
Why the U.S. government owes itself money

The U.S. government is $36 trillion in debt. But who is owed all that money? Well, the government owes some of this money to itself.
The best example begins with Social Security. It collects money from payroll taxes and spends that money on retirees, disability insurance claims and other services, what they call pay-in pay-out.
For many years it actually ran a small surplus, and “when the baby boomers were in their peak earning years and hadn’t yet retired, that surplus became a little bit larger than usual,” said Eugene Steuerle, a cofounder of the Brookings Tax Policy Center and author of “Beyond Zombie Rule: Reclaiming Fiscal Sanity In a Broken Congress.”
So decades ago, Social Security had this pile of extra money and by law it could only do one thing with it: buy government debt.
It lent its extra money to the rest of the government. The government immediately spent it, but told Social Security it would pay it back when there’s a rainy day and Social Security might need it.
“And that’s what’s going on now in Social Security, spending is exceeding revenues,” said Steuerle.
The government is now paying Social Security back plus interest. That cushion is, incidentally, expected to run out at around 2035, and Congress will have to figure out another way to send Social Security money that’s different from these debt repayments.
The debt owed to Social Security is a large chunk of what’s known as “intergovernmental debt” — debt that the government owes itself. Other large pieces include federal employee pensions. There’s a lot that hasn’t been paid back yet.
“We have $36 trillion in total governmental debt, and about 20% of that, or more than $7 trillion of that, is these intergovernmental holdings or intergovernmental debt,” explained Alex Arnon, director of Policy Analysis at Penn Wharton Budget Model.
This debt is special in that it’s “not really debt or securities in the way we typically think of, these are non-marketable securities that cannot be bought and sold in the market like other debt,” he said.
And because this debt is not out in the wild, being traded in bond markets, it doesn’t do things that bond markets do — it doesn’t affect the cost of borrowing, doesn’t affect the government’s ability to borrow, it doesn’t influence mortgage rates.
“The intergovernmental debt is much more an accounting device,” said Brad Setser, a senior fellow at the Council on Foreign Relations. “The real focus is on debt owed to the public stuff that actually has to be financed with treasury bonds or bills in the market.”
Out of the total $36 trillion the government’s on the hook for, it owes $29 trillion to the public at large — anyone or any organization that holds a government bond.
“Most that is held domestically by various financial institutions, pension funds, banks hold a lot of it. It’s considered of course a very safe asset,” said Dean Baker, senior economist at the Center for Economic and Policy Research.
“Some of it’s held by the Federal Reserve Board. About 15% is held by the Federal Reserve Board,” said Baker. The Fed bought a lot of U.S. government debt during Covid and the Great Financial Crisis as a way to help out the economy. This debt is considered part of that $29 trillion that’s held by the public. But the Fed is holding less and less of that debt these days.
Another 30%, said Baker, is held by foreigners. “This would be basically the same sort of institutions here that hold U.S. government debt, same thing with foreign financial institutions, foreign banks, foreign insurance companies,” he said.
Foreign central banks as well. The top two holders of U.S. debt abroad are China and Japan.
The share of debt the U.S. owes abroad has also been shrinking — from just under half in 2011 to just under a third in 2023 — as more U.S. debt is consumed here. But the breakdown of the U.S. national debt is less important than its size.
“What’s a matter of concern is the overall fiscal sustainability of government,” said Laurence Kotlikoff, a professor of economics at Boston University. The national debt is currently 20% larger than the size of the entire U.S. economy, and, he said, it’s on a growth path that’s not sustainable.
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