State pension age to be raised to 70 for today's young workers

Young people currently entering the workforce will have to wait until they are 70 before they can retire under plans to save £500bn over the next 50 years, George Osborne will signal on Thursday.

The chancellor will also use his autumn statement to demand £1bn in additional spending cuts in the hope that voters will focus on Britain's "responsible recovery" – the healthy economic growth prospects for next year, slowly restoring public finances and measures to cut youth unemployment.

In potentially one of the most far-reaching reforms since the introduction of the state pension in 1908, Osborne will say the pension age for men and women will rise to 70 by the 2060s under a new formula linked to average life expectancy. This means that people born in the 1990s, who are now entering the workforce, will have to work until at least the Biblical life expectancy of three score and ten.

Osborne's statement to the Commons on Thursday will attempt to show that the government is making long-term plans as the economy recovers. David Cameron highlighted this approach when he told the BBC in Chengdu, on the final day of his trip to China: "We have been working to a long-term plan and what you are going to see in this autumn statement is the next steps in that long-term plan, a long-term plan to turn the country around, to get us out of our difficulties with debt and deficit and to secure jobs and recovery for all our people – a recovery for all."

Cameron and Osborne were also given a boost ahead of his half-yearly update on the state of the economy when the ratings agency Standard & Poor's said it was considering lifting the threat to Britain's AAA credit rating as a result of the economy's recent strong growth.

The government, which has already announced that the state pension age will rise to 66 by 2020 and to 67 by 2028, will accept the findings of a review that recommends that people should spend a third of their adult lives in retirement. A review by the Department of Work and Pensions, to be started in the next parliament and which will report every five years, will decide on future retirement ages based on ONS life expectancy figures.

The changes mean that the retirement age – based on current life expectancy projections – would reach 68 by the mid-2030s and is expected to reach 70 around three decades later. The changes mean that the immediate post-baby boomer generation – born from the mid-1960s onwards – will see a noticeable increase in the age at which they retired compared to their parents.

The chancellor is expected to stress that the latest changes will not have any impact on people currently in their 40s and above. Nobody over the age of 50 will have a retirement age of 68 or more.

Nick Clegg, the deputy prime minister, defended plans to extend the retirement age, saying the reforms would keep "the principle that a third of your adult life is in retirement that has been the rule of thumb for a long time".

Speaking on LBC 97.3 Clegg said he was not pretending it was an easy concept to accept. He added: "The point at which you retire is being shifted as people become more affluent and live longer. The rules on retirement that were set decades ago have to keep up with demographic changes".

He said the later retirement date would be subject to a periodic review independent of politicians taking into account of the best estimates of life expectancy.

The Treasury also announced that it is demanding a further £1bn annual spending cuts over the next three years, including this financial year. In practice departmental underspends this year mean the bulk of the painful extra cuts will have to be found in the years 2014-15 and 2015-16. In line with precedent, the aid, defence, schools, security services and health budgets will be protected from the extra cuts.

But tensions within departments over spending were highlighted when Michael Gove's education department claimed it was being forced to impose cuts to fund £150m to build new kitchens to meet the Liberal Democrat promise to fund free school meals for all six and seven year-olds. The Department for Education said Clegg's plan "had been drawn up on the back of a fag packet", and insisted it did not have the money in its maintenance budget to fund the plan. In response, the Lib Dems accused the education department of lying about its finances.

Both sides will welcome a skills and youth unemployment package, including the removal of national insurance on under 21 year olds, and the autumn statement will also resolve the drawn out battle over green levies, leading to an averge £50 cut in energy bills. Osborne will also try to protect himself from the charge that he is spokesman for business by publishing forecasts showing that cuts in corporation tax over 20 years will increase the long-term level of GDP by between 0.6 % and 0.7%.

Sterling rose to its highest level in five years on expectations that Osborne will use the statement to raise his growth forecasts – the first time he has been able to do so since 2010. The independent Office for Budget Responsibility will say that growth this year will be 1.5% – up from the 0.6% estimate in the March Budget – while the forecast for 2014 will be lifted from 1.8% to 2.5%.

S&P – the only one of the three major agencies not to have stripped the UK of its coveted AAA status – said it had been surprised at the pick-up in activity during 2013 – a year that began with fears of a triple-dip recession. "As others, we have been surprised on the upside on the growth performance so far this year on the UK" said Moritz Kraemer, S&P's head of sovereign ratings for Europe."

Stronger than expected growth will have a knock-on effect on public finances, with net borrowing expected to be around £15bn lower than predicted in 2014-15. Osborne will also argue that modelling by the Treasury shows that over time the gains to the economy from higher growth will outweigh the cost of tax cuts. The Treasury estimates the average household will be £500 better off as a result of the move.