As chancellor Gordon Brown prepares to announce his Budget next week, a leading government think-tank has proposed the raising of the retirement age by three years.

The Adam Smith Institute said that while the government should double the size of the state pension, people should work on until the age of 68 to save state money in the long term.

Written by the author of the Treasury’s review of pensions, Alan Pickering, the report claims that the current system costs the government £70 billion a year.

Although doubling the state pension payout would increase this cost by £40 billion, £10 billion could be saved for every year that people had to wait before they became eligible for their state pension.

The report also suggested that, by 2008, the basic state pension and the state second pension should be merged to produce a simplified benefit that would only be available once people reached 68.

This would be combined with incentives for employers to re-train older workers to enable them to continue earning, set up their own pension schemes and contribute to them, along with simpler tax rules and lighter regulation.

In a statement, the government said: “We don’t believe that forcing people to work longer is the best approach – instead the government is extending choice to people who want to work longer and providing people with the tools they need to make the right decisions for their retirement.”