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What Will Happen to States if Debt Ceiling Isn’t Raised?

Officials in Kansas and Missouri worry that a federal default could severely disrupt a variety of government services that could cause local layoffs, jettison retirement funds, restrict Medicaid access and more.

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

Experts and officials have warned a default, which could come after the U.S. government hit its $31.4 trillion debt limit last week, could disrupt an array of government services, including delayed or missing Social Security payments to retirees. The payments are a lifeline for many seniors.

“It would be devastating,” said Claudel, an Olathe resident who sits on the board of Kansas’ public pension system and helps lead the Kansas Coalition of Public Retirees.

The Treasury Department last week began taking “extraordinary measures” to prevent a default. But, as the politicians appear to be willing to use the debt ceiling as a political cudgel for the next few months, the effects of the country defaulting on its debt is raising concerns in Kansas and Missouri.

“We’re above a 0 percent probability that this will happen,” said Jeremy Hill, the director of the Center for Economic Development and Business Research at Wichita State University. “And the probability of it happening and possibility is more likely this go around than the last three or four that I’ve gone through.”

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

Still, economists, federal employee unions and local businesses contend a default could have drastic consequences for everyday Americans, including layoffs at local businesses, jettisoned retirement funds, inability to access federal programs like Social Security and Medicaid, a work stoppage for federal employees and disruptions in air traffic.

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

The effects 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, the director of research services at the Mid-America Regional Council. A recession is already expected this year; a default would be “another straw on the camel’s back.”

Recessions often lead to people losing their jobs and it becomes more difficult for people to find work. That, in turn, makes it more difficult for workers to push for raises.

“Failure to raise the debt limit could lead to a default on our country’s commitments and apply negative pressure to an already fragile economy,” said Kevin Walker, the senior vice president of public policy for the Overland Park Chamber of Commerce. “And while [raising the debt ceiling] may be the appropriate move now, it’s crystal clear that Congress and the Biden administration have to get federal spending under control. They have 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 take longer to recover during an upswing. That could provide some modest protection during a default, but he emphasized since a default has never occurred, the exact consequences are unknown.

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

Hill, the economics professor at Wichita State, said the uncertainty around the debt ceiling can affect the stock market, putting retirement funds at risk as many in the Baby Boomer generation are readying to leave the workforce.

“Those retired people in Kansas City, or people wanting to retire soon, are going to look at their portfolios,” Hill said. “The volatility in the stock market will go up and down. It’s already been pretty volatile. I would expect it to be more volatile as the market tries to handle the shut down of the government.”

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

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

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

Like previous government shutdowns, some federal employees could risk missing paychecks. A deal to raise the debt ceiling could potentially include back pay, but workers and their families could face financial trouble in the meantime.

“Federal employees like the thousands who live and work in the Kansas City area are especially prone to harm because their paychecks are among the expenses that the federal government could have trouble paying while in default,” said Tony Reardon, the president of the National Treasury Employees Union. “As we have learned from previous government shutdowns, delaying payroll can wreak havoc on federal employees and their families by making it hard to meet their basic monthly expenses like food, housing and health care.”

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

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

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

The consequences of a default would build the longer it goes on. Organizations that have stayed open during previous shutdowns, like the Postal Service and Veterans Affairs hospitals, could face the risk of having to stop work. The effects are difficult to precisely predict because the United States has never defaulted before.

“Bottom line – if it isn’t fixed by June, we’ll start to worry,” Murray said. “If it still isn’t fixed by the beginning of October, we are looking at a massive problem.”

Experts are concerned about a small group of hard-line Republicans in the House, who have shown that they are 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 members of the caucus won promises 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, has said the Biden administration will not entertain negotiations about 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 the House Republicans put forward a plan showing the spending cuts they would make. He warned that defaulting on the country’s debt would mean increasing interest rates on mortgages, car loans and credit cards and said people would lose money from their retirement funds.

“This is not an abstract issue,” Schumer said. “Real Americans will see real dollars, from so much of what they own, disappear from their pensions, IRAs and home value. Merely approaching default could raise costs on everything. It’s going to hurt average families.”

Not everyone is concerned that Congress won’t be able to reach a deal. Missouri Treasurer Vivek Malek’s office said in a statement that a default isn’t imminent nor probable.

“The likelihood of default is minimal when it comes to debt ceiling arguments,” the office said in a statement. “Should there be a default, it would likely be cured in days and the state would be made whole on their investments.”

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

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

“Treasurer Johnson has confidence that the federal government will continue to meet its debt obligations, and he is encouraged that there are serious discussions occurring in Washington about ways to rein in federal spending,” Johnson spokesperson Clint Blaes said in a statement.

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