We prove new bounds on the dimensions of distance sets and pinned distance sets of planar sets. Among other results, we show that if $A\subset\mathbb{R}^2$ is a Borel set of Hausdorff dimension $s>1$, then its distance set has Hausdorff dimension at least $37/54\approx 0.685$. Moreover, if $s\in (1,3/2]$, then outside of a set of exceptional $y$ of Hausdorff dimension at most $1$, the pinned distance set $\{ |x-y|:x\in A\}$ has Hausdorff dimension $\ge \tfrac{2}{3}s$ and packing dimension at least $ \tfrac{1}{4}(1+s+\sqrt{3s(2-s)}) \ge 0.933$. These estimates improve upon the existing ones by Bourgain, Wolff, Peres-Schlag and Iosevich-Liu for sets of Hausdorff dimension $>1$. Our proof uses a multi-scale decomposition of measures in which, unlike previous works, we are able to choose the scales subject to certain constrains. This leads to a combinatorial problem, which is a key new ingredient of our approach, and which we solve completely by optimizing certain variation of Lipschitz functions.