasury Statement, Table 6. Schedule D-Investments of Federal Government Accounts in Federal Securities, August 30, 2013)
- Foreign - $5.724 trillion
- Federal Reserve - $1.794 trillion
- State and Local Government, including their pension funds - $703.5 billion
- Mutual Funds - $946.4 billion
- Private Pension Funds - $457.7 billion
- Banks - $341.4 billion
- Insurance Companies - $263.3 billion
- U.S. Savings Bonds - $181.7 billion
- Other (individuals, government-sponsored enterprises, brokers and dealers, bank personal trusts and estates, corporate and non-corporate businesses, and other investors) - $1.497 trillion. (Sources: Federal Reserve, Factors Affecting Reserve Balance, March 28, 2013; Treasury Bulletin, Ownership of Federal Securities, Table OFS-2, as of March 2013)
As you can see, if you add up 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 people's retirements. If the U.S. default on its debt, foreign investors would be angry, but the greatest harm would befall the average U.S. citizen.
Why Does the Federal Reserve Own Treasury Debt?
As the nation's central bank, the Federal Reserve is in charge of the country's credit, so it really doesn't have a financial reason to own Treasury notes. So why did it double its holdings between 2007 and 2013? That's when it began its program of Quantitative Easing. It stimulated the economy to escape the grips of the 2009 recession by purchasing more Treasury notes. This stoked demand for Treasuries and kept interest rates low.
The Fed's been criticized for simply monetizing the debt. The Fed purchases Treasuries from its member banks, using credit it created out of thin air. This has the same effect as printing money. It keeps interest rates low, avoiding the high-interest rate penalty the Federal government would usually incur for excessive debt.
However, as the economy returns to normal, the Fed announced it will taper its $85 billion-a-month purchases of Treasuries sometime in the fall of 2013. As a result, interest rates on the benchmark 10-year Treasury note rose from a 200-year low of 1.442% in June 2012, to around 2.9% in the summer of 2013. For more, see Relationship Between Treasury Yields and Mortgage Rates.
What About Foreign Ownership of the Debt?
The breakout of foreign-held debt shows that China was the largest holder, at $1.276 trillion (as of August 2013). It replaced the United Kingdom as the second largest foreign holder on May 31, 2007. It held $699 billion, compared to the U.K., which held $640 billion. At that time, Japan was the largest holder, at $1.106 trillion.
Today, the UK doesn't even rank in the top five. That means second-place belongs to Japan, now holding $1.108 trillion. The Caribbean Banking Centers have also increased their holdings in recent years, and are now third, holding $291 billion. The Bureau of International Settlements has stated that the Caribbean centers, Luxembourg (at $151 billion) and Belgium ($176 billion) are probably fronts for oil-exporting countries and hedge funds that don't want to reveal their positions.
The oil exporting countries have increased their holdings, and edging up to become #4 at $256 billion. Brazil is the fifth largest holder, at $254 billion. The next largest holders are Taiwan, Switzerland, Russia, Hong Kong and the United Kingdom, holding between $124-$186 billion each. (Source: Foreign Holding of U.S. Treasury Securities, August 15, 2013; U.S. Treasury report Petrodollars and Global Imbalances, February 2006)
China has increased its holdings, from $1.147 trillion, in the last year. It's obviously not too concerned that the U.S. will default on its debt. China wants to keep the value of the dollar high. This makes its own currency, the yuan, relatively cheaper by comparison. That helps China's exports to the U.S. seem more affordable, which helps its economy grow. That's why, despite China's occasional threats to sell its holdings, it's happy to be America's biggest banker, and largest foreign owner of U.S. debt. Article updated October 28, 2013. Data used is most recent available as of that time. Note that the data is from different reports, so may not tie out or total $17 trillion.