Two years ago, when the debt limit was in the news, I had a post pointing out that the limit had no effect on the government's ability to make Social Security payments. I have just come across another scare story (in the New York Times) assuming the opposite, so thought it was worth repeating my explanation.
When the Social Security system runs a surplus, as it did from 1984 through 2009, the money is lent by the Trust Fund to the Treasury in exchange for Social Security Trust Fund special bonds. Those bonds count as part of the national debt. If Social Security revenue is less than payments due, the Treasury pays some of the money back to the Trust Fund, redeeming some of those bonds.
The crucial point is that redeeming the bonds lowers the national debt and so permits additional borrowing. Consider the following simple scenario:
1. The government hits the debt ceiling and can no longer borrow.
2. The Social Security Trust Fund asks the Treasury for ten billion dollars to pay Social Security recipients.
3. The Treasury takes ten billion dollars of revenue which it was planning to spend for something else, such as salaries for government employees, and gives it to the Trust Fund, redeeming ten billion dollars of the bonds representing its debt to the Trust Fund.
4. The national debt is now ten billion dollars lower, so the Treasury can borrow ten billion dollars and use it for the salaries it was planning to spend the first ten billion on.
This procedure is only workable until all the bonds are redeemed, but since the Trust Fund is currently over 2.7 trillion dollars, that is going to take a while.
For more details, see this 2011 article by Thomas Saving, who served two terms as a trustee of the Social Security and Medicare Trust Funds.