You can read the original, but the basic idea is that lending money is a form of deferred consumption that wends its way through time like a daisy chain. People live for two periods, with overlapping generations. They buy bonds during the first period and sell them during the second. Thus in each period the debt is neatly handed off to the following generation. But there is an end time, when public debt must be retired. At that point, instead of allowing the final generation, in the bloom of period 1, to purchase and thereby rollover the debt of their ancestors, the government taxes them to retire it. So behold, the borrowing of government from generation the first is a delayed charge against generation the last. And that is why paygo pension systems are an intergenerational crime.
The logic is impeccable, in the sense that if you accept the premises you must accept the conclusion. The question is whether the premises correspond in any meaningful way to the world we inhabit.
One obvious problem is the assertion of an end time. The Greatest Generation, as we know, ran up what was at that point the Greatest Debt; in fact, gross federal debt (including the portion held by the Fed) topped out in 1946 at just under 120% of GDP. Those living today are heirs to that borrowing “binge”. But we haven’t suffered for it, since (1) that specific chunk of debt has become much smaller in relation to our incomes today due to inflation and real growth, and (2) we continue to roll over principle and interest, since the end time is not nigh. As long as we don’t go crazy, and keep our current and future borrowing on a sustainable basis, the end time need never come. (And I’m abstracting, as Simon and others do, from the benefits financed by borrowing—like saving the world from Hitler or, more mundanely, all those nice CCC-built parks—that are also legacies for the future.)
The second is less recognized. The consumption-smoothing life plan at the heart of the standard OLG model, simply does not reflect the facts. Here, for instance, is the 2011 average household net worth (not including home equity) by age of household head, as estimated by the Census Bureau:
The bottom line is that the generation is not a meaningful unit of accounting when it comes to the distributive effects of public deficits. How about shifting attention to the decision to sell bonds to the rich instead of taxing them?