Despite President Obama's hint to the contrary, Social Security checks can still be paid on August 3rd, even if an agreement on increasing the debt ceiling is not made.

We shouldn’t worry about not getting Social Security checks after August 3^rd.  According to Jagadeesh Gokhale, in an article that can be found here, despite the President’s dire hints that Social Security checks would be interrupted on August 2, there is every reason to believe that Social Security payments will be made in full in August, and for many more months, no matter whether the budget deadlock is resolved by August 2^nd.  This is because among other reasons, even if the debt limit is reached, Social Security payments that are covered by incoming payroll taxes would not be delayed. 

Gokhale describes it thus:

The debt limit encompasses both debt held by the public, and that held in intra-governmental accounts such as Treasury IOU's in the Social Security Trust Funds. Even if the debt limit is reached, Social Security payments covered by incoming payroll taxes would not be delayed. As some observers correctly point out, payroll taxes are insufficient to cover present-law Social Security benefits. But that's true only on an annual basis. Because the payroll tax rate is applied to earnings, those tax withholdings generate more revenues during earlier months of the year than during later ones -- when higher earners' taxable earnings limit is reached and payroll tax collections decline. That means the still quite small annual payroll tax shortfall will not emerge until November or December of this year. Therefore, no Social Security beneficiaries should miss their payments in August.

Even if payroll taxes were to fall short of scheduled benefits on August 3rd, there is a way to ensure that Social Security checks are mailed on time. The Social Security Trust Funds would simply exchange their Treasury IOUs for cash from Treasury, financed out of non-Social Security taxes. This is exactly how they are to be used in the event of a payroll tax shortfall anyway. But this redemption of Trust Fund IOUs would reduce federal debt below the current debt limit. Treasury could then simply issue more public debt to recover the cash -- in effect exchanging debt to the Social Security Trust Funds for debt held by investors.

So, despite the heated rhetoric surrounding whether or not to raise the debt ceiling, Social Security checks can still be paid on August 3^rd.

Update on Thursday, July 21, 2011 at 9:16AM by Jess Monnette

Following up on the Gokhale article is a new article which fleshes out the ability of Social Security to make all necessary benefit payments.   

The authors are Nancy Altman (co-director of Social Security Works and co-chair of the Strengthen Social Security coalition and campaign) and Mark S. Scarberry (Professor at Pepperdine School of Law).  

Update on Thursday, July 28, 2011 at 11:20AM by Jess Monnette

Altman and Scarberry have updated the original op-ed in light of President Obama's Monday night speech.  You can find more info at the TaxProf Blog here.