2 Categories of the National Debt

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

Intragovernmental Debt

The Treasury owes this part of the debt to other federal agencies. In October 2021, intragovernmental holdings totaled more than $6 trillion.1 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. Treasurys.

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 Treasury notes, bills, and bonds? Social Security, by a long shot.

The U.S. Treasury publishes this in its Monthly Treasury Statement. In its August 2021 statement, Social Security trusts, including the Federal Old-Age and Survivors Insurance and Federal Disability Insurance Trust Funds, held $2.86 trillion in Treasurys. The next largest agency was the Military Retirement Fund at $1.03 trillion. The other large holders of debt include the Office of Personnel Management Retirement, Medicare, which includes the Federal Supplementary Medical Insurance Trust Fund, and then cash on hand to fund federal government operations.2

The public holds over $22 trillion of the national debt.1 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 savings bonds.

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. If the U. S. ever defaulted on its debt 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 does it?

Between 2007 and 2014, the Federal Reserve actually tripled its holdings. The Fed needed to fight the 2008 financial crisis, so in 2008, it ramped up open market operations by purchasing bank-owned mortgage-backed securities. In 2009, the Fed began adding U.S. Treasurys. By 2011, it owned $1.6 trillion, maxing out at $2.5 trillion in 2014.4 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.

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.

In 2017, the Federal Open Market Committee (FOMC) said the Fed would begin reducing its Treasury holdings. But just a few years later, it purchased Treasurys again.

On March 15, 2020, the Federal Reserve announced it would purchase $500 billion in U.S. Treasurys and $200 billion in mortgage-backed securities over the next several months.6 On March 23, 2020, the FOMC expanded QE purchases to an unlimited amount.7 By May 20, its balance sheet had grown to $7 trillion.8

Current Foreign Ownership of U.S. Debt

In July 2021, Japan owned $1.3 trillion in U.S. Treasurys, making it the largest foreign holder of the national debt. The second-largest holder is China, which owns $1.1 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 U.S. affordable, which helps their economies grow.

Despite China’s occasional threats to sell its holdings, both countries are happy to be the biggest foreign holders of U.S. debt. China replaced the UK as the second-largest foreign holder in 2006 when it increased its holdings to $699 billion.9

The UK is the third-largest holder with $539.5 billion. Its holdings have increased in rank as Brexit continues to weaken its economy. Ireland is next, holding $320 billion. Switzerland, Luxembourg, Cayman Islands, Brazil, Taiwan, and France round out the top 10.10

The Bottom Line

The U.S. national debt is the sum of public debt which 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.

So while many people believe that much of the U.S. national debt is owed to foreign countries like China and Japan, the truth is, most of it is owed to Social Security and pension funds right here in the U.S. This means U.S. citizens own most of the national debt.

The Balance