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What will happen to states if the debt ceiling is not raised?


(TNS) — Ernie Claudel, a 75-year-old retired educator from Kansas, doesn’t know exactly what will happen if the US defaults on its debt for the first time in history in the next few months, but it wouldn’t be any good.

Experts and officials have warned that a default, which could occur after the US government reached its $31.4 trillion debt limit last week, could disrupt a number of government services, including delayed or missed payments on the social security for retirees. Payments are a lifeline for many seniors.

“That would be devastating,” said Claudel, an Olathe resident who sits on the board of the Kansas Public Pension System and helps lead the Kansas Coalition of Public Retirees.

The Treasury Department last week began taking “extraordinary steps” to prevent a default. But as politicians appear willing to use the debt ceiling as a political cudgel for the coming months, the effects of the country’s default on its debt are raising concerns in Kansas and Missouri.

“We have a better than 0 percent chance of that happening,” said Jeremy Hill, director of the Center for Economic Development and Business Research at Wichita State University. “And the likelihood of that happening and the likelihood of it going around more than the last three or four that I’ve been through.”

While there have been debt ceiling deadlocks before, the federal government has never defaulted on its debt, making it difficult to clearly predict all the ways that default would affect people in the Kansas City region.

However, economists, federal employee unions and local businesses argue that a default could have drastic consequences for everyday Americans, including layoffs at local businesses, abandoned retirement funds, being unable to access federal programs like Social Security and Medicaid, work stoppages for federal employees, and disruptions in air traffic.

Federal workers, as well as retirees who rely on Social Security benefits, could experience late or missed wages and payments. And while financial experts say a brief default wouldn’t necessarily wreak havoc on investment, it could be enough to destabilize the economy and push the country over the edge of recession, hurting private businesses.

The bills would largely fall into three categories: federal services, job security, and savings accounts.

Just the possibility of a default is creating uncertainty that could cause financial damage, said Frank Lenk, director of research services at the Mid-America Regional Council. Already this year a recession is expected; a default would be “another drop on the camel’s back”.

Recessions often cause people to lose their jobs and it becomes more difficult for people to find work. This, in turn, makes it harder for workers to push for raises.

“Failure to raise the debt limit could lead to a default on our country’s debts and apply negative pressure to an already fragile economy,” said Kevin Walker, senior vice president of public policy for the Overland Park Chamber of Commerce. “And while [raising the debt ceiling] might be the appropriate move now, it is crystal clear that Congress and the Biden administration need to get federal spending under control. They need to restore sanity to our country’s fiscal situation.”

Lenk said the Kansas City area tends to be a little more resilient during economic downturns but takes longer to recover during an upturn. This could provide modest protection during a default, but he stressed that since a default never happened, the exact consequences are unknown.

“We don’t really know what’s going to happen,” Lenk said.

Hill, an economics professor at Wichita State, said uncertainty around the debt ceiling could affect the stock market, putting pension funds at risk as many in the Baby Boomer generation prepare to leave the workforce.

“Those retirees in Kansas City, or people who want to retire early, are going to be watching their wallets,” Hill said. “Volatility in the stock market will go up and down. It’s already been pretty volatile. I expect it to be more volatile as the market tries to manage the government shutdown.”

Nathan Mauck, an associate professor of finance at the University of Missouri-Kansas City, said people who receive payments from the government will most likely face the most immediate negative consequences of a default. Various forms of government relief may be delayed and federal employees may not be paid on time.

Hundreds of thousands of Kansas and Missouri residents could be affected. In 2021, 46,455 Kansan residents and 131,148 Missourians collected their Social Security payments, according to the Social Security Administration.

“I think it’s the group that’s most likely to feel the pain of this. A late or missed payment could be significant to them,” Mauck said.

Like previous government shutdowns, some federal employees could be at risk of losing wages. A deal to raise the debt ceiling could potentially include back pay, but workers and their families could face financial problems in the meantime.

“Federal employees like the thousands who live and work in the Kansas City area are especially prone to harm because their salaries are among expenses the federal government may have difficulty paying while they default,” said Tony Reardon, chairman of the national treasury. Workers’ Union. “As we’ve learned from previous government shutdowns, delaying payroll can wreak havoc on federal employees and their families, making it difficult to meet their basic monthly expenses like food, shelter, and health care.”

As of 2020, there were approximately 5,000 IRS workers based in Kansas City.

Veterans are among those who may be affected by late or missed benefit payments. But Pat Murray, national legislative service director at the Veterans of Foreign Wars, which has its national headquarters in Kansas City, suggested service members and veterans may not be impacted as large immediately financially, pointing to the appropriations package approved by Congress in December.

“Once the funding expires, however, active duty pay, military retiree pay and VA disability benefits, along with day-to-day operations costs for DoD and VA could be at risk,” Murray said in a statement. referring to the Department of Veterans Affairs and the Department of Defense.

The consequences of a default would increase the longer it goes on. Organizations that have remained open during previous closures, such as the Postal Service and veterans’ hospitals, may be at risk of having to stop work. The effects are hard to predict accurately because the US has never gone bankrupt before.

“Bottom line: If it’s not fixed by June, we’re going to start to worry,” Murray said. “If it’s still not fixed by the beginning of October, we’re faced with a huge problem.”

Experts are concerned about a small group of hardline Republicans in the House who have shown themselves willing to obstruct the government in order to achieve their goals, regardless of the consequences.

House Speaker Kevin McCarthy, R-California, has a narrow majority, and caucus members have vowed to cut spending in exchange for supporting his speakership. They appear willing to default on the country’s debt in order to achieve their goals. The White House, meanwhile, said the Biden administration would not enter into negotiations on cutting spending to raise the debt ceiling.

Senate Majority Leader Chuck Schmuer, D-New York, said on the Senate floor Monday that he wants to see House Republicans table a plan showing the spending cuts they would make. He warned that defaulting on the country’s debt would mean raising interest rates on mortgages, auto loans and credit cards and said people would lose money from their pension funds.

“This is not an abstract problem,” Schumer said. “Real Americans will see real dollars, from so much of what they own, disappear from their pensions, IRAs and home values. Simply approaching default could drive up costs on everything. It will harm ordinary families.

Not everyone is concerned that Congress will fail to reach an agreement. Missouri Treasurer Vivek Malek’s office said in a statement that a default is neither imminent nor likely.

“The likelihood of default is minimal when it comes to debt ceiling topics,” the bureau said in a statement. “If there was a default, it would likely be resolved in a few days and the state would recover from its investments.”

The Republican treasurer’s office also downplayed the risk to Missouri. State government typically does not depend on interest payments to fund operations, so the state would experience “minimal” effects from a default on Treasury interest payments, he said.

Kansas Treasurer Steven Johnson, a Republican, has vowed to continue monitoring investment decisions made by state officials.

“Treasurer Johnson has confidence that the federal government will continue to service its debt obligations, and is encouraged that serious discussions are underway in Washington about ways to curb federal spending,” Johnson’s spokesman said in a statement. Clint Blaes.

©2023 The Kansas City Star. Distributed by Tribune Content Agency, LLC.

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