No, it makes "release when ready" easier, since the entire distribution doesn't have to wait for that single software release becau the next distro release is not that far away. At least that's how it works for Java. (I'm not that deep into Linux distros.)

How is that supposed to work? I understand that it possible to pull the plug on packages which are not ready at time T, but it also means pulling the plug on all the packages that depend on it.

So if libreoffice depends on package P, and that one is not ready, is Debian going to simply drop libreoffice until next release?

Nothing is dropped.

At a very high level, it works like this:

New versions of stuff go into Unstable. When they've been tested a while they get pushed to Testing. Periodically Testing is frozen and branched into a new Stable release. If a package doesn't make it into Testing before the freeze then it's out of luck and has to wait for the next release.

For example, assume libreoffice 1.0 and libfoo 1.0 are in Unstable, Testing and Stable. If libreoffice 1.1 comes out and depends on libfoo 1.1, but libfoo 1.1 is broken in Unstable, then libfoo 1.1 and libreoffice 1.1 won't be pushed to Testing until the issue is fixed. If they don't make it into Testing before the release freeze then the next stable will ship with libreoffice 1.0.

After the freeze, when the libfoo 1.1 is fixed in Unstable, then libreoffice 1.1 and libfoo 1.1 will go into Testing and wait for the next Stable to get branched.