Alistair Darling, Secretary of State for Social Security, said his "radical new contract" would double the pensions of people earning less than pounds 9,000 and lift many workers, mothers and carers off means-tested benefits in their old age.
His Green Paper received a lukewarm reception from several Labour MPs, who said it would deepen Britain's "morass of means-testing". They were disappointed that ministers backed away from a compulsory pension scheme encompassing the well-off and the poor.
Instead, Mr Darling announced higher national insurance rebates in a pounds 500m-a-year subsidy to encourage middle-income groups earning pounds 9,000 to pounds 18,500 to join "stakeholder" schemes run mainly by the private sector. He feared that a universal scheme, in which the rich subsidised the contributions of the low-paid, would be seen as a breach of New Labour's key pledge not to raise income tax.
Mr Darling said poor pensioners would be protected by a new guaranteed minimum pension from April and hoped that over the long term this would rise in line with earnings, rather than prices, so it maintained its value. The pledge failed to quell criticism by Labour MPs, who said the guarantee would extend means-testing and be a disincentive to people joining the stakeholder schemes.
Frank Field, who resigned as minister for welfare reform in July after failing to win Tony Blair's backing for a compulsory-for-all scheme, led the criticism. "It means that if you don't bother to save you will just pick up this [guaranteed minimum] pension at the end anyway. So the Jack the Lads who don't intend saving will benefit."
He said the Green Paper failed to treat the poor as "equal citizens", and he feared that future politicians would seek to unwind the proposed system. "I doubt whether the settlement will last. It is doubtful whether it is fair," he said.
Other Labour MPs said the minimum pension guarantee, which in effect builds income support into the state pension, would still leave old people with the "stigma" of having to claim it. Paul Flynn, MP for Newport West, said one million elderly people already missed out because they did not want the "charity" of claiming income support, and would not take up the new guarantee. "Why should we continue cheating them?" he asked.
Steve Webb, pensions spokesman for the Liberal Democrats, who back a compulsory system, said relying on incentives for middle-income earners would not solve the problem of future pensioner poverty.
Quentin Davies, Conservative spokesman on pensions, said anyone earning between pounds 15,000 and pounds 18,000 would be "completely barmy" to save under the scheme because they would be depriving themselves of thousands of pounds of means-tested benefits.
The charity Help the Aged said the Green Paper was "weak and disappointing".
Mr Darling insisted that his radical and affordable package would guarantee everyone a secure and decent income in retirement, and prevent millions more relying on means-tested benefits. He said a "convention of rocket pension scientists" could produce all sorts of clever schemes. "What I am interested in is what works," he said.