The Labour leadership hopeful said the move would defuse the “ticking timebomb” of ballooning pension payouts facing the UK economy in years to come.
Under the radical proposal, current or former public sector employees with fewer than two years of pension rights built up would be allowed to access 75% of their cash as a lump sum immediately.
If it was successful, the new arrangement would then be made available to workers with up to 10 years of contributions.
Writing exclusively for PoliticsHome, Ms Thornberry said it was “a practical measure that starts to tackle a major long-term threat to the public finances, but at the same time puts money into the pockets of millions of working people on low-to-medium incomes”.
Ms Thornberry unveiled the idea as she launched a last-ditch bid to get through to the last round of the contest to succeed Jeremy Corbyn.
The Shadow Foreign Secretary currently has 30 Constituency Labour Party nominations, just three short of the total she needs before Friday’s deadline.
Outlining her proposal, the Islington South MP wrote: “At a time when the Tories are taking reckless risks with our economy, I believe we can also be the party of credibility on the public finances, but married with radical solutions. Especially when it comes to the ticking time-bomb of the pension payouts eventually due to millions of people in our country who’ve worked for short or longer periods in the public sector over recent decades.
“One 2017 estimate put the level of all existing unfunded public sector pension liabilities at £1.7 trillion, about the same as the total value of London’s housing stock. Paying out those pensions currently costs £40 billion per year, the same as we spend on defence.”
Ms Thorberry went on: “So what I’d do is simple. I’d say to every former public sector worker with fewer than two years of pension rights built up, you can have 75% of your money now as a lump-sum, or you can wait until you retire and get the full amount. It’s entirely your choice.
“If that scheme is popular, we’d move to four years of service, then six, eight and 10 by the end of the Parliament. And at every stage, current public sector workers could take the same offer in relation to that equivalent period of their service, which might make all the difference when paying off a loan, or other short-term costs.”
Ms Thornberry said the scheme would need to be “tax neutral”, meaning no one who signed up to it could gain a tax advantage over other workers.
She added: “This scheme obviously comes at a short-term cost, which would have to be funded through borrowing, but there are two points.
“First, there is no better time to borrow given the historic lows in interest rates. And second, even if it mean an increase in short-term borrowing, the credit agencies, investment firms and others will all see that it puts Britain on a much sounder footing in terms of our long-term fiscal health.
“We would therefore have a practical measure, that starts to tackle a major long-term threat to the public finances, but at the same time puts money into the pockets of millions of working people on low-to-medium incomes, at a time when the economy is slowing down.”
Keir Starmer, Rebecca Long-Bailey and Lisa Nandy have already made it onto the ballot paper in the leadership contest.
The winner will be announced at a special conference on 4 April.