The National Debt Explained

FT Contributor  | 

The national debt is the amount of money the United States owes to lenders. The concept is similar to personal debt — when the government spends more than it makes, it adds to its debt levels.

Growing Debt in the U.S.

According to the U.S. Treasury, the U.S. national debt was at over $25.6 trillion on May 26, 2020. The figure has been rising year to year. To get an idea of its growth, American debt was at almost $5.7 trillion in 2000 and roughly $13.5 trillion in 2010. It’s nearly doubled over 10 years to where it’s at today.

The Treasury Department breaks the debt down into two types: public debt and intragovernmental holdings. Intragovernmental debt is owed to other parts of government, such as Social Security and Medicare, and consists of roughly 24% of the $25.6 trillion. Public debt makes up for the bulk of what the U.S. owes and includes what the country owes its creditors, including the buyers of its bonds.

Forms of Government Borrowing

The U.S. government finances part of its spending by issuing Treasury securities. They include treasury and savings bonds as well as Treasury Inflation Protected Securities (TIPS). The world considers U.S. Treasury securities to be the safest investment around. After all, few people believe the United States will default, even with its high debt.

Individuals, banks, and other countries own U.S. Treasury securities. Besides Americans, the top 10 countries holding U.S. treasury debt (in order of greatest to least) are:

  1. Japan;
  2. China;
  3. United Kingdom;
  4. Ireland;
  5. Brazil;
  6. Luxembourg;
  7. Hong Kong ;
  8. Switzerland ;
  9. Cayman Islands;
  10. Belgium.

Why Is the U.S. in Debt?

Many people ask why the United States doesn’t just cut back on spending or stop it altogether, the same way you would if your personal spending is out of control and you are in debt. Although the concept of spending less than you earn is a healthy one, applying it to a government responsible for almost 331 million people is complicated.

There are several reasons the U.S. is in debt. Take a closer look at some of the main factors to understand why.

Healthcare

One of the biggest drivers of the national debt is healthcare. The United States currently has a large aging population in need of more medical attention — and the U.S. healthcare system is one of the most expensive in the world. Plus, as they retire, Americans who would normally pay for their own private insurance or receive it through their employers, will be qualifying for government-funded healthcare programs such as Medicare and Medicaid, increasing the government’s healthcare spending.

The combination of rising healthcare costs and a larger demographic of older Americans is set to continue increasing the country’s spending into the future. Paradoxically, more expensive healthcare doesn’t mean it’s better. The country’s health outcomes rank low, compared to other advanced nations. Failing to treat citizens’ health issues effectively may lead to other health complications, adding to the country’s overall healthcare costs.

Military Spending

The President has released his 2021 fiscal year budget proposal with $705.4 billion earmarked for the Department of Defense (DoD). It’s about the same amount as the previous year. Key spending components include:

  • Modernizing the country’s nuclear defenses;
  • Missile defense;
  • Space defense;
  • Cybersecurity;
  • Air defenses, including fighter jets and helicopters;
  • Maritime defenses, such as submarines and aircraft carriers;
  • Land vehicles;
  • Munitions including bombs and rockets;
  • Research and development of technologies including hypersonics and artificial intelligence;
  • Building and maintenance of military facilities;
  • Overseas operations;
  • Armed forces readiness;
  • Service and family member support in the form of military pay raises, housing allowances, and support programs such as childcare, professional development, and education.

Social Security

Social Security provides retirement benefits and assistance to retired workers, surviving spouses and children, as well as disabled workers and their kids. In 2019, $1 trillion went to Social Security spending. That’s almost a quarter of the year’s budget.

The number is high, but the bulk of Social Security is mostly covered by payroll taxes. Everyone who works legally is paying into the system to cover their future retirement or to cover their benefits should they become unable to work. The shortfall in Social Security that payroll taxes doesn’t cover is funded by the government.

Tax Cuts

Taxes help fund government spending. If you’re putting together a personal budget, you’ve got two columns — income and expenses. Taxes are the income column for the federal government. If Congress agrees to tax cuts, they’re essentially accepting a pay cut, which means there is less money available to pay for the growing amount of spending.

National Debt vs. Budget Deficit

In the simplest of terms, the budget deficit is the amount of money that the government lacks when it comes time to pay its bills. For example, if you earn $2,000 per month and your expenses are $2,500 per month, your budget deficit is $500.

In most cases, you’ll need to take money from your savings account or borrow to cover the $500 shortage. If you put the $500 shortfall on your credit card, you now have a debt of $500 because of your budget deficit. In a similar but larger-scale fashion, the U.S. government borrows to cover its deficit. The amount it borrows is added to the national debt.

What the National Debt Means for You

The growing national debt may have you wondering how it will affect you or if we’re on the way to another recession. The national debt is a double-edged sword. Increased government spending benefits Americans. More healthcare benefits saves people money, new infrastructure leads to more jobs, and the savings and employment could improve how people feel about their lives, causing them to spend more.

But creditors could demand higher interest payments from the government if they feel that U.S. spending is risky. Then there’s the number of treasury securities the government issues — far too many may lead to less demand, which could slow spending and the economy. The lower investment in treasuries could lead to a drop in the value of the dollar. Foreign investors, who hold a large part of U.S. debt, may turn to stronger currencies to invest in.

As the economy and investment interest slow, higher taxes may be needed to cover the rising debt, putting a dent in your earnings and affecting your standard of living.


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