by Kimberley Amadeo

The U.S. debt is more than $18 trillion. Most headlines focus on how much the U.S. owes China, which is one of the largest foreign owners. However, the biggest owner is actually 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. It’s broken out the debt into two main categories: Intragovernmental Holdings, at $5.117 trillion, and Debt Held by the Public, at $13.024 trillion (as of December 31, 2014).

Intragovernmental Holdings – Nearly 30% of the Federal debt is owed to about 230 other Federal agencies. 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 right now. Rather than stick this cash under a giant mattress, they 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 September 30, 2014):

  • Social Security (Social Security Trust Fund and Federal Disability Insurance Trust Fund) – $2.783 trillion
  • Office of Personnel Management Retirement – $924 billion
  • Military Retirement Fund – $483 billion
  • Medicare (Federal Hospital Insurance Trust Fund, Federal Supplementary Medical Insurance Trust Fund) – $270 billion

Debt Held by the Public – Foreign governments and investors hold about half of the nation’s public debt. A little over one-fifth is held by other governmental entities, like the Federal Reserve and state and local governments. Fifteen percent is held by mutual funds, private pension funds, savings bonds or individual Treasury notes. The rest  is held by businesses, like banks, and insurance companies and a mish-mash of trusts, businesses and investors. Here’s the breakout:

  • Foreign – $6.013 trillion
  • Federal Reserve – $2.461 trillion
  • Mutual Funds – $1.033 trillion
  • State and Local Government, including their pension funds – $818 billion
  • Private Pension Funds – $506 billion
  • Banks – $407 billion
  • Insurance Companies – $269 billion
  • U.S. Savings Bonds – $177 billion
  • Other (individuals, government-sponsored enterprises, brokers and dealers, bank personal trusts and estates, corporate and non-corporate businesses, and other investors) – $1.115 billion.(Sources: Federal Reserve, Factors Affecting Reserve Balance, January 2, 2015. Treasury Bulletin, Ownership of Federal Securities, Table OFS-2, as of September 2014)

This debt is not only in Treasury bills, notes, and bonds but also TIPS and special State and Local Government Series securities.

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 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 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 2014?

That’s when it ramped up its open market operations, purchases of Treasuries. This Quantitative Easing stimulated the economy by keeping interest rates low, escaping the grips of the recession.

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 asprinting money. By keeping interest rates low, the Fed helps the government avoid the high-interest rate penalty it would usually incur for excessive debt.

The Fed ended QE in October 2014.  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 2.17% by the end of 2014. For more, see Relationship Between Treasury Yields and Mortgage Rates.

What About Foreign Ownership of the Debt?

China is the largest holder, holding $1.712 trillion in June 2015.  Japan is next, at $1.197 trillion. Both Japan and China want to keep the value of the dollar high when compared to their own currencies. That helps their exports to the United States seem more affordable, 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 UK’s $640 billion.

The Caribbean Banking Centers are third, at $318.5 billion, and Belgium is ninth, at $207.7 billion. The Bureau of International Settlements believes both are fronts for sovereign wealth funds and hedge funds that don’t want to reveal their positions.

The oil exporting countries are fourth, holding $296.7 billion. Brazil is the sixth at $256.3 billion. The next largest holders are Ireland, Switzerland, the UK, Luxembourg (another front), Hong Kong, Taiwan, and India.  They hold between $117-$217 billion each. (Source: Foreign Holding of U.S. Treasury Securities. U.S. Treasury report Petrodollars and Global Imbalances, February 2006). Article updated August 28, 2015. Data is from various reports, so the total may not add up to $18 trillion.

3 Reasons Why America Is in Debt

The U.S. debt is the sum of all outstanding debt owed by the Federal Government. It’s greater than $18 trillion, and is tracked by the national debt clock.

America’s debt is the largest in the world for a single country. It runs neck and neck with that of the European Union, which is an economic union of 28 countries. For more, see Sovereign Debt Rankings.

Nearly two-thirds is the public debt, which is owed to the people, businesses and foreign governments who bought Treasury bills, notes and bonds.

The rest is owed by the government to itself, and is held as Government Account securities. Most of this is owed to Social Security and other trust funds, which were running surpluses. These securities are a promise to repay these funds when Baby Boomers retire over the next 20 years. For more, see Who Owns U.S. Debt?  (Source: U.S. Treasury, Debt to the Penny; Debt FAQ)

The debt is nearly as much as the country produces in a whole year. That normally tells investors that the country might have problems repaying the loans. This is a new and worrying occurrence for the U.S. In 1988, the debt was only half of America’s economic output. For more, see Debt-to-GDP Ratio.

How Did the Debt Get So Large?

First, the debt is an accumulation of Federal budget deficits. Therefore, the best way to look at how the debt got so large is to compare the budget deficits by President. President Obama added the economic stimulus package, the Obama tax cuts and roughly $800 billion a year in military spending.

For more, see National Debt Under Obama.

The national debt grew rapidly even beforethe 2008 financial crisis. Between 2000-2007, it ballooned from $6-$9 trillion, a 50% increase. The $700 billion bailout expanded it to $10.5 trillion by December 2008. President Bush also added theEGTRRA and JGTRRA tax cuts and the War on Terror.

President Reagan cut taxes, increased defense spending and expanded Medicare. All of these Presidents also suffered from lower tax receipts resulting from recessions. For more, see U.S. Debt by President.

Second, the Federal government couldn’t keep running up deficits if interest rates skyrocketed, like they did with Greece. Why have interest rates remained low? Purchasers of Treasury bills still reasonably expect that the U.S. will pay them back. For foreign investors like China and Japan, the U.S. is such a large customer it’s allowed to run a huge tab so it will keep buying exports.

Countries like China and Japan maintain large holdings of Treasuries to keep their currencies low relative to the dollar. Even though China warns the U.S. to lower its debt, it keeps buying more Treasuries. During the recession, foreign countries increased their holdings of Treasury Bonds as a safe haven, which kept U.S. interest rates low. These holdings went from 13% in 1988 to 31% in 2011.

Many of the foreign holders of U.S. debt are investing more in their own economies. Over time, diminished demand for U.S. Treasuries could increase interest rates, thus slowing the economy. Furthermore, anticipation of this lower demand puts downward pressure on the dollar. That’s because dollars, and dollar-denominated Treasury Securities, may become less desirable, so their value declines. As the dollar declines, foreign holders get paid back in currency that is worth less, which further decreases demand. For more, see What Is the U.S. Debt to China?

Third, the U.S. has been able to borrow from the Social Security Trust Fund. It took in more revenue through payroll taxes leveraged on Baby Boomers than it needed. Ideally, this money should have been invested to be available when the Boomers retire. In reality, the Fund was “loaned” to the government to finance increased deficit spending. This interest-free loan helped keep Treasury Bond interest rates low, allowing more debt financing. However, it’s not really a loan, since it can only be repaid by increased taxes when the Boomers do retire.

The debt ceiling is supposed to limit the debt to $16.394 trillion. However, Congress usually raises the ceiling to prevent the negative consequences of a debt default.

How The Large Debt Affects the Economy

In the short run, the economy and voters benefit from deficit spending. In the long run, a growing Federal debt is like driving with the emergency brake on, further slowing the U.S. economy. At any point, debt holders could demand larger interest payments to compensate for what they perceive as an increasing risk they won’t be repaid. When this happens, the United States will have to pay exorbitant amounts just for the interest. To current interest payments, see Federal Spending.

Congress realizes it is facing a debt crisis. Over the next 20 years, the Social Security Trust Fund won’t have enough to cover the retirement benefits promised to Baby Boomers. That means higher taxes, since the high U.S. debt rules out further loans from other countries. Unfortunately, it’s most likely that these benefits will be curtailed, either to retirees younger than 70, or to those who are high income and therefore aren’t as dependent on Social Security payments to fund their retirement.

Unlike American Citizens, the U.S. Governments Doesn’t Pay It’s Debt

The U.S. budget deficit is when Federal spending is greater than the tax revenue received for that year. InFiscal Year 2014, the budget deficit was projected to be $649 billion. This is much lower than the all-time high of $1.4 trillion reached in FY 2009. For more, see Deficit by President.

The U.S. debt exceeded $18 trillion on December 15, 2014. This is three times the debt in 2000, which was $6 trillion.

For more, see Debt by Year.

How Does the Deficit Affect the Debt?

Each year, the deficit is added to the debt. The Treasury must sell Treasury bonds to raise the money to cover the deficit. This is known as the public debt, since these bonds are sold to the public.

In addition to the public debt, there is the money that the government loans to itself each year. This money is in the form of Government Account Securities, and it comes primarily from the Social Security Trust Fund. These loans are not counted as part of the deficit, since they are all within the government. However, as the Baby Boomers retire, they will begin to draw down more Social Security funds than are replaced with payroll taxes. These benefits will need to be paid out of the general fund. This means that either other programs must be cut, taxes must be raised or benefits must be lowered. Unfortunately, legislators have not yet agreed on an effective plan to meet Social Security obligations.

How Does the Debt Affect the Deficit?

The debt affects the deficit in three ways.

First, the debt actually gives a better indication of the true deficit each year. You can more accurately gauge the deficit by comparing each year’s debt to last year’s debt. That’s because the budget deficit, as reported in each year’s budget, does not include the amount owed to the Social Security Trust Fund. However, this is a debt that will need to be repaid one day, and so the amount borrowed from it is a more accurate description of each year’s government liabilities than the reported budget deficit. (Source: St. Louis Federal Reserve, Deficit, Debts and Trust Funds, August 2006)

Second, the interest on the debt is added to the deficit each year. About 5% of the budget is allocated to debt interest payments. Interest on the debt hit a record in FY 2011, reaching $454 billion. This beat its prior record of $451 billion in FY 2008 — despite lower interest rates. By the FY 2013 budget, the interest payment dropped to $248 billion, as interest rates fell to a 200-year low. However, as the economy improved, interest rates rose starting in May 2013. As a result, interest on the debt is projected to quadruple to $850 billion by FY 2021, making it the fourth largest budget item. (SeeBudget Spending)

Third, the debt can decrease tax revenue in the long run. This would further increasing the deficit. As the debt continues to grow, creditors can become concerned about how the U.S. government plans to repay it. Over time, these creditors will expect higher interest payments to provide a greater return for their increased perceived risk. Higher interest costs dampen economic growth.

How Does the Deficit and Debt Affect the Economy?

Initially, deficit spending and the resultant debt boosts economic growth. This is especially true in a recession. That’s because deficit spending pumps liquidity into the economy. Whether the money goes to jet fighters, bridges or education, it ramps up production and creates jobs.

However, not every dollar creates the same number of jobs. In fact, military spendingcreates 8,555 jobs for every billion dollars spent. This is less than half the jobs created by that same billion spent on construction. For more, see Unemployment Solutions.

In the long run, the resultant debt is very damaging to the economy, and not only because of higher interest rates. The U.S. government may be tempted to let the value of the dollar fall so that the debt repayment will be in cheaper dollars, and less expensive. As this happens, foreign governments and investors will be less willing to buy Treasury bonds, forcing interest rates even higher.

The greatest danger comes from the debt to Social Security. As this debt comes due when Baby Boomers retire, funds will need to found to pay them. Not only could taxes be raised, which would slow the economy, but the loan from the Social Security Trust Fund will stop. More and more of the government’s spending will need to be devoted to pay this mandatory cost. This would provide less stimulation, and could further slow the economy.

The Surprising Truth About the U.S. Debt Crisis

On December 15, 2014, the U.S. national debt exceeded $18 trillion, more than America’s annual economic output as measured by Gross Domestic Product (GDP). The last time the debt to GDP ratio was more than 100% was to pay for World War II. For details, see National Debt by Year.

A true debt crisis is when a country is in danger of not meeting its debt obligations. The first sign is when the country finds it cannot get a low interest rate from lenders.

Why? Investors become concerned that the country cannot afford to pay the bonds, and it will go into debt default.

As lenders start to worry, they require higher and higher yields to offset their risk. The higher the yields, the more it costs the country to refinance its sovereign debt. In time, it really cannot afford to keep rolling over debt, and it defaults. Investors’ fears become a self-fulfilling prophecy.

However, this didn’t happen to the U.S, as demand for U.S. Treasuries remained strong throughout 2011 and beyond. In fact, interest rates in 2011 reached 200-year lows, as investors required little return for their safe investment. That’s because U.S. debt is considered to be 100% guaranteed, backed by the power of the country with the largest economy in the world.

U.S. Debt Crisis Explained

The debt crisis was created by a political battle between Democrats and Republicans who were stalemated over ways to curb the debt. Democrats blamed the Bush tax cuts and the 2008 financial crisis, both of which lowered tax revenues.

They advocated increased stimulus spending or consumer tax cuts. The resultant boost in demand would spur the economy out of recession, increase GDP and tax revenues. In other words, the U.S. would do as it did after World War II, and grow its way out of the debt crisis. This is known as Keynesian economic theory.

Republicans advocated further tax cuts for businesses, who would then turn around and invest the cuts in expanding their companies, creating new jobs. That is known as Supply-side Economics.

However, both sides lost focus by concentrating on the debt instead of continued economic growth. Whether you lower taxes or increase spending is not worth arguing about until the economy is in the expansion phase of the business cycle. The most important thing is to take aggressive action to restore business and consumer confidence. This provides the gasoline to fuel the economic engine.

Both political parties compounded the crisis by arguing over how much to cut spending, and whether the cuts should come from “entitlement” programs, such as Social Security and Medicare, or defense. To recover from a recession, government spending should remain consistent. Any cuts will remove liquidity and raise unemployment through government layoffs.

The time to cut spending is when the economic growth is greater than 4%. Then, spending cuts and tax hikes are needed to slow growth and prevent the economy from entering the bubble phase of the business cycle.

What Happened During the Debt Crisis in 2011?

The debt crisis started in April 2011, when Congress almost caused a government shutdown by delaying approval of the FY 2011 budget. Republicans were concerned about a $1.3 trillion deficit, the third highest in history. To reduce the deficit, Democrats suggested a $1.7 billion cut in defense spending, to coincide with the wind-down of the Iraq War. Republicans wanted $61 billion non-defense cuts, including Obamacare. The two parties compromised on $81 billion in spending cuts, mostly from programs that couldn’t use the funds, anyway. For more, see Government Shutdown.

The debt crisis escalated a few days later when Standard & Poor’s lowered their outlook on whether the U.S. would pay back its debt to “negative.” This meant there was now a 30% chance the U.S. would lose its AAA S&P credit rating within two years. S&P was concerned that Democrats and Republicans would not be able to resolve their approaches to cutting the deficit. Each had plans to cut $4 trillion over 12 years — the Democrats by allowing the Bush tax cuts to expire at the end of 2012, while Republicans, as outlined in Ryan’s Road Map, by replacing Medicare with vouchers.

By July, Congress was stalling on raising the $14.294 trillion debt ceiling. Many thought this was the best way to force the Federal government to stop spending, and that’s true. The Federal government would then be forced to rely solely on incoming revenue to pay ongoing expenses. However, it would also wreak economic havoc. For example, millions of seniors would not receive Social Security checks. Ultimately, the Treasury Department might in fact default on its interest payments, causing an actual debt default. It’s a clumsy way to override the normal budget process.

In August, Congress did raise the debt ceiling. However, it attached a caveat in theBudget Control Act. This required a Congressional Super Committee to create a proposal to reduce the debt by $1.5 trillion. If this wasn’t successful, it would trigger asequestration that would trim roughly 10% of FY 2013 Federal budget spending. However, the Committee could not agree on a proposal, allowing the debt crisis to leak into 2012.

Debt Crisis 2012

In 2012, the debt crisis took center stage throughout the 2012 Presidential Campaign. For more, see First Presidential Debate Summary. After the election, difficulties in resolving how to cut the deficit remained, as the country headed toward the fiscal cliff. For more, see U.S. Fiscal Cliff 2012.

Debt Crisis Solution

The solution to the debt crisis is economically easy, but politically difficult. First, agree to cut spending and raise taxes an equal amount. Each will reduce the deficit equally, although they have different impacts on economic growth and jobs creation. For more, see Do Tax Cuts Create Jobs?, Job Creation, and Unemployment Solutions.

Whatever is decided, make it crystal clear exactly what will happen. This will restore confidence, allowing businesses to put the assumptions into their operational plans.

Second, and perhaps most important, delay any changes for at least a year. This allows the economy to recover enough to grow the 3-4% needed to create jobs and reduce unemployment. An increase in GDP, combined with tax increases and spending cuts, will eventually reduce the debt-to-GDP ratio enough to eliminate the debt crisis.

3 Reasons Why the National Debt Probably Won’t Ever Get Paid

The U.S. debt is more than $18 trillion, the largest in the world. However, this kind ofsovereign debt (owed by countries) is only a threat when creditors become worried it won’t get paid back. They use several tools to determine this. The most important is thedebt-to-GDP ratio. That compares the level of debt to the entire economic output of the country, which is measured by Gross Domestic Product.

What is that tipping point when creditors start to worry? It’s generally when the debt-to-GDP ration exceeds 77%, according to the World Bank. The U.S. debt-to-GDP ratio is closer to 100%. That means the debt pretty much equals everything the United States produces in a year.

However, keep in mind that creditors are only worried about the public debt, which is $12.7 trillion. The public debt-to-GDP ratio of the U.S. is only 73%, not yet at the tipping point.

The rest is owed to itself, mostly the Social Security Trust Fund. It does need to pay this one day, as Baby Boomers retire, but creditors aren’t worried about this component of the debt.

Will the government ever pay it off? Not likely, for three reasons:

  1. Elected officials get voted out of office if they cut popular programs, like Medicare, defense, and Social Security.
  2. Over time, the economy has grown robustly enough to dwarf the debt. The U.S. debt at the end of World War II was $259 billion. That was a lot then, but not much now. Politicians are banking that today’s debt will be dwarfed by tomorrow’s economic growth.
  3. The only way to reduce the debt is, as you said, cut spending or raise taxes. Both are highly unpopular, which is why most people only want to do it to others.

Therefore, the only way the U.S. will reduce its debt is if the American people are ready to tighten their belts and accept austerity measures. The most painless time to do so is when the economy is booming, with GDP growth rates above 3% and unemployment at 5% or less. In fact, that’s the BEST time to cut the debt, because it will slow economic growth and actually prevent a recession. For more, see Business Cycle Stages.


Kimberley Amadeo is President of and the US Economy expert of She has 20 years senior-level experience in economic analysis and business strategy working for major international corporations.

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