For once I disagree with you Rods,up to a point.If rich pensioners have paid 55% tax and then get some of it back in benefits its not a welfare state.Its marxoid redistribution of wealth by another name.They should have paid less in tax in the first place and not had some of it returned at the discretion of the state.
Imo all benefits should be means tested to find out who actually needs them.Thats the only way the bloated "welfare state" can be shrunk to a reasonable level and we can return to welfare being given to the genuinely needy.
If you read the rest of what I wrote, you would see we wouldn't be where we are, with the market system I suggest.
I agree with Kevin if you are going to have the stupid expensive system of taking money off people in tax, only to give it back again, then keep the administration cost as simple as possible. If I was a higher rate tax payer, but used an off-shore trust to keep me at a lower level, would this count or would you have to add yet another 1000 pages to Tolley's 17,000 page tax guide as of last year, to cover it.

A good example of this is where on expensive houses this and the last Government increased stamp duty to the current 7%. Oversea's people got round this by buying in a limited company. To stop this there are now a whole raft of new regulations on price, BTL, as BTL what you can and can't do etc etc. The road to hell is paved with good intentions.
Anyway in a few years time when the UK has run out of people to borrow from, then the state pension will only be a nominal amount. All Ponzi schemes eventually collapse, where there are not enough new entrants to feed the existing members. Personally I expect this to happen anytime from 2014 to 2017.
Now if we each had our own personal funds like in Hong Kong, the Government running out of money would not be such a disaster.