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OLG models reveal that government policies distribute burdens and benefits across generations. Unfunded government spending or deficits shift the tax burden to future generations; intergenerational equity requires that the present value of government spending across all generations be matched by taxes. This framework shows why current deficits create intergenerational imbalances and why sustainable policy requires current generations to pay for their consumption.
From overlapping generations models, you know that the economy is not populated by a single infinitely-lived representative agent but by a succession of generations that are born, live, and die. This demographic structure creates a fundamental problem that does not exist in standard representative-agent models: the interests of people alive today can conflict with the interests of people not yet born. Fiscal policy — how the government taxes, spends, and borrows — is the primary mechanism through which these interests interact, because government debt issued today must be serviced by taxpayers in the future.
Consider a concrete example. Suppose the current generation votes for a tax cut financed by government borrowing. Today's adults enjoy higher disposable income and consume more. The government issues bonds to cover the revenue shortfall. When those bonds mature, taxes must rise to repay them — but by then, today's adults may have retired or died, and the burden falls on their children and grandchildren who had no voice in the original decision. This is the core intergenerational transfer at the heart of deficit spending: it shifts real resources from future generations to the present one. In the OLG framework, this transfer is not neutral (unlike in the Ricardian equivalence result for infinitely-lived agents) because there is no operative bequest motive connecting the utility of all generations into a single objective.
The government's intertemporal budget constraint requires that the present value of all future taxes equals the present value of all future spending plus the current outstanding debt. This is an accounting identity, not a policy choice — it must hold regardless of the government's preferences. The equity question is how the tax burden is distributed across generations. A policy of persistent deficits satisfies the budget constraint only if some future generation faces a dramatic tax increase or spending cut. Generational accounting — developed by Laurence Kotlikoff and others — attempts to measure these implicit transfers by computing the net tax burden (taxes paid minus transfers received) for each birth cohort over their lifetime. Studies consistently find that current fiscal policies in most developed nations impose substantially higher net burdens on future generations than on those currently alive.
Several policy instruments can address intergenerational imbalance. Pay-as-you-go social insurance (like Social Security) is an explicit intergenerational transfer from working-age to retired generations; its sustainability depends on demographics and productivity growth. Funded pension systems accumulate real assets rather than claims on future taxpayers, reducing intergenerational transfers. Fiscal rules — balanced budget amendments, debt brakes, spending caps — attempt to constrain the current generation's ability to shift burdens forward. The deeper challenge is political: future generations cannot vote, lobby, or bargain, so democratic processes systematically underweight their interests. The OLG framework makes this bias analytically precise and provides the tools to evaluate whether any proposed fiscal path treats generations equitably.