When President Obama stated that he couldn't guarantee that Social Security checks would go out if Republicans force the government into default, those Republicans said they would and accused him of scaring seniors. Neither side has explained why payments would or would not go out. Here's the scoop.
The US Treasury maintains for the Social Security Administration four trust funds. These are the famous trust funds that popular culture (incorrectly) says the government "raided". By far the biggest of these trust funds is the one that handles old age and survivors benefits; the Social Security checks that we think of as Social Security. There is also a trust fund for disability insurance benefits and two trust funds for Medicare; one for hospitalization benefits and the other for doctor and outpatient visits and the prescription drug benefit.
Social Security tax receipts are deposited into the appropriate trust funds every day. Benefits and administrative costs are paid out of the appropriate trust funds every day.
When there is a surplus, meaning when there are more revenues than payouts, the trust funds are required to invest those surpluses in special US Treasury Bonds that only the trust funds can buy. These bonds protect the trust fund money with the full faith and credit of the United States of America and pay interest based on a standard formula rather than the ups and downs of the market.
When there is a deficit, the trust fund sells some of its special US Treasury bonds so the SSA can pay out benefits and administrative costs.
Since 1983 there has always been an old age and survivors benefits surplus. There have always been more receipts than payouts. This has been deliberate so that the trust fund could grow to be able to pay benefits to retiring baby boomers without placing untenable burdens on the next generation. Until now.
It was expected that the surplus would disappear in 2014 as the retirement of the baby boom accelerated. For the next 30 years or so, there would be deficits that would require the trust funds to sell off some of their Treasury Bonds. The recession, however, depressed earnings across America and, as a result, Social Security tax revenues. At the same time, it spurred many baby boomers to retire early. The net result is that the trust fund for old age and survivors benefits saw a $49 billion deficit in 2010 and a $46 billion dollar deficit in 2011. While these deficits are expected to go down in 2012 and 2013 before rising again for a very long time in 2014, it is really that $46 billion deficit in 2011 that is going to cause the problem.
Because there is a deficit, the trust fund has to redeem some of its special Treasury Bonds in order to fully pay benefits and program costs. In the long run this is fine. It is planned for. Everyone knows what is going on. But in the short term, on any given day that the Treasury cannot redeem those bonds because it has no cash, Social Security will not be able to meet its obligations. It will be able to send out a lot of what it owes because it will have revenue coming in every day from new tax receipts. But it will not be able to pay out everything it owes. Someone will get hosed.
It remains to be seen whether Treasury or the White House would have legal authority to pick and choose which of Treasury's obligations get paid and which don't. With such authority, the White House could direct the Treasury to put Social Security at the front of the line. However, even if it does have that authority, it might not be feasible to do that because all of the other claims will be important too. Soldiers have to get paid. Other bond holders have to get paid. Federal Employees have to get paid. There won't be enough money to go around and there is no guarantee that every single day it will be feasible for Social Security to stand at the front of the line.
In the final analysis, it is a very real possibility that either all Social Security recipients would see reduced payments or some would get full payments while others would get none. They would be made whole when the debt ceiling finally does get raised. In the meantime, there is no question that there would be hungry seniors needing help and not getting it.
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