What makes up the US National Debt?

We hear all the time about the US National Debt being close to 20 trillion dollars -- not to mention the unfunded liabilities. But what actually makes up this debt and who holds it? Let's take a look!

by Quinton on September 4th, 2016

Unfunded Liabilities

Let's start off by mentioning something important: the national debt is stated to be close to $20 trillion as of September 2016. But this is only part of the story.

Corporations in the US are required to account for future obligations such as pensions and retirement benefits. This is how all corporations function in the US. But this isn't the case with the US national debt. The federal budget is not bound to this accounting mechanism. This is important because this is what makes up the unfunded liabilities you've probably heard about.

When you look at programs like Social Security and Medicare they promise to pay people 75 years into the future. But when you look at the projected tax revenue for these programs there is a shortage of funds -- $87 trillion dollars. This is just for Social Security and Medicare.

Now I understand that these are future payments and a lot of things can change in the future. But future obligations obviously mean something since ALL corporations are required to account for such obligations in their own affairs. This is called Accrual accounting and all corporations practice this accounting because it is more accurate. But the federal budget does not practice such accounting for the national debt, it uses what's called Cash accounting. In their own words:

"The federal government primarily uses the cash basis of accounting for its budget, which is the federal government’s primary financial planning and control tool."

Nobody would ever use this accounting for a serious business because it is inherently flawed when you have future obligations. If the numbers matter then you really need to account for things correctly. And what's more important for getting the numbers right than the national debt?

So when you hear talk of ~$120 trillion in unfunded liabilities this is what it has to do with. We are already ~$20 trillion in debt on consumption that has already been rendered. But with all these other government future promises like Social Security, Medicare and pensions we also will need to come up with ~$120 trillion in the future. Right now the government is currently operating at a yearly loss of around $0.5 - $1 trillion dollars each year. How is the government going to turn this around? Anybody with an IQ above room temperature knows that this is a very dangerous situation to be in.

When we talk about the national debt we also have to consider the unfunded liabilities and the fact that the United States hasn't had a yearly surplus since 2001. So things aren't looking too good with the federal budget.

Federal Government Spending

† Social programs include income security, healthcare, education, housing, and recreation.
‡ National defense includes military spending and veterans’ benefits.
§ General government and debt service includes the executive & legislative branches, tax collection, financial management, and interest payments.
# Economic affairs includes transportation, general economic & labor affairs, agriculture, natural resources, energy, and space. (This excludes spending for infrastructure projects such as new highways, which is not accounted for in this graph.)
£ Public order and safety includes police, fire, law courts, prisons, and immigration enforcement.

So you can see here the shift from spending on military to spending on social programs. Let's continue.

2 Main Categories

The federal government divides the national debt into two main categories:

  1. Money that it owes to non-federal entities
  2. Money that it owes to federal entities

Keep in mind that federal law draws no distinction between the debt owed to federal and non-federal entities. Both must be repaid with interest.

Amount

Owed To:

Portion of Total

$13.1 trillion owed to non-federal entities (i.e., publicly held debt) 72%
$5.1 trillion owed to federal entities (i.e., intragovernmental debt) 28%

1. Non-Federal Debt Holdings

Let's break down all the entities that hold debt that are not Federal:

Entities

Amount (billions)

Portion of Total

Foreign & International $6,156 47%
Federal Reserve $2,461 19%
Mutual Funds $1,146 9%
Other Investors $895 7%
State & Local Governments $601 5%
Private Pension Funds $530 4%
Banks & Savings Institutions $518 4%
Insurance Companies $282 2%
State and Local Government Pension Funds $257 2%
U.S. Savings Bonds $176 1%

Foreign & International Holdings

And then let's take a look at all the foreign countries holding debt:

Country

Amount (billions)

Portion of Total

China $1,263 21%
Japan $1,216 20%
Caribbean Banking Centers† $296 5%
Oil Exporters‡ $293 5%
Brazil $263 4%
Belgium $229 4%
Switzerland $216 4%
Ireland $216 4%
United Kingdom $195 3%
Hong Kong $183 3%
Luxembourg $171 3%
Taiwan $170 3%
Others $1,428 23%
Total $6,137 100%
† Caribbean Banking Centers include: the Bahamas, Bermuda, Bonaire, British Virgin Islands, Cayman Islands, Curacao, St. Eustatius, St. Maarten, Panama, and Saba.
‡ Oil exporters include: Ecuador, Venezuela, Indonesia, Bahrain, Iran, Iraq, Kuwait, Oman, Qatar, Saudi Arabia, the United Arab Emirates, Algeria, Gabon, Libya, and Nigeria.

2. Federal Debt Holdings

And now let's look at all the entities holding debt that are Federal:

Funds

Amount

(billions)

Portion of Total

Social Security $2,838 56%
Civil Service Retirement and Disability $740 15%
Military Retirement $532 10%
Medicare $274 5%
Department of Defense Retiree Healthcare $205 4%
Postal Service Retiree Health Benefits $45 1%
Other $441 9%

Now something really obvious needs to be stated here. You will find that the Social Security Trust Fund holds the majority of Federal debt. What does this mean?

Well, taxes are collected each year for Social Security. Any surplus from these taxes goes towards this fund. But this fund isn't a savings account that the government just sits on. This fund is exclusively made to "invest" in the US government by purchasing the national debt. Whether buying US bonds is an investment or not is up for debate. It comes down to whether you think the US will make good on their bonds and pay this back to the Social Security Trust Fund when needed.

 Filed under: Economics, Labor & Money, United States, National Debt, Debt

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