Transfer with Generation Overlap:

Absent generation overlap, reduced private capital formation is the only mechanism by which the burden of domestic borrowing can be transferred to a future generation. But such is not a necessary condition if two generations overlap in time. Suppose that generation 1 lives from year one to year fifty, while generation 2 lives from years twenty five to seventy five. Also suppose that all taxes come from consumption.

Now generation 1, in year one, may be called upon to pay taxes of $ 200,000 to sustain the cost of a government building with a useful life of fifty years. It must do so at the cost of reducing its own consumption by this amount. But it will then be possible, in years twenty-five to fifty, to collect taxes of $100,000 from generation 2 in order to refund generation 1, thus involving a shift in private consumption from generation 2 to generation 1.In this way generation 1, while initially assuming the entire burden can transfer part of it to generation 2. For purposes of reassurance generation 1 may be given a promise of repayment in the form of bonds, to be redeemed later out of taxes imposed on generation 2. Such a transfer among overlapping generations can function even though there is no effect on capital formation in the private sector.

In contrast to this case, generation I may make a present to generation 2 and assume the entire burden without calling upon  generation 2 for repayment later on,  which is precisely the mechanism which applied when old age retirement pensions were introduced and the initially aged were given benefits without having had to contribute.